Contrarian Investment Strategies - The Next Generation (Hardcover)

by David Dreman (Author) "IMAGINE you are entering a deluxe, well-appointed casino..." (more)
Key Phrases: contrarian stocks, investor overreaction hypothesis, four contrarian strategies, Wall Street, World War, New York Stock Exchange (more...)

Editorial Reviews

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

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: Simon & Schuster (May 18, 1998)
• Language: English
• ISBN-10: 0684813505
• ISBN-13: 978-0684813509
• Product Dimensions: 9.2 x 6.5 x 1.6 inches
• Shipping Weight: 1.5 pounds (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars See all reviews (47 customer reviews)
• Amazon.com Sales Rank: #32,403 in Books (See Bestsellers in Books)

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Most Helpful Customer Reviews

75 of 76 people found the following review helpful:

5.0 out of 5 stars Enter the 'Green Room' of Investing, January 16, 2002

By	Peter Hupalo (MN United States) - See all my reviews (REAL NAME)

"Contrarian Investment Strategies: The Next Generation" is an excellent investing book by David Dreman.

Dreman mentions the stock market went nowhere for the seventeen years prior to 1982. This is a reality that many "investors" couldn't imagine, until recently. Dreman says, "Before all else, a successful strategy requires a strong defense: it must preserve your capital."

Preservation of Capital is a key factor that many ride-the-hot-IPO investors missed. Many investors are seeking excitement in the "red" room of investing. In "Contrarian Investment Strategies," Dreman uses a hypothetical example of a casino with two rooms.

One room, the "green" room lacks excitement, but stacks the chances of success in favor of the gambler. Few people are in the green room placing their bets, and the casino manager says it's a good thing, too, because the casino would go broke if people participated.

The other room is active and exciting, but in the "red" room, the odds are stacked in favor of the casino and people tend to lose. Most investors spend their time in the "red" room of investment because they are seeking excitement. Long-term, this fails to build wealth. Dreman introduces investors to the green room of investing-- contrarian investing.

Dreman shows that technical analysis doesn't work. (So, what else is new? We knew this.) But, then Dreman goes on to examine the performance of professional money managers, most of whom use fundamental analysis.

After allowing for the fact that career pressures and short-term performance demands significantly affect professional stock analysts, Dreman concludes professional fundamental analysts are still bound to fail simply because the great majority of people are very incapable of effectively processing large amounts of data and coming to a meaningful and accurate conclusion about the meaning of the data.

Yet, the more specific information investors are fed, the more confident they become in their predictions of a stock's behavior and value. Note, we said, they become more confident, not any more accurate.

Effective securities analysis is impossible due to the scope of the endeavor. For example, Dreman casually mentions of Hewlett Packard, "In 1996, it had revenues of over $38 billion and net profit of $2.675 billion and employed 102,300 people domestically and abroad. Foreign sales in 75 countries accounted for 56% of total revenue." Do you really think you can do fundamental analysis of such a company?

Dreman goes on to show that most analyst's earnings' estimates for the next upcoming quarter are usually off significantly and that valuation methods demanding precision are very dubious.

Further, Dreman notes that often company earnings follow their own random walk and that you can't use the past to predict the future in today's dynamic economy.

So, what's an investor to do? Take advantage of the one thing you can be certain of--the chronic overreaction of other investors. Buy out-of-favor stocks, as measured by low price-to-earnings ratios, low price-to-book values, low price-to-cash-flow ratios, or high dividend yields. Surprisingly, Dreman doesn't mention price-to-sales ratios at all, despite the fact that much evidence supports their use as a great measure of value.

Dreman points out that volatility is not the best measure of investment risk for the investor and he destroys the efficient market hypothesis and that higher reward is correlated with higher risk.

Dreman suggests that one category of stocks, GARP stocks (Growth at a reasonable price), can offer both value (i.e., low risk) and significant appreciation potential. The pharmaceutical stocks of 1993 are an example. These pharmaceutical companies offered significant capital appreciation potential, solid financial positions, and high dividend yields.

Buying out-of-favor GARP stocks "allows you the possibility of a home run, while staying safely in the value camp."

"Contrarian Investment Strategies" offers an eclectic investment strategy based upon Dreman's approach to investing. Dreman recommends using some basic fundamental analysis to assure the out-of-favor companies you buy are financially strong.

This book should be read by any serious investor who wishes to move into the "green" room of investing.

Peter Hupalo, Author of "Becoming An Investor: Building Wealth By Investing In Stocks, Bonds, And Mutual Funds"

30 of 31 people found the following review helpful:

5.0 out of 5 stars good book, but don't buy his Forbes column stock picks, September 16, 2000

By A Customer

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. The most glaring example would be Prison Realty (ticker: PZN), which is currently hovering on the verge of bankruptcy. Dreman recommended it because of its REIT status and its high dividend yield both of which went away shortly after.

My 2c: consider the guy's broad investment strategies with respect, but don't follow his (or anyone else's) picks without putting in your own research.

31 of 35 people found the following review helpful:

3.0 out of 5 stars Long on Stats, a Bit Short on Strategy..., August 1, 2000

By	S. Schneider (USA) - See all my reviews (REAL NAME)

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.

The investment psychology section is useful, but could probably be reduced by half. In fact, Dreman's essential shortcoming is his tendency to bludgeon the reader with the same thought, cloaked slightly differently, several hundred times. Of course, in the world of investment literature, there are worse things than relentless proscriptions against doing stupid things in the marketplace.