Screening for Triggers: Revised Earnings Estimates

by John Bajkowski

To succeed long term, not only do you need a sound strategy, but you must also be able to follow the strategy throughout the market’s emotional roller-coaster ride. Gut reactions, prevailing market beliefs, and conflicting views of market pundits are just some of the elements that put an emotional spin on the decision-making process.

David Dreman, chairman of Dreman Value Management, has long studied the psychological underpinnings of the overall stock market and its impact upon valuation levels. Instead of assuming a rational market as traditional academic studies do, Dreman sees stocks and markets driven by emotions that often push prices from their intrinsic value. Dreman feels the best approach to beating the market is to follow the principles of contrarian investing.

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Contrarian investing involves betting against the crowd by seeking stocks that are out of favor with the market, and avoiding the fashionable, high-profile stocks that have been swept up in market euphoria. The hope is that the market will eventually rediscover the good qualities of the out-of-favor stocks and reward their shareholders.

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