Dreman's Blockbuster

Research on Safe Withdrawal Rates

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JWR1945
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Post by JWR1945 »


JWR1945
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Alec
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Post by Alec »

John,

Actually, the correct interpretation should be "I cannot say with any confidence (whatever level that is) that anyone has beaten the market consistently". Or, I cannot conclude with any level of certainty that any market outperformance is not the result of randomness or chance. No one has to prove that people can't outperform the market, or appropriate peergroups/indexes, etc. One just has to demonstrate that one cannot make the assertion that people can outperform relevant indexes.

- Alec
JWR1945
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Post by JWR1945 »

If a group of investors could consistently beat the market by an average of 5.83% annually for 14 years, the statistical test would have concluded that it is a 50%-50% chance at the 95% confidence level that they can beat the market.

That's a high hurdle. The bar is set exceedingly high.

It is like putting up a high jump in a gym. Then you look at the ceiling of the gym to see if there are any grease spots caused by hair lotion when jumpers hit the ceiling. If there are none, you conclude that no one can make the jump.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

There are tests sensitive enough to show skill and they do. However, they are parametric tests, not simple binomial tests. Purists have insisted on using binomial statistics, which can be blind, instead of parametric tests, which require reasonable approximations, such as the standard Gaussian approximation (while making sure to exclude extremes).

Only in financial studies have I seen people ignore type 2 errors (missed detections) and the power of statistical tests.

Have fun.

John R.
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Post by unclemick »

Hmmmm - I could care less about performance versus the market - I might value my stock portfolio when running a retirement calculator - but even then I usually enter as an income stream and assume it's competitive with inflation.

Of more interest to me is what Dreman has to say about holding/selling decisions. I suspect chasing performance would be counterproductive at elven years into ER.
JWR1945
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Post by JWR1945 »

unclemick wrote:Of more interest to me is what Dreman has to say about holding/selling decisions. I suspect chasing performance would be counterproductive at eleven years into ER.
Here is the rule for purchases from page 197:
RULE 20
Buy the least expensive stocks within an industry, as determined by the four contrarian strategies [of low P/E, low Price/Cash Flow, low Price to Book Value and high dividend yield (or low Price/Dividends)], regardless of how high or low the general price of the industry group.
Here is the rule for selling stocks from page 211:
RULE 21
Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.
From pages 211-212:
Picking a sell point, however, doesn't necessarily mean selling a stock just because it has gone up. If your are a low price-to-book value (P/BV) player, for example, you may find that even after a stock has risen sharply it still sells at a below-market P/BV because book value has continued to go up. Often, stocks remain at a low P/BV for years, despite doubling or tripling in price, because book value has also doubled or tripled, keeping P/BV low. The same is true for low price-to-earnings, price-to-cash flow, or high dividend yields.

Another question is how long should you hold a stock that has not worked out....

Again, there are many partial answers to this problem, but I think that 2.5 to 3 years is an adequate waiting period....John Templeton, one of the masters of value investing, used a six-year time span. You be the judge, but stick to your time frame and don't be stubborn.

Another important rule is to sell a stock immediately if the long-term fundamentals deteriorate significantly....I'm not talking about a poor quarter or a temporary surprise that a stock will snap back from....
This sounds a lot like what unclemick does already.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

David Dreman lists 41 rules for investors in Contrarian Investment Strategies: The Next Generation. Here is a very short list with some of them.
RULE 7. Most current security analysis requires a precision in analysts' estimates that is impossible to provide. Avoid methods that demand this level of accuracy.

RULE 10. Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.

RULE 12. ..
B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.
C) Negative surprises result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks.

RULE 13. Favored stocks underperform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially. [Emphasis added.]

RULE 14. Buy solid companies currently out of favor, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.

RULE 21. Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.

RULE 31. Volatility is not risk. Avoid investment advice based on volatility.
Have fun.

John R.
JWR1945
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Post by JWR1945 »


JWR1945
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Post by JWR1945 »

In its most basic form, David Dreman's contrarian strategies are to buy stocks among the 1500 largest on the New York Stock Exchange (NYSE) [which corresponds to market capitalizations of $1.0 billion or more] in the least expense quintile in terms of price-to-earnings, price-to-cash flow and price-to-book value ratios and/or to buy stocks in the two quintiles with the highest dividend yields. [It is OK to invest in the larger companies in the AMEX and NASDAQ.]

Typically, holding periods can be 8 or 9 years. Faster turnover theoretically produces greater returns assuming that there are no transaction costs.

On page 170 David Dreman recommends:
RULE 18

Invest equally [i.e., equal dollar amounts] in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size).
In a footnote he cites studies that state that 16 carefully selected stocks can capture 85% to 90% of the benefits of diversification.

David Dreman's personal approach differs somewhat. First, he limits his choices to the least expensive 40% [two quintiles] in terms of price-to-earnings ratios, not simply the cheapest quintile. Then, he applies a host of additional criteria, which includes:
1) a strong financial position,
2) as many favorable ratios as possible,
3) a higher rate of earnings growth than the S&P500 in the immediate past [that are unlikely to plummet in the near future based on conservative earnings estimates] and
4) an above-average and growing dividend yield.

Have fun.

John R.
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Post by unclemick »

Alas - Dreman and I don't see completely eye to eye - if after seven to ten years, my yield on $ put in is competative with long Treasuries - my planned holding period is forever. Otherwise I tend to generally agree with him although - again I think his turnover is way too high.
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