Guzzo the Contrarian

One can’t discuss the concepts of contrarian investment strategies without mentioning the name David Dreman.

Mr. Dreman is considered by many to be the Guru of contrarian investing and literally wrote the book on the subject.

So, although it’s a little belated, I’d be remiss if I didn’t mention recent news of Mr. Dreman being fired from the flagship fund that bears his name.

Dreman, like other contrarian investors, was slammed last year for taking big positions in Fannie Mae and Freddie Mac.

According to Morningstar.com, his fund has trailed it’s peers over one- three- and five-year periods as of March 31, and has trailed more than half its peers over a 10-year period. As such, he has fallen out of favor with DWS fund trustees and let go as manager of the DWS Dreman High Return Equity Fund earlier in the month.

But, there’s always two sides to a coin. If the past is any indicator of the future, his firing in itself could serve as a contrarian indicator for the stock market. According to Floyd Norris, of The New York Times:

In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.

Even after being fired, Mr. Dreman still hasn’t changed his views about financials, real estate, and the stock market. According to excerpts from his most recent column at Forbes.com:

Even if stocks drop another 15% to 20%, they are likely to at least double from their current levels over the next five years.. I recommend exchange-traded funds because they give you cheap, easy access to a diversified portfolio of stocks in some down-and-out industries with good potential.

As any good contrarian knows, the key to success is patience. The bulk of my stock market portfolio consists of financials. I’m of the same opinion as Mr. Dreman, and I’m waiting. The market will recover soon enough, and the most beaten down stocks/sectors will be the best performers.