Book review: David Dreman – Contrarian Investment Strategies – The Classic Edition
David Dreman is quite famous as one of the original “contrarian” investors using a formula approach. Similar to other “formula” investors, he dismisses all kind of active forecasting, fundamental analysis, chart reading etc.
In the book, he first presents over around 150 pages (more or less) convincing arguments, why all other approaches are doomed to fail, mostly due to behavioural finance biases. Much of that is now common wisdom but I guess when he wrote his first books this was fairly new.
In the next part he then present his “one and only” strategies, mainly to invest in the:
– lowest P/E stocks
– lowest P/B stocks
– lowest P/CF stocks
– lowest P/Dividend stocks
He advises to hold at least 20-30 different stocks from different industries and against small caps.
His strategies are based on a 26 year dataset (1970-1996).
Interestingly, he then “dilutes” his own low P/E strategy by applying additional indicators, such as
– “strong” financial position
– “as many favourable operating and financial ratios as possible”
– higher past earnings growth than S&P and “likelihood that it will not plummet in the future”
– conservative accounting
– above market dividend yield which can be sustained
In my opinion,this is the weakest point in the book. Before he spends hundred of pages arguing against “judgements” in the stock selection process, but then he basically admits that a low P/E strategy itself does not help a lot and you need to spice it up with fundamental analysis and subjective assumptions about the future.
In the final chapters, he then looks at market bubbles, IPOS etc.
I personally cannot really recommend this book. Although there is a lot of good stuff in it, I would say there are much better book about all the topics covered in the book.
For instance, O’Shaugnessy’s “What works on Wall street” is much better at backtesting formula strategies (and by the way dismissing simple P/E and P/B strategies).
Also on behavioural finance, for instance “The little book of behavioural Finance” from James Montier is much better structured.
My major point however with this book is the following: I am very wary if any author recommends his strategy as the best strategy for EVERY investor. In my experience, many strategies, even based on charts,momentum etc. can lead to success. The major point is that the strategy has to fit to the character of the investor, otherwise one will never have the energy and stamina to follow those strategies over bad times which will happen to ANY strategy.
Personally, I use a strategy very similar to Dreman’s but i would definitely not recommend this vor each and everyone. Going against the crowd sounds easy but it is not.