Notes To David Dreman’s Contrarian Investment Strategies by Redfield, Blonsky & Co
December 23, 2005
Quick Notes to book I read many years ago. “Contrarian Investment Strategies: The Psychological Edge.” The author is David Dreman.
- Investor psychology is an enormous barrier. “The success of contrarian investment strategies requires you at times to go against gut reactions, the prevailing beliefs in the market-place, and the experts you respect.”
- “It is hard to stay unaffected by psychological pressures, as I’ve too often found in free-falling markets. No matter how often you have been there or how much you’ve read, you can’t escape the fear.
- Investors go wrong in a systematic and predictable manner.
- Return on Equity is one of the most important ratios. Another is pre-tax return on sales.
- Be realistic about the downside of an investment.
- Remember the madness of crowds.
Contrarian Investment Rules (selected for my use only. There are 41 in total.) Of the 41, I listed the ones that perhaps at times I am swayed to forget. For example, many of his rules are already a part of my investment make-up. One example would be to understand that security analysis is not precise. With that said, I did not write nearly all of his 41 rules. I imagine that I agree with at least 80% of his rules.
- Rule 2 – Respect the difficulty of working with a mass of information.
- Rule 1 – Do NOT use market timing or technical analysis.
- Rule 10 – Take advantage of out-of-favor stocks.
- Rule 14 – “Buy solid companies currently out of market favor, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.
- Rule 18 – “Invest equally in 20 to 30 stocks, diversified among 15 or more industries.” I don’t practice that approach. I prefer a more focused investment approach. Ideally, I would like to have 8 – 15 companies in my portfolio, and follow those companies for a long period of time.
- Rule 20 – “Buy the least expensive stocks in an industry as determined by the four contrarian strategies.” I certainly don’t operate in that manner either, but I listed it anyway. As I type this, I wonder why I have even listed this rule. I don’t necessarily disagree, I just don’t practice such a strategy (at least not consciously).
- Rule 29 – “Buy during a panic, don’t sell”
- Rule 33 – “Small-cap investing: Buy companies that are strong financially (normally no more than 60% debt in the capital structure for a manufacturing firm).
Contrarian Investment Strategies: The Psychological Edge by David Dreman