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Seed Weekly - Investment Greats ? David Dreman

David Dreman is considered one of the greatest contrarian investors of our age. Born in Canada in 1936, David went on to graduate from University in 1958, after which 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, and has ever since served as its president and chairman. Since its founding, the firm has consistently stayed true to the contrarian style of investing.

Dreman is seen as a pioneer in the field of contrarian investment strategies and behavioural finance. Over the past 30 years, he has been at the forefront of research into contrarian value investing and behavioural finance, proving that over virtually every time period measured, stocks which were out of favour (as reflected by their price/earnings multiple), did significantly better than stocks considered to have more favourable outlooks. "I paraphrase Lord Rothschild: ‘The time to buy is when there's blood on the streets.'"

It is reported that Dreman came to contrarian investing the hard way. In 1969, Dreman, a junior analyst at the time, was following the crowd as the shares of companies with negligible earnings skyrocketed. He is quoted as saying, "I invested in the stocks du jour and lost 75% of my net worth." As a result of that painful lesson of “following the herd”, he became fascinated with how psychology affects investor behaviour and became a contrarian investor. "Psychology is probably the most important factor in the market – and one that is least understood."

"One of the big problems with growth investing is that we can't estimate earnings very well. I really want to buy growth at value prices. I always look at trailing earnings when I judge stocks."

"I buy stocks when they are 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-favour stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time."

The Dreman fund family was eventually bought over by other companies. In 2009 his firm chose to hold on to banking stocks as they were crashing during the great financial crisis - in line with his contrarian value investing philosophy. As a result, his firm was removed from management of his flagship DWS Dreman High Return Equity Fund by the board of Deutsche Bank, citing weak performance.

This “deep value” contrarian approach to value investing can result in a hefty debate. It should be said that the buyer must know what he is are buying and not simply buy stocks after their ratios – quality has proven to be an all important factor for mitigating risk of capital loss. "If you have good stocks and you really know them, you'll make money if you're patient over three years or more."

David Dreman has written numerous books over his lifetime. His first book, "Contrarian Investment Strategy: The Psychology of Stock Market Success" (1980) is an investment classic. Other notable books include "The New Contrarian Investment Strategy" (1982) and "Contrarian Investment Strategies: The Next Generation (1998). He has also authored numerous scholarly investment articles in the Journal of Investing, Financial Analysts' Journal and The Journal of Financial Behaviour. Dreman has also written the highly respected "The Contrarian" column in Forbes magazine for some 22 years.

Kind regards,

Lourens Rabè

Sources: Investopedia.com, Wikipedia.com, Dreman.com

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Tue, 01 Dec 2015

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