David Dreman

Psychology is probably the most important factor in the market – and one that is least understood
The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace, and the experts you respect. We’ve always been contrarian investors
If you have good stocks and you really know them, you’ll make money if you’re patient over three years or more
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
On buying pharmaceutical stocks in 1993 when Hillarycare made the headlines. We took a pretty big position, and in the first year, it hurt us. But in years two and three, we doubled or tripled our money
Contrarian is a form of value investor, where we tend to buy the lowest P/E stocks or by P/E ratio or we can also use Price to Book or Price to Cashflow or even high yield … It does work… There are a lot of very good stocks, where people just don’t like them for one reason or another and they won’t pay much for them.
I buy stocks when they are really battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time
I paraphrase Lord Rothschild: ‘The time to buy is when there’s blood on the streets
Buy only contrarian stocks because of their superior performance characteristics
It is hard to stay unaffected by psychological pressures, as I’ve too often found in free-falling markets. No matter how often you’ve been there or how much you’ve read, you can’t escape the fear
It’s very hard to go against the crowd. Even if you’ve done it most of your life, it still jolts you
Psychology is the necessary link required to activate the contrarian strategies
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
Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites
Negative surprise result in major drops in the prices of favorites, while having virtually no impact on out-of-favor stocks
Favored stocks underperform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially
One of the big problems with growth investing is that we can’t estimate earnings very well… I always look at trailing earnings when I judge stocks
The market does not run on chance or luck. Like the battlefield, it runs on probabilities and odds
Experts are often wrong – sometimes remarkably so
Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks
When advisors go one way, markets go the other
Psychology, no matter how much you’ve studied it or think you know it, can reduce both your ego and your net worth very quickly
Do not use market-timing or technical analysis. These techniques can only cost you money
Not only do investors go wrong, they go wrong in a systematic and predictable manner. So predictable, in fact, that consistent investment strategies can be built on their mistakes
Do not make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear
If contrarian strategies work so well, why aren’t they more widely followed?… It is not enough to have winning methods, we must be able to use them. It sounds almost simplistic, but it isn’t
The great majority of money managers have consistently lagged behind the market averages
Rapid turnover [of stocks] does not improve results, but seems to damage them slightly
The market panic in the third quarter of 1990, following the Iraqi invasion of Kuwait, demonstrated once again that professional, no individual, investors were the largest, and often most desperate, sellers
Well known on the street, is the fear of issuing sell recommendations. Sell recommendations are only a small fraction of the buys. A company that the analyst issues a sell recommendation on will often ban him or her from further contact
People make confident predictions from incomplete and fallible data. There are excellent lessons here for the stock forecaster
People are not good intuitive statisticians, particularly under difficult conditions
It is impossible, in a dynamic economy with constantly changing political, economic, industrial, and competitive conditions, to use the past the estimate the future
The effect of an earnings surprise continues for an extended period of time
Avoid unnecessary trading. The costs can significantly lower your returns over time. Low price-to-value strategies provide well above market returns for years, and are an excellent means of eliminating excessive transaction costs
People like exciting stories; they don’t like boring companies. That is the normal cause of investor overreaction
Diversification is more important than it’s ever been
We have diversification and don’t take really big bets on any one stock
We always sell at the market multiple. We buy below the market multiple, and when a stock moves up to the market multiple we’ll sell it
Invest equally in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size)

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