We invest in stocks and get various information from news, stock bulletin boards, and sometimes people around us. We make investments based on the information we get here, we collect our own information, and we make investment decisions based on the information/opinions that the majority say rather than the few.
At this time, is it always right for the majority to talk? Because it's something I don't know about and it's something that many people and media say, isn't it that they choose what they're talking about, or choose those arguments because they tell the story I want?
As you read this article, I hope you take the time to check your investment principles and investment methods.
A famous American investor named David Dreman created a technique called'reverse investing', who argued that the market is not efficient, people are not rational, and overreacts to emotions. Although he used to be criticized by other existing investors who thought the stock market was moving efficiently and reasonably, he continued to cultivate that logic.
Experience shows that when everyone comes to the same conclusion, that conclusion is almost always wrong. - David Dreman -
David Dreman left several words. It includes "humans instinctively prefer the best stocks and industries, and avoid the worst", and "in the long run, both popular and unpopular stocks are supposed to return to average."
The basic principle underlying his reversed investment technique is that humans (investors) are not rational. "Because humans are not rational, the stock market is equally unreasonable, " he points out, "human emotions are a problem when investing, and humans judge a certain idea or concept based on their likes and dislikes, " he points out. The reason why stocks bubble in the stock market, and sometimes the stock market plunges with fear, he says, is because the stock market isn't rational.
Invest in stocks that are marginalized in the stock market!
David Dreman said that we should invest in marginalized stocks instead of the rapidly rising stocks or theme stocks. One more thing to add here is that you should never invest in stocks that experts recommend and love.
The reason is that it is true that stock experts know more information than individual investors, but that does not mean that the prediction accuracy is high. Rather, it is that there are many cases where we focus only on popular stock recommendations and only talk optimistic about the recommended stock. He also says, "Because humans can't process a lot of information effectively, having a lot of information doesn't always make a better judgment."
In the current stock market, it often happens that the intrinsic value is overvalued. Because of these points, there are many cases where people think that they will go up even at ridiculously expensive prices, and in the case of a collapse, they do not think about the original value and think that it will fall further.
How to Contrarian Investment Strategies
As mentioned earlier, he used this human nature to find a Contrarian Investment Strategies to find unpopular stocks, and invested in that way.
His Contrarian Investment Strategies is to invest in stocks with low stock price/earnings ratio (PER), stock price net asset ratio (PBR), stock price cash ratio (PCR), and share price dividend ratio (PDR). In fact, he did this by far exceeding the average market return at the time. When investing in a portfolio with low PER stocks over the past 25 years in the US, the cumulative return reached a whopping 3,511%. Here, the low PCR stocks achieved an outstanding result of 3,464%.
However, our individual investors are bound to be interested in immediate profits rather than the main indicators of the company. Regarding this phenomenon, David Dreman said that humans in the stock market do not intuitively think, so they do not understand the principle of mean regression. The principle of this average regression is that the market is volatile, but eventually returns to the average price.
For example, when a stock rises, a curve appears and rises if it repeats the rise and fall rather than a straight diagonal line. But in the end, it gets closer to the stock's present value.
In fact, when you look into the stock market, stock prices often move higher or lower than the period during which they trade at the right price for the stock. Investing in David Dreman's unpopular stock often coincides with the way of investing in value.
Popular stocks and theme stocks that are being focused on right now are good, too, but how about looking for stocks, themes, and industries that are less often marginalized? There may be boredom right now, but after a certain period of time, there may be days when the stock or theme of my choice will lead the entire stock market.
This article is a translation of my Korean blog post using the Google Translate function.
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