Sunday, September 7, 2008

The New Contrarian Investment Strategy: Chp 10: Your Broker and the Fastest Games in Town

In this chapter, Dreman writes about what to be mindful of when dealing with brokers and in what ways they can be helpful. In general, look at how your broker is being paid and how their compensation system could be affecting their decisions. Before deciding to use a broker, ask to see their track record and the recommendations they have made to clients over the years and how those have worked out for their clients.

Dreman feels that full service brokers are useful with information gathering tasks. Brokers will have access to lots of data via their firms and that can be useful. If you prefer to go the discount broker route, Dreman prefers to use the largest and best capitalized of the discount brokers. Don't forget to check the federal insurance levels of the discount broker as they can vary.

Dreman discusses many of the possible investment vehicles which he believes are generally riskier than following his low P/E stock strategy. One example is junk bonds. These are low credit bonds that might have some similarity to low P/E stocks since they are overlooked by the majority of market participants. However, Dreman cautions that unless an investor is well trained with credit assessments or is particularly well advised, these investments can be quite risky.

Commodities is another investment vehicle, and one that Dreman is not fond of. There is a lot of volatility with commodities with considerable risk. One article that Dreman references from Money Magazine estimates that 90% of small investors lose money on commodities while the average life span of individual accounts is only 4 months. Dreman does note that commodities are an ideal revenue source for brokers. With short contract lifespans, the brokers get to benefit from frequent commissions.

Stock options is another way for investors to put money to work. Conservative investors can deploy risk-mitigating strategies by buying portfolio insurance, locking in capital gains, employing tax reduction strategies and getting lower price fills with the use of options. Dreman is not a strong advocate of options, but he recognizes that they are useful if used in a conservative manner.

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