David Dreman's Advice for a Bear Market
Quote:
Originally Posted by
Hoop
PAUL B. FARRELL
14 winning strategies for a bear-market recession
Commentary: Sell stocks, realty, commodities, and buy bonds, dollar
That was an interesting article by Farrell. David Dreman expressed almost the opposite point of view in one of his regular his Forbes Magazine articles last October http://www.forbes.com/personalfinanc.../1015/106.html (free access but registration is required).
The article title "Panic No. 12" referred to the twelve major market sell-offs since the end of World War II. Dreman says:
Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.
During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."
This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.
Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.
Dreman and Buffet (and Ben Graham)
Quote:
Originally Posted by
Hoop
Deev It seems David Dremans strategies have touch of Buffet.
Similarities aren't surprising I suppose. They were both students of Ben Graham at Columbia University, although Dreman's approach is closer to Graham's concentrating more on quantitative analysis while Buffet places more emphasis on the quality of management and identification of companies with "defensive moats" etc