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Contrarian Investment Strategies - The Classic Edition Hardcover – May 18, 1998

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Editorial Reviews 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

From Library Journal

Manager of the Kemper-Dreman High Return Fund and chair and CEO of Dreman Value Management, Dreman analyzes contrarian investment strategies for the 1990s and into the 21st century, defining contrarian investment as involving buying and selling securities by going against the crowd and prevailing investor opinions. He emphasizes the importance of investor psychology, which he terms "the necessary link required to activate the contrarian strategies we will now examine." Additionally, Dreman describes investor overreaction as a response to events in a predictable fashion: investors "consistently overvalue the prospects of `best' investments and undervalue those of the `worst.'" He presents and discusses 41 contrarian investment rules involving such factors as stock performance, political and financial crises, volatility, and analysts' forecasts. Especially interesting are the specific case studies involving the effect on the securities markets of major crises such as the 1987 stock market "crash" and the Gulf War. Highly recommended for business collections in both public and academic libraries.?Lucy T. Heckman, St. John's Univ. Lib., Jamaica,
Copyright 1998 Reed Business Information, Inc.

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Product Details

  • Hardcover: 464 pages
  • Publisher: Free Press; First Printing edition (May 18, 1998)
  • Language: English
  • ISBN-10: 0684813505
  • ISBN-13: 978-0684813509
  • Product Dimensions: 6.1 x 1.3 x 9.2 inches
  • Shipping Weight: 1.7 pounds
  • Average Customer Review: 4.0 out of 5 stars  See all reviews (63 customer reviews)
  • Amazon Best Sellers Rank: #406,682 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

58 of 60 people found the following review helpful By A Customer on September 16, 2000
Format: Hardcover
The key idea in this book constitutes sound common-sense advice to any investor: buy a diversified portfolio of out-of-favor stocks with sound underlying businesses (e.g., low P/E firms) and sell when the market recognizes their value. The book is controversial because it slams current academic theories on how the market works, especially the idea of "efficient markets". Dreman believes that simply because of the way our minds work, the market tends to systematically over-react or under-react to news (especially earnings reports), and this can be exploited forever (because the way our minds are wired is not going to change). Other controversial ideas: 1) don't buy index funds (because the committees which make indexes tend to put in firms which have had a price run-up and drop firms which have had a price decline, so that buying the index involves buying high and selling low); 2) don't buy NASDAQ stocks unless they have great volume (because NASDAQ market-makers are not regulated enough, and will cheat you on the spread); 3) avoid international (non-US) stocks (because international markets have performed much worse than the US stock market over time); 4) equities are a safer way to hold money than treasury bonds or gold or cash (because of inflation and taxes). The author presents fairly detailed statistical evidence to show that his methods have worked over the past several decades. This is actually evidence that even academics are beginning to notice.
That said, it should be noted that the author's Kemper-Dreman fund (ticker: KDHAX) has done pretty badly in the last few years. Also, some of the stock picks in his Forbes column have been horrible.
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20 of 20 people found the following review helpful By Befragt VINE VOICE on August 21, 2006
Format: Hardcover
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").
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42 of 48 people found the following review helpful By S. Schneider on August 1, 2000
Format: Hardcover
This is one of perhaps a handful of books the value-oriented investor will likely find indispensable. The book's indispensability is a product of something for which David Dreman deserves great accolades: his apparent monopoly on an expansive array of statistics --statistics to support buying stocks when they are inexpensive in several different respects, statistics to support the avoidance of stocks priced to perfection, and statistics to support the pathetic fallacy of entrusting valuations and earnings estimates to investment house analysts. The stats compiled by Dreman concerning the latter, especially earnings estimates and a particular issue's probability of meeting these estimates over serial quarters, are particularly impressive and sobering. At the very least, all of these statistics serve as a validation for what the value investor has at least accepted intuitively. Yet the reader will probably also derive new ways of looking at securities from a value perspective. (Incidentally, readers who are expecting a rehash of the Tweedy Browne value studies will be pleasantly surprised...)
The two additional sections of the book concern investment strategy and investment psychology. Regarding the former, it is hard to cover strategy satisfactorily in value investing without discussing valuation itself. The central challenge of the value approach is distinguishing what's compellingly cheap from what's cheap for compelling reason. But here Dreman directs readers to other resources, and coyly suggests buying whatever has the largest number of attractive financial ratios. Thus the newcomer to these approaches will likely have ample reading and work to do if he/she really wishes to seriously embrace the task of finding "oversold" securities.
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