Exclusive Interview with the Dean of Contrarian Investing
“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.”
That’s what David Dreman wrote back in 1980. At the time, the S&P 500 was sitting around 100 and the Dow was trading around 900 and had plenty of volatile swings. But it pretty much went nowhere for more than a decade.
Practically no one was interested in buying stocks back then. That is, of course, except for Dreman.
In 1980, he literally wrote the book on contrarian investing – Contrarian Investment Strategy: The Psychology of Stock-Market Success - in which he recommended buying stocks.
The book was spot on in its timing and has gone on to be a classic when it comes to investment books. And it has earned Dreman the title of “Dean of Contrarian Investing” by some.
Since then, Dreman has had quite a few more major successes. One of the biggest was buying financial stocks in the early 90’s after they had been decimated by the Savings & Loan Crisis.
As you might expect, Dreman’s success has attracted a large following. At last report, Dreman Value Management had more than $8.5 billion of assets under management.
Dreman has been managing money for decades and has survived and thrived despite many different crises and under almost every market condition.
Naturally, he’d be a great person to have a one-on-one with to get some insight into the current crisis, right?
Well, at the Prosperity Dispatch we routinely get the chance to sit down with some of the legends. This time David Dreman made some time for us. Below you’ll find a full transcript of our recent discussion. In it you’ll see:
-Where Dreman sees “huge upside”
-The one strategy which allows you to safely catch any upturn while still being safely positioned in the markets for a downturn
-The one investment Dreman is buying, yet 99% of the world would consider “crazy”
-The sector which should be good for a “double or triple”
-Why you should be using “Shotgun” style investing now more than ever
Those of us at Q1 Publishing may not necessarily agree with him on everything. Everyone has a right to their own opinion. But given his track record for going against herd, he’s definitely worth listening to. Here it is. Enjoy.
Andrew Mickey: Our focus today is to get your thoughts on the current situation. You’ve been through similar situations when stocks were greatly out of favor and played it right.
We’ve researched how investors have reacted to past crises. What are some similarities and differences that you see with this crisis compared to others? Also, how do you see this affecting market psychology?
David Dreman: Well, all of these financial crises are just starting it now. This crisis has been accelerating for the last 15 or 20 years. We always had little bubbles with technology stocks and whatnot, but bubbles had totally distorted the whole landscape to the point we’re at now.
It equates to market history. We had a true crisis in 1929. We didn’t have another really serious crisis until about 1987. There was a long period without a true crisis.
Since then, a lot has changed. Money managers, analysts, and bankers had more education and training. If anything, they are more knowledgeable and smarter. But the more education and training they had, the greater confidence they had, and the more likely they are to make an error from a psychological point of view.
What we are seeing now is that the current crisis is probably as bad as anything since the Great Depression. That goes until about 1940.
There are many similarities. Just before the First World War we had unemployment of about 10%...very likely it will get even higher than that now. After the Second World War we had higher unemployment than that and the banking system had collapsed in the early ‘30s.
It’s pretty bad. But the extent of collapse this time is probably worse worldwide than we had ever seen before. Credit is unavailable. And all major industrial economies run on credit.
Andrew Mickey: Ahhh, credit. The global economy has relied on credit for a long time. Supply lines are tighter than they’ve ever been before and the relationships between businesses and customers are very close, and it all relies on credit. What do you see happening as a result of bankers who can’t or won’t extend credit?
David Dreman: I was curious about this, but it looks like the credit-based economy goes right back to the 1930’s. It was always about credit use. Now, all of a sudden, that’s changing. Nobody wants to step up and extend credit. Bankers are totally risk averse.
So we are seeing – this time really is different. We have never been in this world. I don’t think even in the ‘30s. The multiplier effect is working in reverse.
The multiplier effect has a big positive impact on an economy. When the multiplier effect runs in reverse, everything that goes down brings something down somewhere else. Everything is so interrelated.
Banks don’t even have the chance to get credit when everything is falling. The impact can be seen clearly in the auto industry.
GM and Ford may not make great cars. But with the way things are they can’t even sell them. Some people have obviously come down hard on them but at the same time, but it’s not about their ability to make cars. It’s really about their ability to sell the cars. I don’t know the exact percentage, but I suspect 70% of cars are bought on credit so people can’t buy cars right now.
So you take quality companies like GM, Chrysler and whoever makes cheap cars and all their sales are off enormously. But you take Toyota and they’re hurt too. This is the first time it has lost money.
And you have this worldwide credit crisis where people can’t get credit for big ticket items like cars. Banks are just terrified to lend because they have so many bad assets.
That’s how you get to the dissolution of the auto industry…That’s how we get to the point of panic.
But it’s a bigger panic than we have seen in since World War II. So to find a reasonably close comparison of anything of this magnitude, we have to go back to the ‘30s. The best thing to do then was…
To read more of David Dreman’s take on the market and learn what he sees as a “double or a triple” and “shotgun”-style investing follow this link.
Andrew Mickey
www.q1publishing.com
“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.”
That’s what David Dreman wrote back in 1980. At the time, the S&P 500 was sitting around 100 and the Dow was trading around 900 and had plenty of volatile swings. But it pretty much went nowhere for more than a decade.
Practically no one was interested in buying stocks back then. That is, of course, except for Dreman.
In 1980, he literally wrote the book on contrarian investing – Contrarian Investment Strategy: The Psychology of Stock-Market Success - in which he recommended buying stocks.
The book was spot on in its timing and has gone on to be a classic when it comes to investment books. And it has earned Dreman the title of “Dean of Contrarian Investing” by some.
Since then, Dreman has had quite a few more major successes. One of the biggest was buying financial stocks in the early 90’s after they had been decimated by the Savings & Loan Crisis.
As you might expect, Dreman’s success has attracted a large following. At last report, Dreman Value Management had more than $8.5 billion of assets under management.
Dreman has been managing money for decades and has survived and thrived despite many different crises and under almost every market condition.
Naturally, he’d be a great person to have a one-on-one with to get some insight into the current crisis, right?
Well, at the Prosperity Dispatch we routinely get the chance to sit down with some of the legends. This time David Dreman made some time for us. Below you’ll find a full transcript of our recent discussion. In it you’ll see:
-Where Dreman sees “huge upside”
-The one strategy which allows you to safely catch any upturn while still being safely positioned in the markets for a downturn
-The one investment Dreman is buying, yet 99% of the world would consider “crazy”
-The sector which should be good for a “double or triple”
-Why you should be using “Shotgun” style investing now more than ever
Those of us at Q1 Publishing may not necessarily agree with him on everything. Everyone has a right to their own opinion. But given his track record for going against herd, he’s definitely worth listening to. Here it is. Enjoy.
Andrew Mickey: Our focus today is to get your thoughts on the current situation. You’ve been through similar situations when stocks were greatly out of favor and played it right.
We’ve researched how investors have reacted to past crises. What are some similarities and differences that you see with this crisis compared to others? Also, how do you see this affecting market psychology?
David Dreman: Well, all of these financial crises are just starting it now. This crisis has been accelerating for the last 15 or 20 years. We always had little bubbles with technology stocks and whatnot, but bubbles had totally distorted the whole landscape to the point we’re at now.
It equates to market history. We had a true crisis in 1929. We didn’t have another really serious crisis until about 1987. There was a long period without a true crisis.
Since then, a lot has changed. Money managers, analysts, and bankers had more education and training. If anything, they are more knowledgeable and smarter. But the more education and training they had, the greater confidence they had, and the more likely they are to make an error from a psychological point of view.
What we are seeing now is that the current crisis is probably as bad as anything since the Great Depression. That goes until about 1940.
There are many similarities. Just before the First World War we had unemployment of about 10%...very likely it will get even higher than that now. After the Second World War we had higher unemployment than that and the banking system had collapsed in the early ‘30s.
It’s pretty bad. But the extent of collapse this time is probably worse worldwide than we had ever seen before. Credit is unavailable. And all major industrial economies run on credit.
Andrew Mickey: Ahhh, credit. The global economy has relied on credit for a long time. Supply lines are tighter than they’ve ever been before and the relationships between businesses and customers are very close, and it all relies on credit. What do you see happening as a result of bankers who can’t or won’t extend credit?
David Dreman: I was curious about this, but it looks like the credit-based economy goes right back to the 1930’s. It was always about credit use. Now, all of a sudden, that’s changing. Nobody wants to step up and extend credit. Bankers are totally risk averse.
So we are seeing – this time really is different. We have never been in this world. I don’t think even in the ‘30s. The multiplier effect is working in reverse.
The multiplier effect has a big positive impact on an economy. When the multiplier effect runs in reverse, everything that goes down brings something down somewhere else. Everything is so interrelated.
Banks don’t even have the chance to get credit when everything is falling. The impact can be seen clearly in the auto industry.
GM and Ford may not make great cars. But with the way things are they can’t even sell them. Some people have obviously come down hard on them but at the same time, but it’s not about their ability to make cars. It’s really about their ability to sell the cars. I don’t know the exact percentage, but I suspect 70% of cars are bought on credit so people can’t buy cars right now.
So you take quality companies like GM, Chrysler and whoever makes cheap cars and all their sales are off enormously. But you take Toyota and they’re hurt too. This is the first time it has lost money.
And you have this worldwide credit crisis where people can’t get credit for big ticket items like cars. Banks are just terrified to lend because they have so many bad assets.
That’s how you get to the dissolution of the auto industry…That’s how we get to the point of panic.
But it’s a bigger panic than we have seen in since World War II. So to find a reasonably close comparison of anything of this magnitude, we have to go back to the ‘30s. The best thing to do then was…
To read more of David Dreman’s take on the market and learn what he sees as a “double or a triple” and “shotgun”-style investing follow this link.
Andrew Mickey
www.q1publishing.com
