I read a lot of books about finance and investing, and this is one of the best. I seriously put this on par with Benjamin Graham (The Intelligent Investor and Security Analysis, Warren Buffett (Berkshire Hathaway shareholder letters), and John Mihaljevic (The Manual of Ideas). It is that good.
Katsenelson’s model for active value investing is designed for range-bound markets but works very effectively in all markets. He focuses on evaluating stocks for quality, valuation, and growth (QVG), then making buy and sell decisions based primarily on a P/E model.
This is not a simple buy stocks with low P/E and sell stocks with high P/E model. Katsenelson determines a stock’s fair value P/E based on growth and risk factors. Instead of setting price targets for buying and selling, which will likely expire in a short time, the buy and sell targets are P/E levels. These work great no matter what is happening in the market. For example, right now there is a lot of uncertainty and volatility in the market, and inflation is on the rise. This has caused me to question my price targets and have trouble determining what the fair value of a stock is. Using a P/E system would work a lot better right now.
The only weakness I see in this system is in how P/E is calculated. The standard P/E might include non-recurring items that could throw off the formula. Even a tax policy change could throw a P/E ratio in a weird direction. The book does not do much to address this, but that is really the only criticism I have.
After experimenting with different types of value investing over the last 5 years, I started focusing last year on an active value investing strategy that uses a combination of valuation and technical analysis to trigger buys and sells. While reading this, I started plugging some of the book’s formulas into spreadsheets and applying them to my strategy. I plan to keep using this book as a reference and getting better at incorporating Katsenelson’s P/E model into my buy/sell strategy.
I highly recommend this book to anyone who is interested in long-term stock investing, especially if they want to enhance returns with a more active approach than buy-and-hold. In addition to having a great model, it is well written and has good advice about investing in general.