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Monday, January 11, 2010

Market View and trading strategy from Vitaliy Katsenelson

Vitaliy Katsenelson provides a clear and concise view on the market movement and strategies to make money.

Market Performance Outlook

He predicts another year of range-bound behaviour with higher highs and lower lows. I am not sure about the duration but I agree with higher highs and lower lows theory. Further I believe the cycles (high to low) will be much compressed this time around.
Investment Strategy
Katesenelson's investment strategy suggestions are must read for all investors. I would just add that one needs to pick winners/survivors in this crises. This is type of crisis that separates really dynamic companies from sitting ducks. So extra due-diligence is the order of the day.

Vitaliy Katsenelson's recommendation for investment strategy:
In range-bound markets, as P/Es compress they turn against investors; thus investment strategy in this very different and difficult environment needs to be adjusted for the new investment reality:
  • Become an active value investor.  Traditional buy-and-forget-to-sell (hold) strategy is not dead but is in a coma waiting for the next secular bull market to return; and it’s still far, far away.  Sell is not just another four-letter word; sell discipline needs to be kicked into higher gear.
  • Margin of safety needs to be increased.  Typically, value investors seek for margin of safety to protect them from overestimating the “E”.  In this environment it needs to be beefed up to accommodate the impact of constantly declining P/Es.
  • Don’t fall into the relative valuation trap.  Many stocks will appear cheap based on past valuations, but past secular bull market valuations will not be in vogue for a long time, thus absolute valuation tools such as discounted cash-flow analysis should carry more weight.
  • Though timing the market is alluring, don’t – it is very difficult to do it consistently.  Value individual stocks instead. Buy them when they are undervalued and sell them when they become fairly valued.
  • Increased margin of safety and stricter sell discipline will lead one to have a higher cash position at times.  Don’t invest for the sake of being invested, because this will force you to own stocks of marginal quality or ones that don’t meet your heightened required margin of safety.  Secular bull markets taught investors not to hold cash, as the opportunity cost of doing so was very high.  However, the opportunity cost of cash is a lot lower during a range-bound market.