The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

Katsenelson argues that equity markets alternate between secular bull markets, secular bear markets and long range-bound periods, and that the range-bound periods are the most common and the least discussed. His historical evidence is that periods of strong returns end with high price-earnings multiples that then compress over a decade or more even while earnings grow, producing flat index returns.

His explanation is mechanical. Total return decomposes into earnings growth, dividend yield and change in the multiple. In a sideways market earnings growth continues at its normal rate while the multiple contracts, and the two roughly offset. He argues the multiple compression occurs because the preceding bull market ended with valuations that impounded returns already delivered.

His prescribed approach is an active value strategy adapted to that environment. He raises the required margin of safety, treats selling discipline as more important than buying discipline since positions will not be carried up by the market, weights dividend yield heavily because it becomes a larger share of total return, and applies what he calls a quality, valuation and growth framework in which a stock must pass all three rather than compensate on one.

The book is short and readable. Its framework is a straightforward decomposition rather than a novel insight, and the historical pattern identification is done by inspection. The specific forecast was made in 2010 and the following decade was a strong bull market, which the framework did not anticipate. The decomposition and the selling discipline argument remain useful.