Review: Little Book of Sideways Markets

The Little Book of Sideways Markets: How to Make Money in Markets That Go Nowhere (Wiley, 2011). Vitaliy does a great job at telling simple stories that teach complicated lessons within the financial markets, while embedding value investing wisdom within those stories, so that we may capitalize when the markets are caught in a range, which he calculates to be 50% of the time.

From a trader’s perspective “Sideways Markets” also provides real world advice for active traders that I can utilize within my trading plan tomorrow, while filling in any gaps that technicians may lack in the fundamental analysis department. As an active trader my biggest concern when reading an investing book is what can I take away from this book and use right now. Whether Vitaliy wants to admit he has a little active trader in him or not, it’s quite apparent when you analyze the markets in hopes of gaining an edge from future direction, while adjusting your strategy along the way…that is described as trading. It’s really just a question of time frame at this point.

My two favorite lessons for short-term traders in this book are brilliant in their simplicity. Vitaly tells a story about a farmer named Tevye and his cow Golde, that anybody can understand, illustrating the concepts of value investing, margin of safety, and the pitfalls of speculation. At the end of this fable was a very insightful concept that is more applicable to momentum investing than he probably realizes. “That’s why I stopped bidding on sunny days when everybody’s got a smile on their face.” We all know about over exuberance and how it suckers most traders in at the exact wrong time.

The other lesson comes in the chapter Vitaliy recalls an experience he had at a casino. It’s been well documented by many the similarities of professional gamblers to that of traders and the need to “spend more time focusing on the process, not on the outcome.” Both need to protect their bankroll and they do that through a rigid system, and the personal discipline to follow that system no matter what their emotions are telling them. Traders and Gamblers both know when to follow through with the big bet while keeping their losses small to fight another day. If you allow your system to play out over the course of many trades and you have a profitable edge, you put the odds in your favor and you become the house, as long as your emotions are kept in check.

To better illustrate how accurately titled this book is, I’ve included a chart of the S&P since 1997 showing how there has been a whole lot of up and down action, but essentially we’ve ended up right where we started. While markets, sectors, and stocks will continue to go up and down, Vitaliy points out that “the easiest way to combat p/e erosion is to increase the required margin of safety for stocks in your portfolio.” And to do that you must become a stock-picker and analyze each individual stock with the components of quality, evaluation, and growth as the basis of your purchases. Only then will you put the odds in your favor to combat the roller coaster that has become the stock market.

If I had to disagree with any one thing within the book it’s when the author states to sell a stock. When a stock reaches fair value, Vitaliy preaches that the stock should be sold, instantly. This goes against my trend trading rules because as long as the stock is moving higher, it would be in a trader’s best interest to enter trailing stop to give one the potential to capitalize on more upside potential should the stock continue higher. I agree with the author that one needs to have zero emotions around your stocks, but it also is in your trading performance’s best interest to stay invested when stocks are moving higher, as long as your trailing stops are in place.

Vitaliy’s lastest book is thoroughly enjoyable, easy to read, and covers many different topics that your sure to learn something new as you make your way though it. I can say that after seeing him in person and reading this book, Vitaliy has a great understanding in what it takes to outwit the sideways markets that we find ourselves in.

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