Friday, January 28, 2011

Book Review - The Little Book of Sideways Markets by Vitaliy Katsenelson

I don't do a lot of book reviews because I seem to love books that agree with me and hate books that have a different opinion than mine.  Since I am a Momentum Investor who use Barchart I usually don't like books that dwell on fundamentals but The Little Book of Sideways Markets: How to make money in markets that go nowhere by Vitaliy N. Katsenelson published by John Wiley & Sons, Inc is one that I really can recommend whole heatedly.  By the way, Wiley is the publisher of all the "Dummies" books and has a really great series "The Little Book Profits Series"  that I'm going to start on soon.  Don't hold it against me that my book case is filled with "Dummies" books, I'll admit to being a cult member.

Some of the books I've been asked to review I just had to decline because they were either so badly written or so convoluted and complicated that I saw no use of the book by the average reader.  One series of books and DVDs sent to me by a penny stock promoter were so poorly produced and contained so many wild proposals that I thought new investors would loose a bundle following bad advice.

Although now I consider myself a Momentum Investor, I started out my career in Public Accounting after completing a degree in Accounting and Business Administration at Berry College.  As an accountant  I loved reading annual reports and looking at fundamentals.  I soon noticed most of my fellow CPAs so over analyzed companies that they never made any money investing themselves.  Most of the mutual funds had highly educated and highly paid analysts that had all the data and computer tools available but still couldn't beat the markets.

I have been a Value Line subscriber for many years and before that poured over issues at the library. One of the screens that always fascinated me was the Highest Growth Stocks screen.  As Value Line puts it "To be included, a company's annual growth of sales, cash flow, earnings, dividends and book value must together averaged 10% or more for the past 10 years and be expected to average at least 10%  in the coming 3-5 years.".  This seemed to be the only list of stocks I would ever need.

What fascinated me about the list is that my head told me these are the stocks I should own but it seemed as many of the stocks were going down as were going up.  What was the difference?

Well, Vitaliy explains the missing component in his book: Price Earnings Ratios.  His analysis of why price earnings compression is so important is worth the price of this book.

The Chapter 12 -- "Applying Darwinism to the sales process" is some of the best 14 pages you will ever read.

His ideas on Total Return with the combination of price increases and dividends is an idea missed by most technical analysis followers.

He goes into detail about the risks associated with the opportunity costs of staying in cash; another point missed by most of the mutual fund portfolio managers.

There are several things you will have a much better understanding of after reading this book:

  • How do I evaluate the P/E ratios of the economy, the industrial sector and the individual stock?
  • How do I tell if the stock is a bargain or is about to run out of steam?
  • When should I sell and protect my profits?
  • Once I sell should I jump back in the market or sit on the side?
Best of all this is not your typical fundamental analysis book that is so full of formulas and equations that you need a degree in math or economics to even understand it.  His parable "Tevye was a rich man" should be a classic on how to value any business proposal.

This is a book you can understand and have fun with no matter what level of experience you have.  Even advanced investors have to refresh themselves in the basics once in awhile.

Read it and let me know what you think.

I found this video clip where Tadas Viskanta of Abnormal Returns interviews Vitaliy N. Katsenelson about his new book "The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere.  Enjoy!

Jim Van Meerten is a professional investor with over 40 year experience in investing in stocks, mutual funds and ETFs.  He shares his knowledge on Barchart in his daily blogs -- Barchart Portfolio Blogs.

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