Comments on: Contrarian Investment Rules – Part 1

By: Value Screen Results for an Explosive 2010 | Old School Value

Value Screen Results for an Explosive 2010 | Old School Value — Thu, 07 Jan 2010 07:54:42 +0000

[...] stocks are leveraged but profitable. Profitable means they have positive FCF. This is a contrarian strategy as nobody likes companies with high debt, but the ability to generate FCF makes it interesting and [...]

By: Jae Jun

Jae Jun — Sun, 22 Mar 2009 06:07:41 +0000

Once I get through the list of books that are waiting to be read, I’ll have to take a look at “Value Investing with the Masters”. Thanks.

By: Value Investing with the Masters

Value Investing with the Masters — Sat, 21 Mar 2009 01:24:41 +0000

I agree about reading it for the details. It took me about 7 or 8 detailed books like this to develop my own screens and calculations. Is my system the best, far from it, but it is fun and interesting to develop your own that makes sense to you and is within your capability. Full agreement that at the very least Dreman offers a good starting point for basic screening and the logic to back them up.

He is very long winded and tends to beat the dead horse over and over, but the book was still an easy read.

For a good follow up read “Value Investing with the Masters.” Also a great read with specifics. Take these twenty guys ideas and blending makes for an easy start to value investing.

By: Sivaram Velauthapillai

Sivaram Velauthapillai — Fri, 20 Mar 2009 19:05:07 +0000

Good recap Jae. Dreman had a disastrous year last year but he’ll still one of the top contrarians IMO. I’m contrarian wanna-be , although a concentrated investor, and I think he captures the core tenets of contrarian investing.

The key point I learned from the book–and this was actually shocking to me when I was a total newbie–is that out-of-favour, poorly performing, stocks rise on bad news, while popular stocks actually fall on good news. I think he spends a lot of time on it (some of it seemingly repetitious) to prove this point. The low quartile outperforms the top quartile even when news is bad for the beaten down ones. This is one of the things that gives me faith for investing in distressed stocks (although distressed or beaten-down ones are very risky and often value traps.)

As for the point about buying mid-cap or larger, I have to disagree with WideMoat and Jae if we are talking about contrarian situations. I think sticking with mid-cap or larger is fine if you are a contrarian. Since contrarians, and certainly what Dreman would suggest involves, buying out of favour stocks, I would argue that the potential return is arguably as attractive as many small-caps or smaller ones. Some of Buffett’s biggest successes were with out of favour mid-caps or large-caps. Certainly Coca-Cola and Gillette were large-caps. But, someone correct me if I’m wrong, his investments in Washington Post and American Express may have been in mid-caps or large-caps. I’m not really sure if Amex was a large-cap back in the 60’s but supposedly it was the leader in traveler’s cheques and the like, so it may have been a mid-cap (rather than small-cap). Washington Post may also not have been small cap although I’m not entirely sure.

However, I think for non-contrarian investors (i.e. not looking at a beaten down, distressed, stock,) small-caps or microcaps will beat the larger ones.

Anyway, just my opinion… good post…

Sivaram Velauthapillai’s last blog post..One of the few irreversible things in life… decline of world languages

By: Jae Jun

Jae Jun — Fri, 20 Mar 2009 05:52:59 +0000

I’m about halfway through the book and yes, I do disagree with a majority of it. Dreman like all other fund managers is concerned with beating the market which is one of the first points I disagree with. A hefty amount of the book is also focused on discussing historical numbers. Some were worthwhile to note but not all. I’m sure it helps in strengthening the case but other disciplines (value, growth, trading) all have their own data to back up why their strategies work better.

My thoughts would be to use it as a screen, but did Dreman really have to write so much for a screen with low ratios?

I do like the psychological aspect of the book but overall mechanical investing doesn’t suit me. I love finding out about companies, learning what they do and how they do it. It’s the details that make it interesting for me which Dreman says that we shouldn’t bother with.

@Wide Moat
It is directed to the DIY investor. Agree that you’re not going to have much of an edge on larger companies unless they are really beaten down.

By: It's the data

It's the data — Fri, 20 Mar 2009 02:31:15 +0000

You say you disagree, but the point of the book is that he is developing rules based upon what would have worked historically. You say you disagree with buying on low ratios yet that is really the basis of the whole book. Historically if you had divided the market into fifths by P/BV, P/E, etc and bought the lower fifth each year you would have beaten the market. So to say you disagree with this is kind saying you disagree with the premise of his whole book. While this is tough to do and contrarian, that is why he spends so many pages talking about the psychology of investing and keeping your discipline and emotions in check.

I like this strategy, and then when you combine it with “value investors add value,” meaning that you probably can’t afford to buy the entire bottom 5th, but you can hand pick a large chunk of them, you can probably do pretty well. For those who haven’t head on over to the library and read the book, it is an excellent read.

By: Wide Moat

Wide Moat — Thu, 19 Mar 2009 23:49:48 +0000

So who do you see as his intended audience? Portfolio managers, DIY investors? If the latter, I disagree as well with Rule 19. The DIY won’t find much of an edge on the big companies.

Wide Moat’s last blog post..Concentration or Diversification