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Msg  2 of 12  at  7/27/2006 1:11:09 PM  by


Dreman-Buying oppotunity?

David Dreman

There was a time when David Dreman, 70, the noted contrarian investor and investment chief of $17 billion Dreman Value Management, followed the crowd. It was 1969, and Dreman, then a junior analyst, watched in wonder as the shares of tiny companies with negligible earnings skyrocketed. "I invested in the stocks du jour and lost 75% of my net worth," Dreman says. "It was the only time I had an ulcer."

His stomach feels better now. Turning his back on the herd, he became fascinated with how human psychology affects investing why, for example, people overpay for stocks and why they make the same mistakes again and again. "Why don't people just get it?" Dreman asks. "We know from 50 years of data that low price-to-earnings stocks will outperform high-P/E stocks." One million dollars invested since 1970 in low-P/E stocks, he notes, would have earned $228 million, versus $23 million from those with high valuations.

Dreman says that people fall prey to all sorts of biases when they buy stocks. If you can avoid the biases, you can avoid mistakes. "I don't know what kind of car he drives," says Richard Zeckhauser, who teaches a course in behavioral finance at Harvard University. "But if he were to choose between a BMW and a Buick, he might want the Buick. He will not overpay for status."

In other words, he invests in the kind of sensible stocks that are the equivalent of a Buick. Who, for example, would brag about owning a drug company? Big Pharma stocks have been pounded because investors think there are more headaches over lawsuits than new drugs to cure the headaches. Dreman is using that disconnect as an opportunity to add to his positions in Merck and Pfizer; he also owns Johnson & Johnson and Wyeth. That contrarian attitude earned his DWS Dreman High Return Equity fund Lipper's No. 1 ranking among equity income funds. Since 1988 it has returned an average of 14% a year, compared with an 11.6% return for the S&P 500.

While Dreman is talking, the market tumbles 250 points. His computer screen is a sea of red blinking lights. Some might panic. Not Dreman. In fact, color comes to his pale skin. "I paraphrase Lord Rothschild: 'The time to buy is when there's blood on the streets.'" Dreman is smiling.

Dreman's Picks
His research shows that an out-of-favor stock with positive earnings surprises will outperform the market by 92%. Here are three that are poised for good news.
Aetna (AET)
Suffering from an overreaction to bad earnings, but gaining market share.
Merck (MRK)
While victimized by Vioxx, its research engine is going gangbusters.
UnitedHealth Group (UNH)
Knocked down after a disclosure of exorbitant CEO pay. Otherwise solid.

< EOM >

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3 Re: Dreman-Buying oppotunity? Sops 0 7/27/2006 8:45:23 PM

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