Book Review > The Little Book of Sideways Markets: How to make money in markets that go nowhere.

“The Little Book of Sideways Markets” is the latest in the ever expanding “Little Book of …” series by Wiley. The author Vitaliy Katsenelson, using history as his guide, predicts that the (US) stock market will likely continue to stagnate until the year 2020 (give or take a few years). In light of this, he believes that one’s investment strategy must be adapted over the coming decade to account for this.

The opening chapters contain background information covering topics such as secular versus cyclic markets, what happens to PE ratios and earnings growth in a sideways market, mean reversion, and the importance of dividends. Continuing with the tradition of associating animals with the direction of the market, Katsenelson has chosen another animal to represent a sideways market – the cowardly lion: “whose bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a descent.” He summarises these introductory chapters by stating that “rigorous stock selection and a disciplined buy-and-sell strategy must be used to make money in this low return environment.”

In chapter four, Katsenelson introduces “Tevye” the milkman”, and “Golde” the cow.  This is a fun story of what value investing is all about – analysing an asset; assessing its risk; valuing it and calculating a suitable purchase price; and waiting patiently for the asset to reach that price. Following is a short chapter on investment process, discipline and the impact of randomness.

The next four chapters contain an in-depth discussion of the investment process that Katsenelson has developed specifically for sideways markets: Active Value Investing. Here he focuses on three letters: Q, G and V (Quality, Growth and Value); and adding them up to create a framework for selecting stocks for your portfolio.

Having discussed the investment selection process, Katsenelson then discusses the execution strategy, i.e. the buy-sell process and information specific to sideways markets:

• The importance of thinking long-term, but acting short-term
• The importance of going against the crowd
• Buy-and-sell rather than buy-and-hold
• The importance of focusing on value and not chasing tops and bottoms, and
• Global issues

Katsenelson next discusses risk management and diversification. He believes that what “risk” means to the individual investor is shaped by his or her time horizon. As the book was written primarily for the longer-term investor, he therefore approaches risk as a permanent loss of capital and thus regards volatility as a “mere inconvenience”. His discussion on diversification is succinct and practical – advising the reader that a portfolio of about 20 stocks is manageable and at this level, the cost of being wrong is not too high. Additionally, he advises the reader to “stress test” their portfolio to expose any potential weaknesses.

Katsenelson finishes off with a brief discussion of what a portfolio’s performance could be like if he is wrong about the next decade being characterised by a sideways market. His view is that by purchasing stocks of high-quality companies at the right price, with an appropriate margin of safety, the investor should generate solid returns regardless. Overall Katsenelson has done an excellent job in providing the reader with a practical guide to active value investing, but as always, investors should conduct their own research and seek guidance from trusted advisers.