Contrarian Investment Strategies – The Classic Edition

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Contrarian Investment Strategies – The Classic Edition

David Dreman’s name is synonymous with the term “contrarian investing,” and his contrarian strategies have been proven winners year after year. His techniques have spawned countless imitators, most of whom pay lip service to the buzzword “contrarian,” but few can match his performance. His Kemper-Dreman High Return Fund has been the leader since its inception in 1988 — the number one equity-income fund among all 208 ranked by Lipper Analytical Services, Inc. Dreman is also one of a handful of m


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Contrarian Investment Strategies – The Classic Edition

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3 Responses to “Contrarian Investment Strategies – The Classic Edition”

  1. S. Schneider says:
    54 of 56 people found the following review helpful
    5.0 out of 5 stars
    good book, but don’t buy his Forbes column stock picks, September 16, 2000
    By A Customer
    This review is from: Contrarian Investment Strategies – The Classic Edition (Hardcover)

    The key idea in this book constitutes sound common-sense advice to any investor: buy a diversified portfolio of out-of-favor stocks with sound underlying businesses (e.g., low P/E firms) and sell when the market recognizes their value. The book is controversial because it slams current academic theories on how the market works, especially the idea of “efficient markets”. Dreman believes that simply because of the way our minds work, the market tends to systematically over-react or under-react to news (especially earnings reports), and this can be exploited forever (because the way our minds are wired is not going to change). Other controversial ideas: 1) don’t buy index funds (because the committees which make indexes tend to put in firms which have had a price run-up and drop firms which have had a price decline, so that buying the index involves buying high and selling low); 2) don’t buy NASDAQ stocks unless they have great volume (because NASDAQ market-makers are not regulated enough, and will cheat you on the spread); 3) avoid international (non-US) stocks (because international markets have performed much worse than the US stock market over time); 4) equities are a safer way to hold money than treasury bonds or gold or cash (because of inflation and taxes). The author presents fairly detailed statistical evidence to show that his methods have worked over the past several decades. This is actually evidence that even academics are beginning to notice.

    That said, it should be noted that the author’s Kemper-Dreman fund (ticker: KDHAX) has done pretty badly in the last few years. Also, some of the stock picks in his Forbes column have been horrible. The most glaring example would be Prison Realty (ticker: PZN), which is currently hovering on the verge of bankruptcy. Dreman recommended it because of its REIT status and its high dividend yield both of which went away shortly after.

    My 2c: consider the guy’s broad investment strategies with respect, but don’t follow his (or anyone else’s) picks without putting in your own research.

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  2. Befragt says:
    41 of 46 people found the following review helpful
    3.0 out of 5 stars
    Long on Stats, a Bit Short on Strategy…, August 1, 2000
    By 
    S. Schneider (USA) –
    (REAL NAME)
      

    This review is from: Contrarian Investment Strategies – The Classic Edition (Hardcover)

    This is one of perhaps a handful of books the value-oriented investor will likely find indispensable. The book’s indispensability is a product of something for which David Dreman deserves great accolades: his apparent monopoly on an expansive array of statistics –statistics to support buying stocks when they are inexpensive in several different respects, statistics to support the avoidance of stocks priced to perfection, and statistics to support the pathetic fallacy of entrusting valuations and earnings estimates to investment house analysts. The stats compiled by Dreman concerning the latter, especially earnings estimates and a particular issue’s probability of meeting these estimates over serial quarters, are particularly impressive and sobering. At the very least, all of these statistics serve as a validation for what the value investor has at least accepted intuitively. Yet the reader will probably also derive new ways of looking at securities from a value perspective. (Incidentally, readers who are expecting a rehash of the Tweedy Browne value studies will be pleasantly surprised…)

    The two additional sections of the book concern investment strategy and investment psychology. Regarding the former, it is hard to cover strategy satisfactorily in value investing without discussing valuation itself. The central challenge of the value approach is distinguishing what’s compellingly cheap from what’s cheap for compelling reason. But here Dreman directs readers to other resources, and coyly suggests buying whatever has the largest number of attractive financial ratios. Thus the newcomer to these approaches will likely have ample reading and work to do if he/she really wishes to seriously embrace the task of finding “oversold” securities.

    The investment psychology section is useful, but could probably be reduced by half. In fact, Dreman’s essential shortcoming is his tendency to bludgeon the reader with the same thought, cloaked slightly differently, several hundred times. Of course, in the world of investment literature, there are worse things than relentless proscriptions against doing stupid things in the marketplace.

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  3. Anonymous says:
    17 of 17 people found the following review helpful
    5.0 out of 5 stars
    A must-read, August 21, 2006
    By 
    Befragt (Midwest USA) –
    (VINE VOICE)
      

    This review is from: Contrarian Investment Strategies – The Classic Edition (Hardcover)

    I have read this book three times now, and intend to do so again. Dreman is obviously an outstanding investor, and his strategies flesh out and arguably “modernize” the techniques used by the noted fundamental investor Benjamin Graham, who was the mentor to Warren Buffett (although, I might add, this book does not emphasize the study of financial statements, which is something Benjamin Graham did in painstaking detail).

    Dreman’s approach is most notable because of his use of investor psychology and his forceful rejection of the efficient market hypothesis. Instead, Dreman cites any number of studies and examples to support his main thesis: investors over-react to events, and those over-reactions create opportunities for savvy investors to make money. His approach involves a two-part strategy: first, preserve capital, and second, take advantage of market over-reactions to profit. His point is that the market is like a casino, but one in which the odds can favor a knowledgeable investor. In other words, no one can guarantee that a particular stock will do well, but over time, investors who follow a contrarian strategy will outperform the market generally.

    Dreman’s approach to investing is notably different than much of what is considered “conventional” wisdom within the financial markets (for a good contrasting view, read “Expectations Investing” by Rappaport and Mauboussin). In particular, Dreman takes the position that experts err predictably and often, and that humans base decisions on a minute portion of the information thrown at them. In this respect, his skepticism differs notably from some other authors (example: Mauboussin in “More than What You Know”).

    From this, he demonstrates how buying low p/e, high yielding, low price/book, and low price/free cash flow stocks results in higher-than-average returns. Dreman shows how favored stocks tend to underperform the market, while out-of-favor companies tend to outperform. However, reappraisal can happen slowly, even glacially.

    I found this book to be both enjoyable and informative, and it inspired me to read a couple books about behavioral finance (Paulos, “A Mathematician Plays the Stock Market” and Belsky and Gilovich “Why Smart People Make Big Money Mistakes and How to Correct Them”).

    In all, I highly recommend this book to anyone who is interested in investing. A few other recommendations (other than those listed above) include:

    Klarman – “Margin of Safety” (out of print)
    Whitman – “The Aggressive Convervative Investor” and “Value Investing”
    Greenblatt – “You Can be a Stock Market Genius” (horrible title, great book)
    Graham – “Security Analysis” and “the Intelligent Investor”

    Each of these books sets forth a somewhat different approach to investing, but at the core, each of them shares a skepticism of the principals underlying the efficient market hypothesis.

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