$$$$$ = new or old, an indispensable classic
$$$$ = first-rate: informative, helpful and a good read
$$$ = a useful book on investing
$$ = some good ideas but hampered by weaknesses
$ = skip it
. ($$$+). Simon & Schuster, 1998.
new book is, once again, ahead of its time, and once again readers can profit from heeding his advice.
In his last book, the wonderfully written and researched
New Contrarian Investment Strategies
, Dreman forecast that we could be at the beginning of "one of the major bull market runs of the century." That was in the fall of 1982 -- one of the great market calls of all time.
So what does he say about the markets today? For Dreman, a diehard value investor, the recent market run-up is symptomatic of a market top. No, he is not suggesting that investors sell all and take cover. But he does suggest that we take a hard look at the relationship of risk and reward throughout market history, fully understand the pitfalls of human judgment, and regard with suspicion those who say we are in a "new era" where the "old" valuation tools no longer apply.
"I've been here before," he says in the introduction, and cautions, "Never in my recollection or in my study of previous markets have I seen such widespread investor enthusiasm for stocks -- even including the run-up prior to the 1929 Crash. The price of stocks, relative to what we call 'fundamentals,' is higher than in 1929 or in 1987, the years of the two great market crashes of the twentieth century."
This is not, however, a gloom-and-doom book. All Dreman wants is to remind readers that there are prudent ways to tip the odds of investment success in our favor, and that if we attend to some basic rules of investing (he gives 41 of them sprinkled throughout the book), we can limit our downside exposure and vastly improve our upside.
Much of the book covers material familiar to readers of his other books as well as his columns in
. He spends quite a while debunking technical analysis, market timing, the credibility of analyst earnings forecasts, efficient market theory, momentum investing and investors' insatiable appetite for financial information. "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." And elsewhere, "Most current security analysis requires a precision in analysts' estimates that is impossible to provide. Avoid methods that demand this level of accuracy."
In its place, Dreman suggests investors follow one of his four contrarian strategies, all of which are designed to tip the odds of success in your favor.
1. Low P/E -- a strategy that "has outperformed in both up and down markets since the mid-1930s, and likely will for a good deal longer."
2. Low price-to-cash flow.
3. Low price-to-book value -- stocks selected by these criteria have outperformed the market on a total-return basis, helped along by their higher dividends.
4. Price-to-dividend -- this strategy still beat the market, but not by as high a margin as the other three. Again, higher-yielding stocks provide the better total return (capital gains plus dividends). Indeed, Dreman says that almost half of their outperformance can be attributed to their superior dividends.
Dreman's books are always superbly researched and documented, and he seems to relish in refuting those academics and money managers who have ridiculed his contrarian strategies, chiding them with the results of his comprehensive studies. But I must admit, the vast majority of the book is negative: criticizing faddish investment strategies, taking pleasure in exposing the inaccuracy of highly paid Wall Street analysts, and reminding readers over and over about the dangers of mass psychology and the emotional excesses we fall into. After 400 pages of this, a reader can grow weary of the lessons.
But I urge investors not to wait until the next bear market to read Dreman's book. The lessons here are simply meant to show us how we can we can increase our chances of success by following some well-tested strategies.
Roger Segal, the main keeper of the Investors' Bookshelf, writes his reviews from Manhattan's Upper West Side. He welcomes your feedback at