“Contrarian value investing is based on various performance metrics that outperform the market, like low price/earnings, low price/cash flow, low price/book and even high-yield. All of these, in numerous academic studies, have outperformed the market…significantly over time.” – David Dreman
A contrarian investor is someone who attempts to profit by investing in a manner that differs from the conventional wisdom of the crowd when the consensus opinion appears to be wrong. A contrarian seeks out investment opportunities in “down and out” companies that are better than the price of their stock indicates. One great example is a company whose stock price has been hurt because the company’s overall industry has taken a hit. Maybe that one company does not deserve to have a lower stock price like the rest of its industry peers. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets.
“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.” – David Dreman
David Dreman wrote that in 1980 when the Dow Jones Industrial Average was sitting around 1,000 and the S&P 500 index was at 100. The same can be said for many of the investors who bailed on the markets during the recession that we just finished. Recessions and bear markets come and go. They are part of the growth that the markets need in order to grow. Many of the scared investors who pulled their money out of the markets this year after a severe beating have missed out on the market’s subsequent historic rise (60% since March 2009). One of the most important attributes about investing is picking a strategy after intense research and having the conviction to know you are right and to stick with it.
Who Is David Dreman? David Dreman 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. Dreman is often referred to as one of the kings of contrarian investing. He has written several books including: “Contrarian Investment Strategies – The Next Generation“, “Contrarian Investment Strategies: The New Psychological Breakthrough“, and “Contrarian Investment Strategies“. Dreman also writes a column for Forbes Magazine, is on the board of directors of the Institute of Behavioral Finance, and publisher of the Journal of Behavioral Finance.
Do you have your own favorite investing quote or a favorite investor that you would like to see in this series? I would love to hear it. Please drop me a line in the comment section below or e-mail me.
Note – This is a part of a series of posts every Wednesday on the blog featuring quotes about investing from famous investors and people in finance. Check out the entire series of Famous Investors’ Quotes.