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
David Dreman's name is synonymous with the term "contrarian investing," and his contrarian strategies have been proven winners year after year. His techniques have spawned countless imitators, most of whom pay lip service to the buzzword "contrarian," but few can match his performance. His Kemper-Dreman High Return Fund has been the leader since its inception in 1988 -- the number one equity-income fund among all 208 ranked by Lipper Analytical Services, Inc. Dreman is also one of a handful of money managers whose clients have beaten the runaway market over the past five, ten, and fifteen years.
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.
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