“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.” — David Dreman
David Dreman: Background & bio
David Dreman is a noted investor, who founded and is Chairman and Chief Investment Officer of Dreman Value Management, an investment company. The company focuses on the assets of mutual funds, pension, foundation, and endowment funds, as well as high net-worth individuals.
David Dreman graduated from the University of Manitoba (Canada) in 1958. After graduating, he worked as director of research for Rauscher Pierce, senior investment officer with Seligman, and senior editor of the Value Line Investment Service. In 1977, he founded his first investment firm, Dreman Value Management, Inc., and has served as its president and chairman.
Over the past 30 years, David Dreman has been at the forefront of research into contrarian value investing and behavioral finance, proving that over virtually every time period measured, stocks which were out of favor, as reflected by their price/earnings multiple, did significantly better than stocks considered to have more favorable outlooks. This research has led to five books on the topic. These works include Mr. Dreman’s most recent book,Contrarian Investment Strategies: The Psychological Edge, which was published on January 12, 2012 by Simon & Schuster. His other widely acclaimed books were: Contrarian Investment Strategies: The Next Generation, (1998), Psychology and the Stock Market, (1977);Contrarian Investment Strategy: The Psychology of Stock Market Success (1980); and The New Contrarian Investment Strategy, (1982). Articles dealing with the success of Mr. Dreman’s methods have also appeared in many national publications, including Money Magazine, Barron’s, The Wall Street Journal, The NewYork Times, Money and Fortune. Additionally, Mr.Dreman is a senior columnist for Forbes , where he has been writing a regularly published column, appropriately titled ” The Contrarian,” for over 30 years.
David Dreman: Investment philosophy
Dreman’s studies of the market led him to discard conventional wisdom, ignore the attraction of glamour stocks and develop his own brand of contrarian value investing. This meant hunting for shares that nobody else was interested in and deliberately acting against the prevailing market fashion.
He wants to find unloved and overlooked stocks in beaten down sectors at knock-down prices. He judged that it was precisely these sort of shares that will bounce back when the mood of the market eventually changes.
To find them, Dreman suggests focusing on the cheapest 20% of stocks in the market based on value measures like price-to-earnings, price-to-book and price-to-cash flow. He also has a contrarian high dividend yield approach.
The philosophy at Dreman Value Management: “We invest in undervalued companies that exhibit strong fundamentals, above-market dividend yields and historic earnings growth, which our analysis indicates will persist. Our strategy is to own strong, fundamentally sound companies and to avoid speculative stocks or potential bankruptcies.” They believe that the markets are not perfectly efficient, and that behavioural psychology influences investor actions and reactions.
For added protection, Dreman also employed demanding fundamental analysis, preferring to buy larger company stocks with signs of earnings growth and financial strength. As soon as a company looks overvalued against the market, its price weakens or its fundamentals deteriorate, he sells it.
David Dreman uses metrics such as low P/S, P/B, P/E, and P/D to identify undervalued stocks
Some of the more specific criteria David Dreman used to evaluate stocks:
- P/E bottom 20% of market
- P/CF bottom 20% of market
- P/B bottom 20% of market
- P/D bottom 20% of market
- For cyclical companies David Dreman prefers P/CF
- Market cap top 1,500 largest companies
- Earnings in the most recent quarter should be higher than previous quarter
- For non-cyclical companies past six months of EPS greater than S&P
- for non-cyclical companies projected EPS growth should be higher than S&P projections
- Payout ratio between 40-80 percent
- ROE in the top third of large cap stocks
- Pre-Tax Margin above 8% and a very good company should have above a 22% ratio
- Debt to Equity ratio of 0
- Current ratio higher than 2
From Invest like a legend: David Dreman – The Globe and Mail:
HOW I’D INVEST $100,000 RIGHT NOW: I’d put it in good-quality stocks in a portfolio large enough to diversify, or, for the average investor, an index fund. Stocks have traditionally gone up if we see inflation coming. We’re not seeing much inflation yet, but we’ve been printing an awful lot of money; in the United States, they’ve printed $7 trillion since 2008. I’ve never seen the two not meet.
BEST INVESTMENT: The sin stocks—tobacco. We’ve owned Philip Morris and R.J. Reynolds for many years. These stocks collapsed in the early 2000s because the companies were losing court cases. But we studied this carefully, and it looked like the Supreme Court was swinging the other way. When it put a lid on punitive damages, the stocks took off.
WORST INVESTMENT: Fannie Mae and Freddie Mac. They were more political disasters than anything else. FDR set up Fannie Mae in the Depression, and it worked well. But both Republicans and Democrats wanted to have more low-cost housing, and they pushed Fannie and Freddie to lower the standards on mortgage loans.
BIGGEST OPPORTUNITIES: U.S. stocks, and I’d include Canada there. For my book, I went back 25 years on the S&P 500 versus foreign markets, and this was just before the European downturn. It was a dead heat—in fact, U.S. stocks did somewhat better. There isn’t a lot of liquidity in markets in developing countries, so you’re taking extra risk for the same gain.
ADVICE FOR INVESTORS: On the whole, investors don’t do as well as markets. Even money managers want to buy hot stocks, and they waive their valuation rules. It’s very hard not to go along with something that’s exciting. The Internet, for example, was going to change our lives forever—and it did. But people paid 50 times what stocks were really worth.
David Dreman: Quotes
“There’s no question that people saw the excitement of the Internet, … how important it would be. There was absolutely no question they caught it right in the late 1990s. But they paid far too much.”
“I want to take a little bit more time now that the market has closed and take a good look. Is there anything really new here? I really don’t know,”
“There’s a lot of nervousness with what interest rates are doing, … Financial stocks are up 3 percent one day and down 3 percent the next.”
“Whenever you get some kind of natural disaster, the best thing is to stay on the sidelines for the first couple days. We’ll see higher oil prices from here on in. Demand is simply outstripping supply.”
“Analysts have always been overly optimistic.”
“If you play it out long enough it blows up,”
David Dreman: Books
- Contrarian Investment Strategies – The Next Generation
- The New Contrarian Investment Strategy
- Psychology and the Stock Market: Investment Strategy Beyond Random Walk
- Psychology and the Stock Market: Why the Pros Go Wrong and How to Profit
- Contrarian Investment Strategies: The New Psychological Breakthrough
David Dreman: Articles
- David Dreman Likes Devon Energy Corp., Apache Corp., General Electric Company, And Emerson Electric Co.
- Sign of market bottom? A star manager is fired.
- David Dreman Sees `Major Opportunity’ in Financials
- Contrarian Buys David Dreman Might Love
- Strategy for a Weak Market
- Investors Urge More Reforms at NYSE
- USA TODAY Investment Roundtable: What will 2003 bring?
- The Greatest Investors: David Dreman | Investopedia
- How to profit like contrarian legend David Dreman
- Steve Forbes Interview: David Dreman, Contrarian Investor
- David Dreman: A Very Undervalued Value Investor
- David Dreman Sticks to His Contrarian Strategy
- Invest like a legend: David Dreman – The Globe and Mail
- David Dreman Wrote the Book on Contrarian Investment
David Dreman: Videos/podcasts
- David Dreman on WealthTrack episode 417
- David Dreman on WealthTrack episode 341
- David Dreman on WealthTrack episode 311
- David Dreman On CNBC
- David Dreman on Value
- Market Expert: Inflation Will Rise 8-10%
- David Dreman and Donald Yacktman on Finding Value
- A Long-Time Contrarian Learns Some New Tricks
- Value investing guru reveals his secrets – David Dreman Interview
- Stansberry Radio Interviews Investing Legend David Dreman
- Investor David Dreman Says Keep Your Dollars In The U.S