This story received surprisingly little coverage in the value world. David Dreman announced last week that he was significantly scaling back his role at Dreman Value Management LLC. Bloomberg News reported that E. Clifton Hoover who joined the firm in 2006 will take over on Oct. 31 as sole investment chief, with responsibility for $5 billion in assets. Dreman will still manage the $77.5 million Dreman High Opportunity Fund and the $7.26 million Dreman Market Over- Reaction Fund. It seems that Dreman is de-facto retiring.
I wanted to share some ideas that I learned from Dreman, who has played a large role in forming my outlook on investing. I was also fortunate enough to meet Dreman last year and interview him, and it deepened my appreciation of the man.
For all not familiar with Dreman below is a long bio of Dreman’s long and impressive career as a writer and money manager:
David Dreman’s bio from Dreman.com
David Dreman is the founder, Chairman and Chief Investment Officer of Dreman Value Management, L.L.C., established in 1997. Mr. Dreman founded his first investment firm, Dreman Value Management, Inc., in 1977 and served as its President and Chairman until 1995, followed by a similar role at Dreman Value Advisors, Inc. from 1995 to 1997.
Mr. Dreman’s best selling book, Contrarian Investment Strategies – The Next Generation, was published in 1998 by Simon & Schuster. His previous widely acclaimed books include Psychology and the Stock Market (1977), The New Contrarian Investment Strategy: the Psychology of Stock Market Success (1980), and The Contrarian Investment Strategy (1982). Articles discussing the success of Mr. Dreman’s investment methodologies have appeared in national publications such as Forbes, Barron’s, Institutional Investor, The Wall Street Journal, The New York Times, Newsweek, Money andFortune.
A regular columnist for Forbes for over 29 years, he has presented before the National Bureau of Economic Research, the Society of Quantitative Analysts, the Harvard Medical School, the Cambridge Center for Behavioral Studies, the Institute of Behavioral Finance, the Association for Investment Management and Research (AIMR), the National Financial Analysts Seminar, as well as numerous other academic and professional groups. Mr. Dreman’s research findings have also been published in The Financial Analysts Journal, The Journal of Investing, and The Journal of Behavioral Finance.
Mr. Dreman is also co-editor of The Journal of Behavioral Finance, President of the Dreman Foundation, and a Director of the IFREE Foundation, whose founder Vernon Smith was awarded the Nobel Prize in Economics in 2002. Mr. Dreman was awarded a Doctor of Laws Degree from the University of Manitoba in 1999 and is a member of the Board of Trustees of the University of Manitoba.
More from GuruFocus: David Dreman is the founder and Chairman of Dreman Value Management, LLC and also serves as the firms Chief Investment Officer. His Large Cap Value Fund has returned average 17% annually, and Small Cap Value Fund average 16.5% annually since inception in 1991. A regular columnist for Forbes for 25 years, Mr. Dremans recent best-selling book, “Contrarian Investment Strategies – The Next Generation” was published in the spring of 1998.
I have noted earlier articles that Dreman was a cigar butt type of investor. He would look for the cheapest stocks in the market on the assumption that the market was over-reacting and there would be a reversion to the mean. Over time this strategy has worked very well with stocks in the lowest 20 percentile in terms of P/E, P/CF, P/B, and P/D. If possible Dreman would try to find stocks that had all four of these character traits.
Dreman was known for doing only cursory research on stocks. He believed it was very hard to analyze and get a true picture of a company’s health by looking at the financial statements. Anyone who took this approach with a concentrated portfolio could get killed. However, Dreman had a very diversified portfolio.
During 2008 this approach really hurt Dreman’s returns. Like many other investors, including many great value investors Dreman bought stocks that looked cheap based on valuation, but were highly leveraged and engaged in high risk activities.
While I do not by any means soley invest according to Dreman’s investment style, there were two instances that Dreman’s contrarian strategy really helped me make great investments.
In early 2009 it seemed as almost every day the market would just go lower and lower. Financials looked cheap but there was serious talk of nationalization. I felt at the time it was impossible to properly evaluate these financial institutions’ balance sheets. However the financial ETF (XLF, Financial) was trading at a low multiple to book value, and on the basis of the past three years of earnings. Even if the big banks were nationalized the ETF contained many banks that were unlikely to be taken over by the Government. I decided to buy the ETF and bought more when the ETF declined further. The luckiest moment of my investing career is when I purchased further shares on March 4th, 2009. Without reading Dreman’s writings I doubt I ever would have pulled the trigger.
The next moment came more recently with BP. The stock was tanking day after day. There was talk of definite bankruptcy and tens of billions of dollars in legal fees. I thought to myself whether BP a buy or not at $30 per share. It seemed that the market was mispricing the situation. The main thesis which I will briefly summarize it that it is highly unlikely BP will go bankrupt. The biggest threat to bankruptcy is huge legal costs and they would likely take many years to play out. Exxon-Valdez took about twenty years to finally get settled. I therefore thought the risk of bankruptcy was very low. However, I figured if bankruptcy was a 50% chance I had a 50% chance to make 200% (since at 12x earnings the stock would be $90) or 50% chance to lose 100% of my money. This seemed like a good gamble where the odds were stacked in my favor. I decided to buy and was reassured when Whitney Tilson came out with a strong recommendation on the stock only days later. While the entire scenario has not played out yet, today BP is trading at $41.52. Again, I attribute this move to the influence Dreman had on me.
David Dreman’s “retirement” is a big loss to the value investing community. Besides being “The Original Contrarian”, he also wrote some very convincing arguments debunking the efficient market theory. David Dreman is a man who I will definitely miss.
To learn more about David Dreman check out my David Dreman resource page- http://www.valuewalk.com/resource-page-2/current-value-investors/david-dreman-resource-page/
Disclosure: Long BP, no position in XLF
http://www.valuewalk.com/
I wanted to share some ideas that I learned from Dreman, who has played a large role in forming my outlook on investing. I was also fortunate enough to meet Dreman last year and interview him, and it deepened my appreciation of the man.
For all not familiar with Dreman below is a long bio of Dreman’s long and impressive career as a writer and money manager:
David Dreman’s bio from Dreman.com
David Dreman is the founder, Chairman and Chief Investment Officer of Dreman Value Management, L.L.C., established in 1997. Mr. Dreman founded his first investment firm, Dreman Value Management, Inc., in 1977 and served as its President and Chairman until 1995, followed by a similar role at Dreman Value Advisors, Inc. from 1995 to 1997.
Mr. Dreman’s best selling book, Contrarian Investment Strategies – The Next Generation, was published in 1998 by Simon & Schuster. His previous widely acclaimed books include Psychology and the Stock Market (1977), The New Contrarian Investment Strategy: the Psychology of Stock Market Success (1980), and The Contrarian Investment Strategy (1982). Articles discussing the success of Mr. Dreman’s investment methodologies have appeared in national publications such as Forbes, Barron’s, Institutional Investor, The Wall Street Journal, The New York Times, Newsweek, Money andFortune.
A regular columnist for Forbes for over 29 years, he has presented before the National Bureau of Economic Research, the Society of Quantitative Analysts, the Harvard Medical School, the Cambridge Center for Behavioral Studies, the Institute of Behavioral Finance, the Association for Investment Management and Research (AIMR), the National Financial Analysts Seminar, as well as numerous other academic and professional groups. Mr. Dreman’s research findings have also been published in The Financial Analysts Journal, The Journal of Investing, and The Journal of Behavioral Finance.
Mr. Dreman is also co-editor of The Journal of Behavioral Finance, President of the Dreman Foundation, and a Director of the IFREE Foundation, whose founder Vernon Smith was awarded the Nobel Prize in Economics in 2002. Mr. Dreman was awarded a Doctor of Laws Degree from the University of Manitoba in 1999 and is a member of the Board of Trustees of the University of Manitoba.
More from GuruFocus: David Dreman is the founder and Chairman of Dreman Value Management, LLC and also serves as the firms Chief Investment Officer. His Large Cap Value Fund has returned average 17% annually, and Small Cap Value Fund average 16.5% annually since inception in 1991. A regular columnist for Forbes for 25 years, Mr. Dremans recent best-selling book, “Contrarian Investment Strategies – The Next Generation” was published in the spring of 1998.
I have noted earlier articles that Dreman was a cigar butt type of investor. He would look for the cheapest stocks in the market on the assumption that the market was over-reacting and there would be a reversion to the mean. Over time this strategy has worked very well with stocks in the lowest 20 percentile in terms of P/E, P/CF, P/B, and P/D. If possible Dreman would try to find stocks that had all four of these character traits.
Dreman was known for doing only cursory research on stocks. He believed it was very hard to analyze and get a true picture of a company’s health by looking at the financial statements. Anyone who took this approach with a concentrated portfolio could get killed. However, Dreman had a very diversified portfolio.
During 2008 this approach really hurt Dreman’s returns. Like many other investors, including many great value investors Dreman bought stocks that looked cheap based on valuation, but were highly leveraged and engaged in high risk activities.
While I do not by any means soley invest according to Dreman’s investment style, there were two instances that Dreman’s contrarian strategy really helped me make great investments.
In early 2009 it seemed as almost every day the market would just go lower and lower. Financials looked cheap but there was serious talk of nationalization. I felt at the time it was impossible to properly evaluate these financial institutions’ balance sheets. However the financial ETF (XLF, Financial) was trading at a low multiple to book value, and on the basis of the past three years of earnings. Even if the big banks were nationalized the ETF contained many banks that were unlikely to be taken over by the Government. I decided to buy the ETF and bought more when the ETF declined further. The luckiest moment of my investing career is when I purchased further shares on March 4th, 2009. Without reading Dreman’s writings I doubt I ever would have pulled the trigger.
The next moment came more recently with BP. The stock was tanking day after day. There was talk of definite bankruptcy and tens of billions of dollars in legal fees. I thought to myself whether BP a buy or not at $30 per share. It seemed that the market was mispricing the situation. The main thesis which I will briefly summarize it that it is highly unlikely BP will go bankrupt. The biggest threat to bankruptcy is huge legal costs and they would likely take many years to play out. Exxon-Valdez took about twenty years to finally get settled. I therefore thought the risk of bankruptcy was very low. However, I figured if bankruptcy was a 50% chance I had a 50% chance to make 200% (since at 12x earnings the stock would be $90) or 50% chance to lose 100% of my money. This seemed like a good gamble where the odds were stacked in my favor. I decided to buy and was reassured when Whitney Tilson came out with a strong recommendation on the stock only days later. While the entire scenario has not played out yet, today BP is trading at $41.52. Again, I attribute this move to the influence Dreman had on me.
David Dreman’s “retirement” is a big loss to the value investing community. Besides being “The Original Contrarian”, he also wrote some very convincing arguments debunking the efficient market theory. David Dreman is a man who I will definitely miss.
To learn more about David Dreman check out my David Dreman resource page- http://www.valuewalk.com/resource-page-2/current-value-investors/david-dreman-resource-page/
Disclosure: Long BP, no position in XLF
http://www.valuewalk.com/
