I am currently reading Contrarian Investment Strategies by David Dreman and enjoying the rules that pop out throughout the book. There are 41 in total for the contrarian. There are many obvious rules. My comments are in bullet points and the highlighted rules are the ones I found interesting.
The list of 41 rules is quite long so I’ll break it into 2 parts. Part 2 will be posted tomorrow.
Rule 1: Do not use market-timing or technical analysis. These techniques can only cost you money.
Rule 2: Respect the difficulty of working with a mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits.
Rule 3: Do not make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear.
Rule 4: Tread carefully with current investment methods. Our limitations in processing complex information correctly prevent their successful use by most of us.
Rule 5: There are no highly predictable industries in which you can count on analysts’ forecasts. Relying on these estimates will lead to trouble.
Rule 6: Analysts’ forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate.
Rule 7: Most current security analysis requires a precision in analysts’ estimates that is impossible to provide. Avoid methods that demand this level of accuracy.
Rule 8: It is impossible, in a dynamic economy with constantly changing political, economic, industrial, and competitive conditions, to use the past accurately to estimate the future. The past gives some frame of reference but cannot be exact.
Rule 9: Be realistic about the downside of an investment, recognizing our human tendency to be both overly optimistic and overly confident. Expect the worst to be much more severe than your initial projection.
Rule 10: Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
Rule 11: Positive and negative surprises affect “best” and “worst” stocks in a diametrically opposite manner.
Rule 12: (A) Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites.
(B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.
(C) Negative surprises result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks.
(D) The effect of an earnings surprise continues for an extended period of time.
Rule 13: Favored stocks under-perform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially.
Rule 14: Buy solid companies currently cut 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.
Rule 15: Don’t speculate on highly priced concept stocks to make above-average returns. The blue chip stocks that widows and orphans traditionally choose are equally valuable for the more aggressive businessman or woman.
Rule 16: 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.
Rule 17: Buy only contrarian stocks because of their superior performance characteristics.
Rule 18: Invest equally in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size).
Rule 19: Buy medium-or large-sized stocks listed on the New York Stock Exchange, or only larger companies on Nasdaq or the American Stock Exchange. (Obviously American centric here)
Rule 20: Buy the least expensive stocks within an industry, as determined by the four contrarian strategies, regardless of how high or low the general price of the industry group.
Be sure to visit tomorrow for the remaining half.