193-204; Chapman and Chapman, "Illusory Correlations As an Obstacle to the Use of Valid Psychodiagnostic Signs," Journal of Abnormal Psychology (1974), pp. 271-280.

55. For details, please see David N. Dreman, The New Contrarian Investment Strategy (New York: Random House, 1982), Appendix I, pp. 303-307.

56. "Vanderheiden Choices Top Odier Pickers," Wall Street Joumal, January 3, 1994, p. R34; John R. Dorfman, "Value Still Has Value, Says This Quartet of Stock Pickers," Wall Street Joumal, January 4, 1993, p. R8; John R. Dorfman, "Cyclicals Could be die Right Way to Ride to New Highs in 1992," Wall Street Journal, January 2, 1992, p. R24; John R. Dorfman, "New Years Stock Advice in an Icy Economy: Insulate," Wall Street Journal, January 2, 1991, p. R22; John R. Dorfman, "The Sweet Smell of Success Might Be One of Caution," Wall Street Journal, January 2, 1990, p. R6; John R. Dorfman, "Champion Stock-Picker Is Facing 3 Challengers for Title," Wall Street Journal, January 3,1989, p. R6; John R. Dorfman, "Four Investment Advisors Share Their Favorite Stock Picks for 1988," Wall Street Joumal, January 4, 1988, p. 6B; John R. Dorfman, "Stock Pickers Nominate Big Gainers for 1987," Wall Street Joumal, January 2, 1987, p. 4B; Rhonda L. Rundle, "Stock Pickers Make Their Picks Public, Betting on Low Inflation, Falling Rates," Wall Street Joumal, January 2, 1986, p. R4.

57. Just as the theory holds that even professionals cannot outdo the market over time, it also holds that they cannot do substantially worse. After all, it is their very decision-making that keeps prices at their proper level in die first place. The surveys, however, give us a different picture from the one assumed by the theorists. The massive underperformance in both up and down markets indicates diat their most crucial assumption is inconsistent with a significant body of evidence. The hypothesis is made of straw.

CHAPTER 5 Would You Play a 1 in 50 Billion Shot?

1. Michael Siconolfi and Anita Raghavan, "Brokers Launch Bidding War for Top Analyst," Wall Street Joumal, August 4, 1995, p. CI.

2. Ibid

3. "The Superstar Analysts," Financial World, November, 1980, p. 16.

4. Ibid

5. David Dreman, "Cloudy Crystal Balls," Forbes, October 10, 1994; David Dreman, "Chronically Cloudy Crystal Balls," Forbes, October II, 1993; David Dreman, "Flawed Forecasts," Forbes, December 9, 1991; David Dreman, "Hard to Forecast," Barrons, March 4, 1980; David Dreman, "Tricky Forecasts," fiarranj, July 24,1978; "The Value of Financial Forecasting: A Contrarians Approach," Fortieth Annual Meeting of the American Financial Association, 12/29/1981. Recently [6/1996], die study was updated again in collaboration with Eric Lufkin of the Dreman Foundation.

6. David Dreman and Michael Berry, "Analyst Forecasting Errors and Their ImpUcations for Security Analysis," Financial Analysts Joumal 51 (May/ June 1995), pp. 30-41.

7. The average of the forecasts of the analysts covering the company. Studies have shown these estimates are reasonably closely bunched.

8. Before the early 1980s, the database used the forecasts of analysts in the Value Line Investment Survey, which normally were very close to consensus forecasts.

9. We used the database of A-N Research Corporation (formerly the research department of Abel Noser Corp.), which contains estimates from the leading forecast services: Value Line prior to 1981, Zacks Investment service beginning in 1981, and I/B/E/S beginning in 1984, and also First Call. The utilized portion of the database includes approximately 500,000 individual estimates. Eric Lufkin of the Dreman Foundation updated the findings for tiie 1991-1996 period using A-N data tiirough 1993Q3 and I/B/E/S estimates thereafter.

10. The four separate error metrics:

SURPE = (Actual Eamings - Forecast) /1 Actual Eamings I

SURPF = (Actual Eamings - Forecast) /1 Forecast I

SURP8 = (Actual Eamings - Forecast) / standard deviation of

Actual Earnings, 8 quarters trailing SURPC7 = (Actual Eamings - Forecast) / standard deviation of change in Actual Eamings, 7 quarters trailing. All the results in the book are for SURPE-Forecast error divided by actual eamings.

11. With signs removed. We recorded a total of 79,182 surprises in expansions (34,072 positive and 35,181 negative) and 14,769 surprises in recessions (5,872 positive and 7,107 negative). Note that negative surprises outnumbered positive surprises in both expansions and recessions. Surprises of zero, although not true surprises, have been retained in calculations of all surprises, because they count in assessing analysts overall accuracy.

12. Fried and Givoly, "Financial analysts forecasts of eamings: a better surrogate for market expectations," Joumal of Accounting and Economics, 4 (1982), pp. 85-107; OBrien, "Analysts forecasts as eamings expectations," Joumal of Accounting and Economics 10 (1988) pp. 53-83; Butier & Lang, "The Forecast accuracy of individual analysts: evidence of systematic optimism and pessimism," Joumal of Accounting Research, 29 (1991), pp. 150-156; M. R. Clayman and R. A. Schwartz, "Falling in love again-Analysts Estimates and Reality," Financial Analysts Joumal (September-October, 1994), pp. 66-68; A. Ali, A. 1 , and J. Rosenfeld, "Analysts Use of Information about Permanent and Transitory Eamings Components in Forecasting Annual EPS," The Accounting Review 87 (1992), pp. 183-198; L. Brown, "Analysts Forecasting Errors and Their Implications for Security Analysis: An Altemative Perspective," Fiiumcial Analysts Joumal, January-February 1996, pp. 40-47.

13. Jennifer Francis and Donna Philbriclc, "Analysts Decisions as Products of a Multi-Task Environment," Joumal of Accounting Research 31 (Autumn, 1993), pp. 216-230.

14. A Ph.D. in astrophysics who works for the Dreman Foundation.

15. Forbes, January 26, 1998.

16. Managements estimates taken from The Wall Street Joumal.

17. Minus signs removed so errors do not tend to cancel each other out. The last six analysts studies use the S&P Eamings Forecaster exclusively or as major source of estimates.

18. David Green, Jr. and Joel Segall, "The Predictive Power of First Quarter Eamings Reports," Joumal of Business 40 (January, 1967), pp. 44-55.

19. Ronald M. Copeland and Robert J. Marioni, "Executives Forecasts of Eamings per Share Versus Forecasts of Naive Models," Joumal of Business 45 (October, 1972), pp. 497-512.

20. McDonald, "An Empirical Examination of the Reliability of Published Predictions of Future Eamings," Accounting Review 48 (1973), p. 502.

21. Bart A. Basi, Kennedi J. Carey, and Richard D. Twark, "Comparison of the Accuracy of Corporate and Security Analysts Forecasts of Eamings," Accounting Review 51 (1976), 244-254.

22. Samuel S. Stewart, Jr., "Research Report on Corporate Forecasts," Financial Analysts Joumal, January-February, 1973, pp. 77-85.

23. R. M. Barefield and E. E. Cominsky, "The Accuracy of Analysts Forecasts of Eamings per Share," Joumal of Business Research 3 (July, 1975), pp. 241-252.

24. R. Malcolm Richards, "Analysts Performance and die Accuracy of Corporate Eamings Forecasts," Joumal of Business 49 (July, 1976), pp. 350-357.

25. R. M. Richards and D. R. Frazer, "Further Evidence on the Accuracy of Analysts Eamings Forecasts: A Comparison Among Analysts," Joumal of Economics and Business 29 (Spring-Summer, 1977), pp. 193-197.

26. R. Malcolm Richards, James J. Benjamin, and Robert W. Strawser, "An Examination of the Accuracy of Eamings Forecasts," Financial Management, Fall 1977.

27. J. G. Cragg and Burton Malkiel, "The Consensus and Accuracy of Some Predictions of the Growdi of Corporate Eamings," Joumal of Finance 23 (March, 1968), pp. 67-84.

28. Ibid. You may recall the Meehl studies of clinical psychologists, where it was shown that simple mechanical techniques performed as well as or better than the complex analytical diagnoses in 20 separate studies of trained psychologists. In fact, mechanical prediction formulas have been suggested in a number of fields, primarily psychology, as a direct result of these problems, and they will be a part of the strategies proposed in the following chapters.

29. I.M.D. Litde, "Higgledy Piggledy Growdi," Bulletin ofthe Oxford University Institute of Economics and Statistics, November, 1962.