March 12, 2013
I decided to purchase Value Returns: Wise Investing for the Next Decade and Beyond after reading a glowing review in Barrons. You can read the Barrons review here. I thought the book would be interesting because the authors approached value investing from the belief that you need to adjust your investing strategy based on the stage of the business cycle. The authors state, “the type of value investing we practice today is known as a tactical value strategy. This method still includes the more traditional approach of buying great businesses with solid free cash flow and growing dividends while being careful to buy when they’re on sale and holding them for longer term appreciation. But to supplement this, we also purchase solid, well-run businesses as tactical value trades.”
I think the book does a good job of highlighting why you should follow a value investing based approach, but there is nothing really new the authors are saying. Additionally, the authors only provide a cursory overview of how to evaluate a stock. I think there are a number of books that provide a better explanation of how to pursue a value investing approach. Vitaliy Katsenelson’s book Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) is one such book. I’ve written a review, which you can read here. However, the authors do a good job of highlighting that markets follow secular bull and bear patterns and that you need to adjust your investment methodology accordingly.
The book is divided into five parts. The first section provides a basic overview of value investing. In the second section the authors introduce their investment methodology, which they call tactical value investing. In part three of the book, the authors discuss secular stock market cycles and how investors should navigate them. The authors correctly highlight that during secular bear markets, that the market P/E compresses. Thus, continued earnings growth doesn’t translate into higher equity prices. The authors also explain that all investors should have a core portfolio of stocks that represent ownership in businesses with strong franchises. Additionally, investors should then increase or reduce exposure to non-core holding based on the stage of the business cycle. Unfortunately, the authors don’t provide additional detail about what percentage of your portfolio should be in core holdings vs. non-core and only superficially address which sectors tend to outperform during specific stages in the business cycle. For a much more detailed and well researched overview of how to invest in various asset classes according to the stage of the business cycle, I recommend Martin Pring’s Investing in the Second Lost Decade: A Survival Guide for Keeping Your Profits Up When the Market Is Down. For a more detailed discussion on the asset allocation process, I recommend his other book The Investor’s Guide to Active Asset Allocation: Using Technical Analysis and ETFs to Trade the Markets. If you’re interested, you can read my full review of the book here.
The remaining sections of the book discuss how to implement a tactical value investing methodology. Again, my biggest criticism is the that the information provided is quite superficial. I think any investor who has read a few books on value investing will not benefit much from reading this book. I think the authors were targeting novice investors, who are new to value investing and the idea of secular market cycles. For professional investors, I would recommend that you skip the book and head straight to Martin Pring’s or Vitaliy Katsenelson’s book for an overview of how to invest during a secular bear market.