Contrarian Investment Strategies in the Next Generation

Now, as the longest bull market in the history of the stock market winds down, there is increasing volatility and a great deal of uncertainty. This is the climate that tests the mettle of the pros, the worries of the average investor, and the success of David Dreman's brilliant new strategies for the next millennium.

Contrarian Investment Strategies: The Next Generation shows investors how to outperform professional money managers and profit from potential Wall Street panics -- all in Dreman's trademark style, which The New York Times calls "witty and clear as a silver bell." Dreman reveals a proven, systematic, and safe way to beat the market by buying stocks of good companies when they are currently out of favor. At the heart of his book is a fundamental psychological insight: investors overreact. Dreman demonstrates how investors consistently overvalue the so-called "best" stocks and undervalue the so-called "worst" stocks, and how earnings and other surprises affect the best and worst stocks in opposite ways. Since surprises are a way of life in the market, Dreman shows you how to profit from these surprises with his ingenious new techniques, most of which have been developed in the nineties. You'll learn:

• Why contrarian stocks offer extra protection in bear markets, as well as delivering superior returns when the bull roars.

• Why a high dividend yield is just as important for the aggressive investor as it is for "widows and orphans."

• Why owning Treasury bills and government bonds -- the "safest investments" for centuries -- is like being fully margined at the top of the 1929 market.

• Why Initial Public Offerings are a guaranteed loser's game.

• Why you should avoid Nasdaq ("the market of the next hundred years") like the plague.

• Why crisis, panic, and even market downturns are the contrarian investor's best friend.

• Why the chances of hitting a home run using the Street's best research are worse than being the big winner in the New York State Lottery.

Based on cutting-edge research and irrefutable statistics, David Dreman's revolutionary techniques will benefit professionals and laymen alike.

Amazon.com Review
All stock-market investors embrace the motto "Buy low, sell high." Few act accordingly, however, for to do so would require that we go against the crowd, buying stocks that are out of favor and selling Wall Street's darlings. Powerful psychological forces prevent us from pursuing a contrarian investment strategy, although it consistently beats the market, according to David Dreman, a seasoned money manager and long-time columnist for Forbes magazine. One of the Street's best-known and most articulate contrarians, Dreman has updated his 1982 investment classic, Contrarian Investment Strategies, using recent research on investor psychology. His revised book combines proven techniques for selecting undervalued stocks with fresh insights on how to defy, and thereby profit from, the popular fears or enthusiasms of the moment.

Dreman pays only cursory attention to a company's business fundamentals in deciding whether to invest in it. Instead he looks for stocks trading at below-market multiples of per-share earnings, cash flow, book value, or dividend yield. Historically, Dreman claims, stocks that are cheap by any of these measures have tended to outperform the market average, although this is disputed by those who believe the stock market is efficient and therefore impossible to beat except by accident. Dreman devotes many pages to debunking their research. He offers a new refinement of his low-price strategy, which involves picking the cheapest stocks within industries, to create a diversified, contrarian portfolio.

Contrarian Investment Strategies: The Next Generation is full of practical and provocative advice, but some of its most interesting passages delve into the abstruse findings of cognitive psychology. This research has proven that we are woefully inadequate as intuitive statisticians. Interpreting data to make predictions about the probability of future events, we consistently make the same mistakes. For example, we exaggerate the likelihood that current trends will continue, even when they are historically exceptional. (Logic dictates that trends are more likely to regress toward the mean.) This fallacy explains why most Wall Street insiders were gloomiest about stocks in 1981, after six years of falling prices, just before the beginning of the greatest bull market ever. Is today's widespread optimism among investors a reason for caution? Dreman thinks so.

It seems our brains are hard-wired to underperform the market. That's why few investors can keep to a contrarian approach. Dreman recommends buying stocks when prices fall, the worse the panic the better. But that requires overriding powerful instincts.

Besides reflecting Dreman's wide reading in finance, psychology, and history, his book also displays his sometimes windy and self-important writing style. At 464 pages, the book is not a quick read. But its intellectual depth and thoroughly tested advice make many other investment books look paltry and superficial by comparison. Serious, independent investors will find it rewarding. --Barry Mitzman

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All Customer Reviews
Average Customer Review:
2 of 2 people found the following review helpful:

Great info, but horrible presentation, 2007-11-01
I have very mixed feelings about this book. On the one hand, it has so much valuable information that every investor should read it. On the other, the structure and organization are just terrible. Topics are revisited multiple times in different chapters. Topics that are well covered as part of one chapter re-appear several chapters later as a chapter of their own. Entire chapters seem out of place or pointless. For example, after 300 pages of dense material, we are treated to a chapter on the basic "why investing in stocks is better than bonds, etc." topic. Believe me, if someone waded 300 pages into this book, they already know that.

But, having said all that, do yourself a favor and read it. And when you get that deja-vu feeling, just start skimming.


4 of 4 people found the following review helpful:

One of the few investments books that proves its arguments, 2007-09-28
I was bummed out before I read this book- had just read A Random Walk Down Wall Street and had become a believer in a)the efficient market hypothesis and b)the inability to beat the market over the long term.

Then comes this book. Chapter by chapter, Dreman dissects efficient market arguments that I saw as fact and showed that they were folly. Dreman states that the market is not efficient because investors are many times not rational. In fact, they are predictably irrational. And then Dreman gives data to prove this. He presents research to show that investing in a certain way allows you to beat the market.

And he gives more research and data. And more, and more. Some people will complain that this is boring and overwhelming, but he does so to prove the validity of his methods. I've read many investment books, and usually an author will give his guidelines for picking stocks, with return numbers taken at a certain point in time, and holding stocks for a certain period, and maybe a few other stipulations. And in the end, I never trusted the author enough to invest any real money in his strategy.

Not so with Dreman. The wealth of research convinced me that Dremans methods were not datamining and were not limited to certain market environments.

Its the most imporant investing book I have read. Dremans method is very similiar to value investing preached by a number of other famous investors. The difference is that Dreman proves to you through his research that value investing works. Everybody addicted to Mad Money and Jim Cramer needs to give this book a peek.


6 of 6 people found the following review helpful:

Value Investing Handbook, 2006-08-30
Dreman makes a persuasive case here that the financial experts and analysts as well as the average investor are terrible in predicting which way the stock market is going. If you want to beat the market, you need to do the opposite of everyone else, by investing in currently out-of-favor value stocks with low P/E ratios.

To his credit, Dreman correctly forecast the big market crash of 2000-2002. Published in 1998, Dreman here observed that the market of the late 90's was way overpriced and that a major correction was in the works. He was correct, although the crash was 2 years off when this was published.

His whipping boy in this book, as in almost every other investing book on the shelves, is the Efficient Market Hypothesis (EMH). But in truth, his investing strategy does not contradict EMH. In its simplest form, EMH argues that, statistically speaking, the past movements of a stock have no significant relationship to its future movements. Dreman indeed agrees with this, and the assertion has never been disproved.

Dreman has lots of fun poking fun at the assertion of EMH that investors are rational and that current stock prices reflect all known information about the company. But the claim that investors are rational is not really controversial: all it adds up to is that investors seek to maximize returns and avoid losing money. Investors may act for poor reasons, but there is always a reason for the movement of a stock. There are good and poor reasons, but those only emerge in hindsight.

Dreman also says that Beta is completely worthless as a measure of risk and returns, and that may be true for individual stocks, but for mutual funds it's very useful. The Beta for a small-cap fund will be significantly higher than a large-cap value fund, and investors are generally rewarded for taking on that risk, at least in the long run.

All but the most extreme forms of EMH accept that stocks may be undervalued or overvalued *in the short run.* In the long run, the market is in fact completely rational. If it wasn't, there would be no point in investing in the market at all, since stock movements would be completely random. And if there are temporary irrationalities in stock prices, then it follows that investors can profit from those under- or overvaluations. Some theorists argue that it's not wise to try to beat the market, but most EMH theorists advocate a value strategy identical to Dreman's. See for example Larry Swedroe's excellent "The Only Guide to a Winning Investment Strategy You'll Ever Need."


12 of 12 people found the following review helpful:

A must-read, 2006-08-21
I have read this book three times now, and intend to do so again. Dreman is obviously an outstanding investor, and his strategies flesh out and arguably "modernize" the techniques used by the noted fundamental investor Benjamin Graham, who was the mentor to Warren Buffett (although, I might add, this book does not emphasize the study of financial statements, which is something Benjamin Graham did in painstaking detail).

Dreman's approach is most notable because of his use of investor psychology and his forceful rejection of the efficient market hypothesis. Instead, Dreman cites any number of studies and examples to support his main thesis: investors over-react to events, and those over-reactions create opportunities for savvy investors to make money. His approach involves a two-part strategy: first, preserve capital, and second, take advantage of market over-reactions to profit. His point is that the market is like a casino, but one in which the odds can favor a knowledgeable investor. In other words, no one can guarantee that a particular stock will do well, but over time, investors who follow a contrarian strategy will outperform the market generally.

Dreman's approach to investing is notably different than much of what is considered "conventional" wisdom within the financial markets (for a good contrasting view, read "Expectations Investing" by Rappaport and Mauboussin). In particular, Dreman takes the position that experts err predictably and often, and that humans base decisions on a minute portion of the information thrown at them. In this respect, his skepticism differs notably from some other authors (example: Mauboussin in "More than What You Know").

From this, he demonstrates how buying low p/e, high yielding, low price/book, and low price/free cash flow stocks results in higher-than-average returns. Dreman shows how favored stocks tend to underperform the market, while out-of-favor companies tend to outperform. However, reappraisal can happen slowly, even glacially.

I found this book to be both enjoyable and informative, and it inspired me to read a couple books about behavioral finance (Paulos, "A Mathematician Plays the Stock Market" and Belsky and Gilovich "Why Smart People Make Big Money Mistakes and How to Correct Them").

In all, I highly recommend this book to anyone who is interested in investing. A few other recommendations (other than those listed above) include:

Klarman - "Margin of Safety" (out of print)
Whitman - "The Aggressive Convervative Investor" and "Value Investing"
Greenblatt - "You Can be a Stock Market Genius" (horrible title, great book)
Graham - "Security Analysis" and "the Intelligent Investor"

Each of these books sets forth a somewhat different approach to investing, but at the core, each of them shares a skepticism of the principals underlying the efficient market hypothesis.


0 of 6 people found the following review helpful:

pretty good book, 2006-03-16
The author is very knowledgeable on the subject but his prose could use some improvement - its hard to read more then 1-2 hrs at a time.

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