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Brian Nelson
Value Trap
"What if I told you that almost everything you know about finance is wrong? The book Value Trap is the finance and valuation course you didn't get in school," President of Investment Research at Valuentum Brian Nelson says. "The field needs to be almost entirely redefined in a forward-looking manner. Historical data is useless when it comes to asset pricing. It is future expectations that matter. In the age of Big Data, there may be no better book to guide investors than Value Trap."
Data “makes us feel like we are in control, but the conclusions can be misleading if the data isn’t used in the right way,” Nelson warns in his persuasive debut, which attempts to shift the market’s belief in quantitative models of stock analysis back toward a more traditional enterprise valuation approach. Nelson, the president of equity and dividend growth research at Valuentum Securities, demonstrates how quantitative evaluative techniques that base pricing and investment strategies on trends in large sets of past data can lead investors to mistake correlation for causation. This can lead to conclusions that, as he puts it, are “no more predictive than believing the divorce rate in Maine will fall if we just slow our margarine consumption” simply because those two statistics have risen and fallen together.

Nelson makes the case that “spurious” or statistically insignificant correlations mined from ambiguous past data aren’t just a danger for individual investors or investment managers, but in an era of unprecedented volatility, these strategies will continue to increase the market’s erratic tendencies (especially in the uncertain age of Covid-19). Nelson proposes instead that greater returns—and greater market stability—would come from resuming strategies based on enterprise valuation, with an emphasis on forward-looking causal data and companies’ available cash assets.

This second edition is updated with a hefty prologue that invites readers to evaluate Nelson’s track record. He surveys the relative stability of his Valuentum stocks—stocks that meet the criteria of his 15-point checklist—over the course of 2020, demonstrating them to have been at least “pandemic-resistant” when not “pandemic-proof.” Readers eager for a simple investing system may find Nelson’s thorough case-making frustrating, but this work was conceived as a cry for economic stability, not an entry-level guide, and more experienced investors will find it thought-provoking and worth their time.

Takeaway: Readers steeped in the stock market will appreciate this persuasive economic treatise, which sounds the alarm on spurious quantitative analysis.

Great for fans of Aswath Damodaran’s The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit; Richard Barker’s Determining Value: Valuation Models and Financial Statements.

Production grades
Cover: A-
Design and typography: A
Editing: B+
Marketing copy: A