There are a few books that I turn to time and again which I find extremely useful, and a surprising number of them come from the 'Little Books, Big Profits' series published by Wiley. The reason I'm a fan of the series is that the format forces the often very smart authors to distil their thoughts into less than 150 pages. Such a format does away with the verbosity and in-the-know jargon that fills larger tomes leaving the author to focus on storytelling and ideas. One that's useful to read at difficult times like these is the Little Book of Sideways Markets. In the book the author, Vitaliy Katsenelson, describes at length how stock markets have a tendency to move in long wave cycles from extreme overvaluation to undervaluation and describes especially the strategies required to prosper during downwaves.

Redefining markets as bears, bulls and 'cowardly lions'

The real value that Katsenelsen adds in this short book is in providing a mental model to help investors think about what really drives the market over the long term. He makes the distinction between secular movements in the market which last from 5 to 15 years and cyclical movements which last from several months to several years. These cyclical bull and bear moves may be the prime focus of the media, but really they are just shorter term waves within broader secular trends.

Katsenelsen notes that these secular trends have tended to be long term bull and 'sideways' markets rather than bear markets.  He describes sideways markets as 'cowardly lions' given that every brave cyclical rally within them tends to turn and decline.  As shown in the graphic below, the last 100 years have seen 4 main bull markets, 4 sideways markets (each lasting 13 to 18 years) and one short secular bear market in the Great Depression - our current predicament is that of a Sideways market with a long way still to run.


PE ratios drive these trends

A simple equation to understand a stock's return is as follows:  Stock Return = EPS Growth + Change in P/E + Yield . Historically during bull and sideways market periods the level of EPS Growth and dividends haven't been much different - so the entire reason for the long drift upwards or sideways in price has been a result of the P/E multiple expanding and contracting.

During the long bull market from 1982 to…

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