David Dreman January 21, 1998
You would not be a value investor without having a contrarian edge and a thorough understanding of investor psychology. The contrarian of them all is David Dreman. He has been a Forbes columnist for many years and is considered the father of contrarian investing.
In Contrarian Investment Strategies: The Next Generation, Dreman reminds us that the opinion of a Wall Street analyst is not gospel. He will also remind you that markets are far from efficient and that investors overreact in predictable irrational ways which you can profit from. He presents compelling data and statistics which show low P/E, low P/Book and low P/Dividend stocks have outperformed the market over time. He recommends sticking with high quality companies and staying away from bonds which have seriously underperformed stocks when adjusted for inflation and tax.
His 41 Contrarian Investment Rules are valuable reminders of how hard it can be to avoid the herd mentality. Here are a few:
Rule 1 - Do not use market-timing or technical analysis. These techniques can only cost you money.
Rule 2 - 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. (AA note: for more on the powers of rapid cognition without the need for exhaustive deliberation, you should read Malcom Gladwell's Blink)
Rule 6 - Analysts' forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimates.
Rule 10 - Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
Rule 11 - Positive and negative surprises affect "best" and "worst" stocks in diametrically opposite manner.
Rule 14 - Buy solid companies currently out of market favor, as measured by their low P/E, P/Cash Flow or P/Book ratios, or by their high yields.
Rule 20 - 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.
Rule 25 - Don't be seduced by recent rates of return for individual stocks or the market when they deviate sharply from the past. Long term returns of stocks are far more likely to be established again.
Rule 29 - Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don't sell.
Rule 30 - In a crisis, carefully analyze the reason put forward to support lower stock prices - more often than not they will disintegrate under scrutiny.
Rule 32 - Volatility is not risk. Avoid investment advice based on volatility.
Rule 41 - A given in markets is that perceptions change rapidly.
Mentally, these rules can be hard to adhere to especially when the value stocks you own do not participate in hot-stocks-du-jour rallies. A disciplined and patient value investor with a contrarian psyche is a rare breed. But I believe such an investor has the best shot at mastering the stock market. It's a good thing markets are not efficient after all.
You would not be a value investor without having a contrarian edge and a thorough understanding of investor psychology. The contrarian of them all is David Dreman. He has been a Forbes columnist for many years and is considered the father of contrarian investing.
In Contrarian Investment Strategies: The Next Generation, Dreman reminds us that the opinion of a Wall Street analyst is not gospel. He will also remind you that markets are far from efficient and that investors overreact in predictable irrational ways which you can profit from. He presents compelling data and statistics which show low P/E, low P/Book and low P/Dividend stocks have outperformed the market over time. He recommends sticking with high quality companies and staying away from bonds which have seriously underperformed stocks when adjusted for inflation and tax.His 41 Contrarian Investment Rules are valuable reminders of how hard it can be to avoid the herd mentality. Here are a few:
Rule 1 - Do not use market-timing or technical analysis. These techniques can only cost you money.
Rule 2 - 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. (AA note: for more on the powers of rapid cognition without the need for exhaustive deliberation, you should read Malcom Gladwell's Blink)Rule 6 - Analysts' forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimates.
Rule 10 - Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
Rule 11 - Positive and negative surprises affect "best" and "worst" stocks in diametrically opposite manner.
Rule 14 - Buy solid companies currently out of market favor, as measured by their low P/E, P/Cash Flow or P/Book ratios, or by their high yields.
Rule 20 - 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.
Rule 25 - Don't be seduced by recent rates of return for individual stocks or the market when they deviate sharply from the past. Long term returns of stocks are far more likely to be established again.
Rule 29 - Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don't sell.
Rule 30 - In a crisis, carefully analyze the reason put forward to support lower stock prices - more often than not they will disintegrate under scrutiny.
Rule 32 - Volatility is not risk. Avoid investment advice based on volatility.
Rule 41 - A given in markets is that perceptions change rapidly.
Mentally, these rules can be hard to adhere to especially when the value stocks you own do not participate in hot-stocks-du-jour rallies. A disciplined and patient value investor with a contrarian psyche is a rare breed. But I believe such an investor has the best shot at mastering the stock market. It's a good thing markets are not efficient after all.
No comments:
Post a Comment