Dreman Value Management is a pioneer in the field of contrarian value investing. Our investment philosophy has been in place since our predecessor firm was founded in 1977 by renowned contrarian investor David Dreman.
We believe that the markets are not perfectly efficient and that, in particular, behavioral psychology plays a considerable role in stock price movements. This belief is supported by 30+ years of research conducted by David Dreman and the Institute of Behavioral Finance, which has offices at Dreman Value Management. These studies prove that the market overreacts to events in a predictable fashion and that it consistently misjudges the prospects for stocks, often resulting in over-exuberance for outperforming stocks and outsized negativity for underperforming stocks. This pattern provides validity for Dreman Value Management's basic investment strategy of buying financially strong companies paying above-average dividends, but which are currently out of favor. Over time, our studies indicate that in the great majority of cases, there has been a resurgence of earning power followed by renewed enthusiasm and higher market prices.
We believe that the best way to identify these undervalued or out of favor stocks is through a low price-to-earnings (P/E) approach to stock valuation. Although the low P/E method has an outstanding statistical record, it is rarely followed by investment advisors or by investment committees of large banks and insurance companies. Why? The answer, again, lies in behavioral finance. There are simply too many forces in the contemporary money management environment - peer pressures, client pressures, career pressures, psychological forces and the like-that result in following the prevailing trends and fashions. This failure to adhere to proven and disciplined investment philosophies is, we believe, the principal reason for the lackluster record of so many management firms. The countless studies on low P/E investing suggest that the cost to their clients in terms of "investment opportunities foregone" has been enormous.
We conclude that combining a close understanding of behavioral finance with a low P/E approach to stock selection provides the best way to beat the market over time. This contrarian value philosophy leads to a highly disciplined approach to investing that avoids style drift and offers downside protection.