The Dreman Contrarian Model
Dreman rejects both fundamental and technical analysis.
---------------------------------------------------------------------------------
----------------------------------------------
A contrarian, David Dreman rejects both technical and fundamental analysis approaches to stock market investment and offers a psychological model as a more reasonable alternative. He identifies the approach as the low price/earnings ratio investment strategy.
Dreman's objection to the traditional approaches isn't flippant; he devotes several chapters to the critique.
---------------------------------------------
The key behind Dreman's view is to go against the crowd and buy good stocks that are out of favor. In Dreman's words:
The evidence strongly supports an investment philosophy of buying solid companies currently out of market favor as measured by their price/earnings ratio.
Dreman's approach is psychological in that it depends on the popularity of a stock rather than fundamental or technical factors. It's a function of what people think of a stock. Technical and fundamental analyses are correct sometimes but too often wrong. But people themselves can be relied on to behave the same way, following the crowd and getting caught up in the popularity of stocks.
The rule is to buy good stocks (??) that suffer from poor visibility.
What seems apparent is that companies the experts like best tend to be the wrong ones to buy. We must therefore ask: should one avoid the stocks the experts or the crowd are pursuing, and pursue the ones they are avoiding? The answer ... is ... yes.
The main argument is that people believe -- incorrectly, he says -- that they can predict which stocks will perform well and which will do badly.
Just as people get carried away by the high flyers, so too they go to extremes in their rejection of stocks. Even solid companies drop off the investor's radar screen. It's this principle you can take to the bank. It's these stocks you should buy, according to Dreman.
---------------------------------------------
Although Dreman generally throws traditional market selection tools into the trash can, he nevertheless adopts certain indicators, as follows:
--------------------------------------------