As mentioned in previous post, I just completed reading “Contrarian Investment Strategies” by David Dreman last week. The book contains over 400 pages, but author summarized the contents into 41 rules. Let’s take a look at the 1st to 21st rules with Rolf’s two cents opinion in italics. It is no expert comments and may be biased and wrong, please bear with me and appreciate any valuable opinions.
Myths of Past
Information
Information
Rule 1: Do not use market-timing or technical analysis. These techniques can
only cost you money.
only cost you money.
Do not agree. TA is an important tool for Traders
and provides indications of when to buy/sell even for long term investors. While frequent trading is discouraged, case by case trading is still valid.
and provides indications of when to buy/sell even for long term investors. While frequent trading is discouraged, case by case trading is still valid.
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.
can use it successfully. In-depth information does not translate into in-depth
profits.
In-depth info is useful
when it is organised properly, convert into action preceded by a plan. Sometimes I also rely on my
“gut feel” after performing extensive research.
when it is organised properly, convert into action preceded by a plan. Sometimes I also rely on my
“gut feel” after performing extensive research.
Rule 3: Do not make an investment decision based on correlations. All correlations
in the market, whether real or illusory, will shift and soon disappear.
in the market, whether real or illusory, will shift and soon disappear.
Rule 4: Tread carefully with current investment methods. Our limitations
in processing complex information correctly prevent their successful use by
most of us.
in processing complex information correctly prevent their successful use by
most of us.
Analysts’ Forecast
Rule 5: There are no highly predictable industries in which you can count on
analysts’ forecasts. Relying on these estimates will lead to trouble.
analysts’ forecasts. Relying on these estimates will lead to trouble.
Analyst info such as factual statistics compiled is useful for reference. Beware against forecast / estimates and perform your own
research extensively. Always be conservative on Analyst reports.
research extensively. Always be conservative on Analyst reports.
Rule 6: Analysts’ forecasts are usually optimistic. Make the appropriate downward
adjustment to your earnings estimate.
adjustment to your earnings estimate.
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.
estimates that is impossible to provide. Avoid methods that demand this level
of accuracy.
Past as Reference but cannot predict Current
Rule 8: It is impossible, in a dynamic economy with constantly changing
political, economic, industrial, and competitive conditions, to use the past
accurately to estimate the future. The past gives some frame of reference but
cannot be exact.
political, economic, industrial, and competitive conditions, to use the past
accurately to estimate the future. The past gives some frame of reference but
cannot be exact.
Prepare for the Worst
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 initial projection.
human tendency to be both overly optimistic and overly confident. Expect the
worst to be much more severe than your initial projection.
Invest in
out-of-favour stocks
out-of-favour stocks
Rule 10: Take advantage of the high rate of analyst forecast error by
simply investing in out-of-favour stocks.
simply investing in out-of-favour stocks.
Do not agree! Perform your own research. Buy stocks that possess the 3Rs – Right Management, Right Business Model and Right Value (FA).
Positive /Negative Surprises – How it affects Favoured /Out-of-
Favoured Stocks
Favoured Stocks
Rule 11: Positive and negative surprises affect “best” and “worst” stocks
in a diametrically opposite manner.
in a diametrically opposite manner.
This means that if there
are positive surprises that cause a rise in stock price, it will trend upwards
in a faster manner, because people are expecting more out of the stock for a
huge profit. Conversely, if there are negative surprises that cause a slide in
stock price, it will trend downwards in a slower manner, because people are not
expecting too much with a price decline. Have to do with Greed, kind of
agree.
are positive surprises that cause a rise in stock price, it will trend upwards
in a faster manner, because people are expecting more out of the stock for a
huge profit. Conversely, if there are negative surprises that cause a slide in
stock price, it will trend downwards in a slower manner, because people are not
expecting too much with a price decline. Have to do with Greed, kind of
agree.
Rule 12:
(A) Surprises, as a group, improve the
performance of out-of-favour stocks, while impairing the performance of favourites.
performance of out-of-favour stocks, while impairing the performance of favourites.
(B) Positive surprises result in major appreciation for out-of-favour
stocks, while having minimal impact on favourites.
(C) Negative surprises result in major drops in the price of favourites, while having
virtually no impact on out-of-favour stocks.
(D) The effect of an earnings surprise continues for an extended period of
time.
stocks, while having minimal impact on favourites.
(C) Negative surprises result in major drops in the price of favourites, while having
virtually no impact on out-of-favour stocks.
(D) The effect of an earnings surprise continues for an extended period of
time.
Contrarian advocates
that we buy out-of-favoured stocks that have solid fundamentals because when positive
surprises crop up, it normally goes up at a faster rate! On the contrary if you
buy darling stocks, and negative surprises surface, it will fall dramatically. Kind
of agree. One example is Super Group price free-fall due to the crisis in Thailand. Use to be a darling stocks with PE of 27. Hit by political crisis, PE drop to 16 and below at one stage.
that we buy out-of-favoured stocks that have solid fundamentals because when positive
surprises crop up, it normally goes up at a faster rate! On the contrary if you
buy darling stocks, and negative surprises surface, it will fall dramatically. Kind
of agree. One example is Super Group price free-fall due to the crisis in Thailand. Use to be a darling stocks with PE of 27. Hit by political crisis, PE drop to 16 and below at one stage.
Rule 13: Favoured stocks under-perform the market, while out-of-favour
companies outperform the market, but the reappraisal often happens slowly, even
glacially.
companies outperform the market, but the reappraisal often happens slowly, even
glacially.
Rule 14: Buy solid companies currently out of market favour, as measured by
their low price-to-earnings, price-to-cash flow or price-to-book value ratios,
or by their high yields.
their low price-to-earnings, price-to-cash flow or price-to-book value ratios,
or by their high yields.
Agree on the 4
strategies, but there can be situations that the out of favoured stocks stay
unnoticed for many years (or for reasons unknown to retail investors), even when fundamentals seems to be strong. Examples Triyards and Marco Polo Marine within the O&G
sector trading at PE way below their peers.
strategies, but there can be situations that the out of favoured stocks stay
unnoticed for many years (or for reasons unknown to retail investors), even when fundamentals seems to be strong. Examples Triyards and Marco Polo Marine within the O&G
sector trading at PE way below their peers.
Rule 15: Don’t speculate on highly 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.
above-average returns. The blue chip stocks that widows and orphans
traditionally choose are equally valuable for the more aggressive businessman
or woman.
Avoid Trading
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.
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.
Case by case, but
keep trading to minimum. Rolf suggest trading cost within 1-2% of cost of investments.
My average trading cost is 0.5%.
keep trading to minimum. Rolf suggest trading cost within 1-2% of cost of investments.
My average trading cost is 0.5%.
Contrarian Stocks
Rule 17: Buy only contrarian stocks because of their superior performance
characteristics.
characteristics.
Diversify across
Industries
Industries
Rule 18: Invest equally in 20 to 30 stocks, diversified among 15 or more industries
(if your assets are of sufficient size).
(if your assets are of sufficient size).
Diversification
across industries is important but make sure your portfolio is sizeable to
diversify and do not incur high trading fees.
across industries is important but make sure your portfolio is sizeable to
diversify and do not incur high trading fees.
Buy Large and Medium
sized stocks listed in NYSE
sized stocks listed in NYSE
Rule 19: Buy medium-or large-sized stocks listed on the New York Stock Exchange,
or only larger companies on Nasdaq or the American Stock Exchange.
or only larger companies on Nasdaq or the American Stock Exchange.
Disagree.
Buy using Four
Contrarian Strategies
Contrarian Strategies
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.
the four contrarian strategies, regardless of how high or low the general price
of the industry group.
Rule 21: Sell a stock when its P/E ratio (or other contrarian indicator)
approaches that of the overall market, regardless of how favourable prospects
may appear. Replace it with another contrarian stock.
approaches that of the overall market, regardless of how favourable prospects
may appear. Replace it with another contrarian stock.
Case by case. Some smaller-cap stocks
have PE above market value, due to their growth potentials. It does not mean that we should immediately sell. One likely example is Vallianz holdings.
have PE above market value, due to their growth potentials. It does not mean that we should immediately sell. One likely example is Vallianz holdings.
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