Contrarian Investment Strategies B I Z

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Contrarian Investment Strategies B I Z

  1. 2. Contrarian Investment Strategies: The Next Generation Beat The Market By Going Against The Crowd AUTHOR: David N. Dreman PUBLISHER: Simon & Schuster DATE OF PUBLICATION: 1998 NUMBER OF PAGES: 464 pages Book pic
  2. 3. <ul><li>A book based on the author’s strategy that is based on an understanding of investor psychology. </li></ul><ul><li>In particular using the insight that the market overprices popular issues and oversells unpopular ones, in short he is a contrarian investor. </li></ul>THE BIG IDEA
  3. 4. The Rules of Investing <ul><li>Rule 1: Do not use market-timing or technical analysis. These techniques can only cost you money. </li></ul><ul><li>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. </li></ul><ul><li>Rule 3: Don't make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear. </li></ul><ul><li>Rule 4: Tread carefully with current investment methods. Our limitations in processing complex information correctly prevent their successful use by most of us. </li></ul>
  4. 5. The Rules of Investing <ul><li>Rule 5: There are no highly predictable industries in which you can count on analysts' forecasts. Relying on these estimates will lead to trouble. </li></ul><ul><li>Rule 6: Analysts' forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate. </li></ul><ul><li>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 . </li></ul><ul><li>Rule 8: It is impossible, in a dynamic economy with consistently changing political, economic, industrial, and competitive conditions, to use the past to estimate the future. </li></ul>
  5. 6. The Rules of Investing <ul><li>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 original projection. </li></ul><ul><li>Rule 10: Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks. </li></ul><ul><li>Rule 11: Positive and negative surprises affect the &quot;best&quot; and &quot;worst&quot; stocks in a diametrically opposite manner. </li></ul>
  6. 7. The Rules of Investing <ul><li>Rule 12: </li></ul><ul><ul><li>Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites. </li></ul></ul><ul><ul><li>Positive surprises result in major appreciation for out-of-favor stocks, while having minimum impact on favorites. </li></ul></ul><ul><ul><li>Negative surprises result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks. </li></ul></ul><ul><ul><li>The effect of earnings surprises continues for an extended period of time. </li></ul></ul>
  7. 8. The Rules of Investing <ul><li>Rule 13: Favored stocks underperform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially. </li></ul><ul><li>Rule 14: Buy solid companies currently out 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. </li></ul><ul><li>Rule 15: Don't speculate on high 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. </li></ul>
  8. 9. The Rules of Investing <ul><li>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. </li></ul><ul><li>Rule 17: Buy only contrarian stocks because of their superior performance characteristics. </li></ul><ul><li>Rule 18: Invest equally in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size). </li></ul><ul><li>Rule 19: Buy medium- or large sized stocks listed on the New York Stock Exchange, or only the larger companies on NASDAQ or the American Stock Exchange. </li></ul>
  9. 10. The Rules of Investing <ul><li>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. </li></ul><ul><li>Rule 21: Sell a stock when its PER (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock. </li></ul><ul><li>Rule 22: Look beyond obvious similarities between a current investment situation and one that appears equivalent in the past. Consider other important factors that may result in a markedly different outcome. </li></ul>
  10. 11. The Rules of Investing <ul><li>Rule 23: Don't be influenced by the short-term record of a money manager, broker, analyst, or adviser, no matter how impressive; don't accept easy cursory economic or investment news without significant substantiation. </li></ul><ul><li>Rule 24: Don't rely on the &quot;case rate&quot;. Take into account the &quot;base rate&quot; - the prior probabilities of profit or loss. </li></ul><ul><li>Rule 25: Don't be seduced by recent rates of return for individual stocks or the market when they deviate sharply from past norms (the &quot;case rate&quot;). Long-term returns of stocks (the &quot;base rate&quot;) are far more likely to be established again. If returns are particularly high or low, they are likely to be abnormal. </li></ul>
  11. 12. The Rules of Investing <ul><li>Rule 26: Don't expect the strategy you adopt will prove a quick success in the market, give it a reasonable time to work out. </li></ul><ul><li>Rule 27: The push toward an average rate of return is a fundamental principle of competitive markets. </li></ul><ul><li>Rule 28: It is far safer to project a continuation of the psychological reactions of investors than it is to project the visibility of the companies themselves. </li></ul><ul><li>Rule 29: Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don't sell. </li></ul>
  12. 13. The Rules of Investing <ul><li>Rule 30: In a crisis, carefully analyze the reasons put forward to support lower stock prices - more often than not they will disintegrate under scrutiny. </li></ul><ul><li>Rule 31: </li></ul><ul><ul><li>Diversify extensively. No matter how cheap a group of stocks looks, you never know for sure that you aren't getting a clinker. </li></ul></ul><ul><ul><li>Use the value lifelines as explained. In a crisis, these criteria get dramatically better as prices plummet, markedly improving your chances of a big score. </li></ul></ul><ul><ul><li>Rule 32: Volatility is not risk. Avoid investment advice based on volatility. </li></ul></ul>
  13. 14. The Rules of Investing <ul><li>Rule 33: Small-cap investing: Buy companies that are strong financially (normally no more than 60% debt in the capital structure for a manufacturing firm). </li></ul><ul><li>Rule 34: Small-cap investing: Buy companies with increasing and well-protected dividends that also provide above-market yield. </li></ul><ul><li>Rule 35: Small-cap investing: Pick companies with above-average earnings growth rates. </li></ul><ul><li>Rule 36: Small-cap investing: Diversify widely, particularly in small companies, because these issues have far less liquidity. A good portfolio should contain about twice as many stocks as an equivalent large-cap one. </li></ul>
  14. 15. The Rules of Investing <ul><li>Rule 37: Small-cap investing: Be patient. Nothing works every year, but when smaller caps click, returns are often tremendous. </li></ul><ul><li>Rule 38: Small company trading (e.g. NASDAQ): Don't trade thin issues with large spreads unless you are almost certain you have a big winner. </li></ul><ul><li>Rule 39: When making a trade in small, illiquid stocks, consider not only commissions, but also the bid/ask spread to see how large your total cost will be. </li></ul><ul><li>Rule 40: Avoid the small, fast-track mutual funds. The track often ends at the bottom of a cliff . </li></ul>
  15. 16. BusinessSummaries.com is a business book Summaries service. Every week, it sends out to subscribers a 9- to 12-page summary of a best-selling business book chosen from among the hundreds of books printed out in the United States every week. For more information, please go to http://www.bizsum.com. ABOUT BUSINESSSUMMARIES

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