This well-organized, clearly written how-to book deserves a read because of its unconventional insights into long-run stock market returns, but its stock selection methodology has limited usefulness for investment professionals.
Financial services firms energetically encourage the belief that the U.S. stock market has cranked out, decade after decade, a steady 7 percent real return. By investing for the long term, individuals supposedly can count on building their nest eggs at this highly predictable rate. The reality is quite different, as Vitaliy N. Katsenelson details in Active Value Investing: Making Money in Range-Bound Markets .
Upon close examination, the span 1937–2000 consisted of four distinct phases—two extended bull markets (1937–1950 and 1966–1982) and two lengthy periods (1950–1966 and 1982–2000) in which stocks remained within a narrow range of valuations. Patient investors fared quite differently depending on whether prices were steaming higher or stuck in the mud. Annual real returns averaged 13.8 percent during the bull markets but only 0.6 percent during the range-bound periods. An investor who bought a broadly diversified stock portfolio at the beginning of 1966 had to wait 34 years to achieve a 6.8 percent real return.
Katsenelson, a portfolio manager with Investment Management Associates and an adjunct faculty member at the University of Colorado Denver Business School, contends that the U.S. market will remain range bound until approximately 2020. He does not project a sluggish economy for the next dozen years but, rather, shows that the link between economic performance and stock performance is looser than generally supposed. Katsenelson concludes in the first part of his book that to achieve the 7 percent real returns that they have been led to believe are their birthright, investors will have to own the “right” stocks.
The second part of the book purports to teach investors how to find the desired stocks. These chapters are of limited interest to CFA charterholders. They constitute a primer on securities analysis based on the dubious proposition that individual investors have a realistic chance through stock picking of improving upon the market’s expected lackluster returns.
Hewing to the conventions of the how-to genre, Katsenelson offers a systematic-seeming approach to stock picking, but it is not much different from those found in countless other such works. The text is sprinkled with bromides (“Know your limitations”) and an avalanche of quotations of Warren Buffett. Nowhere does the reader find an investment record to suggest that applying the book’s recommended methods might actually enable them to achieve superior results.
Also true to the form of popular books on investment, Katsenelson repeats a few common errors. He incorrectly attributes to baseball immortal Yogi Berra a remark of the late computer scientist/educator Jan L.A. van de Snepscheut: “In theory, there is no difference between theory and practice. But, in practice, there is.” For good measure, he repeats the mistake a few chapters later. Katsenelson also perpetuates a misunderstanding of the famous 17th century tulip bulb speculation by stating that the flowers themselves were regarded as valuable assets.1
Notwithstanding such flaws, Active Value Investing makes several points worthy of notice by professional analysts and money managers. Highlighting the hazards of relying on one widely used valuation tool, the author documents a range of estimated betas for Wal-Mart Stores of 0.17 to 0.90—all published in the same month by three reputable financial information providers. Katsenelson also helpfully reminds readers of the contrary-to-popular-wisdom finding of Rob Arnott and Cliff Asness that high-dividend-paying companies display high earnings growth.2 Nuggets of this sort make Katsenelson’s well-organized, clearly written book worth a look, even for market veterans in no need of basic lessons on cash flow and diversification.
—M.S.F.