Book Review: Active Value Investing

Book: Active Value InvestingA note before I begin. When I do book reviews at this website, I have read the whole thing, even if I might skim some sections. In this case, I read all of it without skimming. It is a very good book on value investing. His objective is to teach you how to make money in range bound markets. Now I hadn’t thought of value investing in that way before, but it makes sense to me. If the average dollar invested in the stock market isn’t going anywhere, how can you make money? It was easy from 1982 to 2000, but what about relatively stale periods like the last seven years? During periods like that, security selection is paramount, as is willingness to adjust your portfolio to accommodate new cheap areas of the market.

He has a three part system for stock evaluation — Quality, Valuation, and Growth. He spends most of his effort on valuation, and provides the reader with a detailed and disciplined way of coming up with what P/E a stock deserves. I am not going to adopt it for myself; I already have my own methods, but someone looking for a rigorous way to value public companies could do worse than the author’s methods. (Note: this is not a full endorsement of his valuation methodology. I’d have to do a lot more work to get there. It’s credible and reasonable; it looks fair, but requires the user to make relative judgments about the character of the company being analyzed.) The methods require thought and work, but none of the formulas require anything more than grade school math, unless you want to try discounted cash flow analysis.

Other key concepts get covered in the book as well: margin of safety (and how to calculate it), buy discipline, sell discipline, contrarianism, and diversification (not too little, not too much). The idea is to not lose much when an idea goes wrong, and make money when the price of an undervalued stock returns to fair value, and sometimes overshoots it. His view on risk is similar to mine: don’t overdiversify, buy quality companies trading at a discount, sell them when they are fairly valued, or when the deteriorating fundamentals no longer justify the price. His view on international investing is similar to mine: go anywhere, but be aware of the risks.

On the whole, I found his methods to be similar to mine. Here are the differences:

  1. His portfolio is more concentrated than mine. 20 stocks vs 35.
  2. I have a more explicit rebalancing strategy.
  3. He focuses more on growth than I do… maybe I could learn something there.
  4. I spend more time on industry selection and pricing power.
  5. I don’t use P/E as my primary metric.
  6. I spend more time looking for ideas that are better than my current portfolio, and doing explicit swap transactions to keep my portfolio focused on value.
  7. I may be wrong here, but I think I spend more time on accounting and free cash flow issues.

That said, I like Vitaliy Katsenelson’s processes and can heartily recommend this book to my readers. His book is a fine addition to the world of value investing. If you want to buy it, you may do so below. Full disclosure: I get a small cut of the proceeds from Amazon if you use the link below.

Oh, and here is the book’s website.