How Earnings Grow While PE Ratios Contract in Sideways Markets: Vitaliy Katsenelson’s Presentation to the Las Vegas Value Investing Congress

By: greenbackd

I’m back from the Value Investing Congress in Las Vegas. There were a number of outstanding presentations, but, for mine, the best was Vitaliy Katsenelson’s epic presentation based on his Little Book of Sideways Markets.

12 years into this sideways market, valuations are still 30% above the historical average, while in 1982 they were about 30% percent below average! Also, historically, stocks spent a good amount of time at below-average valuations before sideways market turned into a secular bull market.

Vitaliy shows that genuine 1930s-style bear markets are rare. Most of the time the market trades sideways or up.

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Since 2000, the market has traded sideways. Vitaliy expects this to continue for another decade:

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Read GDP growth has been consistent. There’s little relationship between earnings growth and stock returns.

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Real GDP growth is very similar in both sideways and bull markets…

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…the difference in returns is the change in valuation.

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Don’t chase stocks. In the absence of good stocks, hold cash.

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Sideways markets contain many cyclical bull and bear markets.

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During a sideways market, asset allocation is not as important as stock selection.

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See the full presentation Active Value Investing: Making Money in This Sideways Market (.pdf)

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About the Author

Greenbackd
My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.