We had the pleasure of interviewing Vitaliy Katsenelson, CFA, chief investment officer of Investment Management Associates, a Denver, Colorado-based value investment firm. Vitaliy is also author of the acclaimed books Active Value Investing and The Little Book of Sideways Markets.
The following transcript has been edited for space and clarity.
MOI Global: You have been credited with some of the most illuminating analysis on the topic of sideways markets. In fact, you coined the term “cowardly lion” for markets that seem to go nowhere for years or even decades. Can you discuss the investor psychology and expectations that prevail in sideways versus bull or bear markets?
Vitaliy Katsenelson: Secular (long-term) sideways markets consist of mini (cyclical) bull and bear markets. For instance the last sideways market of 1966-1982 had four mini-bull and five mini-bear markets. Investor psychology for the most part tends to reflect the market cycle we are in at the time. My first book came out in 2007, and as I spoke to investment groups about sideways markets right after it was published, my message was dismissed because everyone was bullish, since we were in year four of a cyclical bull market. In 2008 and early 2009, when I spoke to groups of investors around the world about sideways markets, the reception was quite different. Everyone was scared and people were actually grabbing desperately at my message, because the idea of a sideways market sounded a lot better than the Great Depression II school of thought.
Today the stock market is still not cheap. If you look at today’s valuations on ten-year trailing earnings, they are still over 20% above the average P/E.
However, after several of these multi-year market swings, investors finally lose hope. The next bull market just needs not to come a few times before they throw in the towel, and this is when the next secular bull market will begin.
MOI: In your books Active Value Investing and the just-released, must-read Little Book of Sideways Markets you provide an analytical framework for evaluating a stock market that seems to be stuck in neutral for a long time. What are the economic, business and valuation conditions necessary for a sideways market? Please contrast them with the conditions that tend to prevail at the beginning and end of bull and bear markets.
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