The Hindu Business Line : Nuggets

David Dreman is a noted investor who is known for his contrarian investment strategies. In 1977, he founded the first investment firm, Dreman Value Management, Inc., and is serving as its president and chief investment officer. He also manages many other mutual funds under the name of Scudder-Dreman. He is the author of Contrarian Investment Strategy: The Psychology of Stock Market Success, The New Contrarian Investment Strategy and Contrarian Investment Strategies: Next Generation. He also writes columns in Forbes magazine.

Here are some quotes from his book Contrarian Investment Strategy: Next generation (Simon and Shuster Inc. publication)

Respect the difficulty of working with a mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits.

Analyst’s forecasts are optimistic. Make the appropriate downward adjustment to your earnings estimate. Most current analysis requires a precision in analysts’ estimates that is impossible to provide. Avoid methods that demand this level of accuracy.

Take advantage of the high rate of analyst forecast error by simply investing in out-of-favour stocks. Favoured stocks underperform the market, while out-of-favour companies outperform the market, but the reappraisal often happens slowly, even glacially.

Buy solid companies currently out-of-market favour, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields. These contrarian stocks have superior performance characteristics.

Buy the least expensive stocks within an industry, as determined by the four contrarian strategies, regardless of how high or low the general price of the industry group. Sell a stock when its P/E ratio approaches that of the overall market, regardless of how favourable prospects may appear. Replace it with another contrarian stock.

Don’t be influenced by the short-term record of a money manager, broker, analyst, or advisor, no matter how impressive, don’t accept cursory economics or investment news without significant substantiation.

Since World War II, a dozen financial crises have erupted. After each the market roared back. Selling stock during the crisis is a wrong reaction. Buy during a panic. In a crisis, carefully analyse the reasons put forward to support lower stock prices — more often than not they will disintegrate under scrutiny.

Diversify extensively. No matter how cheap a group of stocks looks, you never know for sure that you aren’t getting a clinker. Use the value lifelines as explained. In a crisis, these criteria get dramatically better as prices plummet, markedly improving your chances of a big score.

When people are frightened, they cut their time horizon dramatically. Even advisors will say to sell because they see portfolios crumble and they fear people will have nothing left. It’s really not rational, but it does happen.

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