David Dreman: A Very Undervalued Value Investor

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Oct 24, 2010
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When people think of some of the greatest investors and thinkers of our time names like Warren Buffett , and George Soros come to mind. Many other investors are highly respected inside and outside the value investing world, Bruce Berkowitz being a good example.

However, one of the people who people do not talk about as much is David Dreman. David Dreman was both a great investor and thinker. When it came to behavioral finance he is in the same league as people like Robert Shiller, and James Montier. He also does a masterful job in showing what the Efficient Market Theory really is; the world is flat theory.

(To learn more about David Dreman check out my resource page devoted to him- David Dreman Resource Page)

David Dreman is the founder and Chairman of Dreman Value Management, LLC and also serves as the firm’s 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.

When I first started value investing several years ago, one of the first books on the topic that I read was by David Dreman . His thinking and investment style had a profound impact on me.

David Dreman has authored several books on investing including “Contrarian Investment Strategies - The Next Generationir?t=valueinves08c-20&l=as2&o=1&a=0684813505,” “Psychology and the Stock Marketir?t=valueinves08c-20&l=as2&o=1&a=0814454291,” “Contrarian Investment Strategies - The Next Generationir?t=valueinves08c-20&l=as2&o=1&a=0684813505,” and “The New Contrarian Investment Strategyir?t=valueinves08c-20&l=as2&o=1&a=0394523644.” He also founded the investment firm; Dreman Value Management, Inc. Dreman is a contributing writer for Forbes magazine.

The contrarian investing method developed by David Dreman is based on the theory that you invest in a way that is different from “the herd”. A contrarian investor looks for stocks that seem to be undervalued by the rest of the market. Dreman believes that psychological forces often keep people from going against the market trends and that much of how investors react to the stock market is based on psychology.

A contrarian investor believes that the crowd can drive prices so low that it overstates the company’s risk. Too often people follow the crowd so to say, instead of doing their homework. So, when prices are low, the contrarian buys and then sells them when the stock recovers. This results in above-average gains.

This is not exactly value investing. Dreman believed little in fundamental analysis, and would buy many stocks that were value traps. However, since he was so diversified he was able to withstand the losses caused by the stocks which underperformed.

If the crowd drives prices high by being overly optimistic about a stock, the contrarian investor avoids that stock until prices are settled. Basically, they look for opportunities to do the opposite of what the majority of the other investors are doing. Most investors think it takes courage and greater risk to go against the market, but it may also provide greater rewards.

Following the Dreman investment philosophy is for investors who can analyze and see the long-term big picture. As I have stated on numerous occasions, everyone in hindsight says it was obvious stocks were undervalued but how many people were actually buying stocks in early 2009.

Some of the rules to contrarian investing according to David Dreman are:

• Do not invest based on correlations

• Market timing techniques only cost you money

• Do not rely on analysts’ forecasts

• You cannot use the past to reliably predict the future

• Invest in out-of-favor stocks

• Avoid unnecessary trading

• Diversify among industries

• Look at least expensive stocks in an industry

• Don’t be impressed by short-term records of brokers or analysts

• During a panic, buy and not sell

Some contrarian investors follow volatility indexes to track the prices and determine how optimistic or pessimistic the market is. When the indexes are low, they consider the market more optimistic. By following the index trends, they determine when they should buy.

Going against the herd proved especially well, when the contrarians were not investing in technology stocks during the dotcom bubble, but rather looking for other industries to invest in. David Dreman correctly predicted the tech bubble crash He predicted the crash would happen because the Mr. market was overreacting. If you have a diversified portfolio and follow Dreman’s approach you are likely to have good results.

For some reason Dreman is not as popular as many other value investors who have a worse track record then him. In my opinion, Dreman is very undervalued.

Another investor who I think is greatly unappreciated is John Neff. I will talk about him in my next article.



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