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David Dreman is the chairman of Dreman Value Management, and the author of Contrarian Investment Strategies: The Psychological Edge. He has been a columnist for Forbes since 1979. Recently, he sat down with Steve Forbes to talk about how investing has changed and why this market is the best he’s seen in 30 years. Video and a transcript of the first half of their conversation follows.
Steve Forbes: David, it’s good to have you with us. You’ve been a columnist for Forbes before I was born. 1979?
David Dreman: Yes. I’ve been a columnist here for a long time and very, very much enjoyed it.
Forbes: And you have a new book out called Contrarian Investment Strategies but here’s the kicker, The Psychological Edge. Just out – fresh. First of all, before we get to your methods of investing and your insights, you say this is the best time, that you’ve never seen stocks as cheap as they are today since 1982. Explain. This is good news.
Dreman: The averages are way down. I think back in 2000, the S&P was somewhere around 28 times earnings, and normally it’s probably about 17 or 18. And now, on 2012 earnings, it’s around 14, 15, so it’s very cheap. Companies are strong, cash flow is good, finances are probably the best they’ve been in years.
People are just terrified to go near stocks at this point. These huge outflows, out of mutual funds – $200-$300 billion last year alone – have made people just want to be out of the market because the huge volatility and the belief that this depression-like environment will go on for forever.
Forbes: Talking about earnings, do you see any threat to earnings in 2012-2013 from overseas? I mean, Europe’s going into a recession, Singapore had a bad fourth quarter. We’re moving, but not nearly what we should after severe downturn. Do you think earnings could have a nasty surprise that could upset your scenario? Or do you believe that even if earnings take a nick they’re still so cheap, these companies, that they’re still worth buying?
Dreman: I think I agree with you, what you just said. There could be, it’s hard to fine-tune earnings. And they could take somewhat of a nick because of European operations. But stocks are still very, very, cheap and I don’t think it would be a huge nick. Germany’s holding up reasonably well. We weren’t hurt much by what happened abroad this year. I don’t think we’re going to see foreign trade collapse like it did after 1929. I think there might be some changes, but I don’t think they’ll be very major.
Forbes: Go through, for us, your criteria for investing. Of course P/E ratios, sales too, profits and the like. And then get into some of the new tools you reveal in this new book.
Dreman: Right. Thank you, Steve. Well, we’ve always been contrarian investors.
Forbes: Is that another word for “value,” or do you feel that – explain the difference between contrarian and value.
source: forbes,com
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