David Dreman

David Dreman

This strategy comes from the Canadian investor and former senior editor of the Value Line Investment Service, David Dreman. In the 1970s, Dreman became interested in the psychology of investing. His 1979 seminal work Contrarian Investment Strategy – The Psychology of Stock Market Success, and its predecessor, Psychology and the Stock Market, investigated contrarian investment strategies and postulated that stock prices and markets are often determined by emotion.

Summary

Dreman takes the view that emotional responses often shoot stock prices far beyond their intrinsic value, while undervalued stocks are ignored. His disciplined method of using value measures to evaluate stocks ensures the buyer does not fall into an emotional trap. His main belief is that undervalued stocks will be rediscovered when over-valued ones fail to perform.

 

Dreman also firmly adheres to diversification, spreading his investments equally over 15 to 20 different stocks in 10 to 12 industries; thus, he spreads risk while increasing the odds of out-performing the market. He also recommends that the valuation process is kept as simple as possible, as a more complex one can provide a false sense of security. 

Success Formula Contrarian Psychological

If you would like to use the Dreman strategy, you must consider eight points:

 

  1. Current P/E is < 50% of screening universe
  2. Total debt to total asset ratio latest FQ is < industry median
  3. EPS growth % from Continuing Operations latest filing for last 12 months is >= screening universe median
  4. EPS growth % from Continuing Operations for the latest FY is >= screening universe median
  5. Est. EPS for the current FY is > reported EPS for last completed FY
  6. Est. EPS for next FY is > Est. EPS for the current FY
  7. Take the top 50 stocks with the highest  Dividend Yield %

Hypothetical performance back-tested

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical monthly relative performance

How to read this graph:
A green bar shows how much the guru strategy outperformed the benchmark index in a particular month. A red bar shows how much the guru strategy underperformed the benchmark index in a particular month.

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical portfolio turnover

Data source: Bloomberg, Calculations: meetinvest

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