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136

APPENDIX

Contrarian Investment Rules

CHAPTER 2

RULE 1

Do not use market-timing or technical analysis. These techniques can only cost you money.

CHAPTER 4

RULE 2

Respect the difficulty of working with a mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits.

RULE 3

Do not make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear.

RULE 4

Tread carefully with current investment methods. Our limitations in processing complex information correctly prevent their successful use by most of us.

CHAPTER 5

RULES



Analysts forecasts are usually optimistic. Malce the appropriate downward adjustment to your eamings estimate.

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 8

It is impossible, in a dynamic economy with constantly changing political, economic, industrial, and competitive conditions, to use the past to estimate the future.

RULE 9

Be realistic about the downside of an investment, recognizing our human tendency to be both overly optimistic and overly confident. Expect the worst to be much more severe than your initial projection.

CHAPTER 6

RULE 10

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

RULE 11

Positive and negative su rises affect "best" and "worst" stocks in a diametrically opposite manner.

RULE 12

(A) 8 8 8, as a group, improve die performance of out-of-favor stocks, while impairing the performance of favorites.

(B) Positive 8 18 8 result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.

(C) Negative result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks.

(D) The effect of an eamings continues for an extended period of time.



Favored stocks underperform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially.

RULE 14

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

CHAPTER 8

RULE 15

Dont speculate on highly priced concept stocks to make above-average retums. The blue chip stocks that widows and 0 8 traditionally choose are equally valuable for the more aggressive businessman or woman.

RULE 16

Avoid unnecessary trading. The costs can significantly lower your retums over fime. Low price-to-value strategies provide well above market retums for years, and are an excellent means of eliminating excessive transaction costs.

RULE 17

Buy only contrarian stocks because of their superior performance characteristics.

RULE 18

Invest equally in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size).

RULE 19

Buy medium- or large-sized stocks listed on the New York Stock Exchange, or only larger companies on Nasdaq or the American Stock Exchange.

CHAPTER 7



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