December 23, 2005
Quick Notes to book I read many years ago. “Contrarian Investment Strategies.” The author is David Dreman.
1. 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.”
2. “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.
3. Investors go wrong in a systematic and predictable manner.
4. Return on Equity is one of the most important ratios. Another is pre-tax return on sales.
5. Be realistic about the downside of an investment.
6. 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.
1. Rule 2 – Respect the difficulty of working with a mass of information.
2. Rule 1 – Do NOT use market timing or technical analysis.
3. Rule 10 – Take advantage of out-of-favor stocks.
4. 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.
5. 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.
6. 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).
7. Rule 29 – “Buy during a panic, don’t sell”
8. 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).