Contrarian Investment Strategies: The Psychological Edg… (2024)

Overall I liked this book. The strategy is to invest in low P/E companies for an industry. It seemed like the first half of the book covered this and supported it with a great deal of research.

The second half of the book wasn't as good/useful. It was a bit long winded and several chapters are more appropriately technical papers for an investing journal. It felt like Dreman has a personal vendetta with many economists and kept repeating his points against their work. I get it, you don't believe efficient market theory. These arguments didn't help me invest better so much after I already understood and agreed.

The book is fairly in depth in psychology of the markets. But it does an excellent job of explanating the meat behind the theory. The later parts of the books are easier to follow and lay out excellent examples of what the author is convening. I highly recommend this book for any one in the financial services industry or the individual investor.

During the summer InvestingByTheBooks will review some older books that we never got around to writing about although we think they are important. Canadian born value investor David Dreman founded New Jersey based Dreman Value Management in 1977 after having served as a senior editor of Value Line Investment Service. Apart from being his firm’s president and chairman until 1997 Dreman has written several books on investing. A number of these books, including this one, are continuations, updates and expansions of the author’s Contrarian Investment Strategy from 1980. Dreman is often considered the dean of contrarian investing.

The book contains three main themes: investment psychology, criticism against the efficient market hypothesis (EMH) and value based investment advice. Since the core of being contrarian is that investors overreact, this is to a large extent a book on behavioural finance seen from a practitioner’s perspective. Plenty of materials from the likes of later day luminaries such as Daniel Kahneman and Amos Twersky, Richard Thaler, Vernon Smith and Robert Shiller are presented. In this Dreman, who published his first book on investment psychology in 1977, was truly before his time and he not only discusses individual biases among investors but also group dynamics, social validation and herding leading to wider market miss-pricings.

A number of common investment strategies and practices on the financial markets are presented and discarded in a factual but entertaining way. Dreman presents academic evidence that technical analysis doesn’t work but has no hope of convincing anyone of its followers. As the price patterns are so complex that chartists often disagree on their meaning there is always lingering hope. Growth investing is dismissed as human ability to forecast long-term growth is close to non-existent. In this Dreman’s discussion on the outside view and inside view is reminiscent of Michael Maboussin’s 2012 bestseller The Success Equation. Further central bankers and analysts are shown to deal with too complex areas for them to be forecasted with any accuracy. Anyone’s ability for market timing is thoroughly trashed. Even the absolute rigidity of Benjamin Graham’s screening methods receives some criticism.

Compared to what consensus forecasts something unexpected always pops up. The interesting thing is that these surprises affect different types of stocks differently. Positive surprises only lead to minor outperformance for high PE-stocks while low PE-stocks soar. Negative surprises leave low PE-stocks almost unaffected while high PE-stocks get thrashed. Dreman shows that low multiples over time leads to higher returns and that this is not the consequence of higher risks.

The investment strategy that the book presents is the same as Dreman Value Management display on their web site: “We invest in undervalued companies that exhibit strong fundamentals, above-market dividend yields and historic earnings growth, which our analysis indicates will persist.” Specifically, investing among the lowest quintile PE-stocks is advocated. Dreman advises to sell stocks when their PE-ratios rise to the average market level or when corporate fundamentals show long term degradation. All strategies are in a great way backed up with academic evidence that they actually do work.

The critique against EMH is justified but perhaps less necessary today than two decades ago. Instead it is the early and deep insights in practical behavioural finance combined with how to use this in real life value investing that deserve the most credit in the text. Paradoxically, the multitude of theoretical information in this 400-page book also obscures Dreman’s personal investment experiences as one of the most successful investors of the 1980s and 1990s. The text becomes a bit impersonal.

This book is jam packed with insights and it was far ahead of its time. Most investors still haven’t caught up – make sure you have.

David Dreman seems to be in the value investor camp and champions contrarian investment strategies. There were some important investment lessons in the book!

He started from basics reminding how it is very difficult to spot a bubble until after the fact when its bursting confirms its existence. And there’s a reason for that. To a crowd few images are more alluring than the promise of instant wealth and everyone FOMO’ing into those asset classes. This is where the human psychology comes into play. Because if the potential outcome of the gamble is emotionally powerful, its attractiveness is insensitive to changes in probability.
No wonder psychology becomes an integral part of investment.

The book then delves into the Efficient Market Hypothesis (EMH) and a lot of pages are devoted to why it’s inaccurate backed by many surveys, studies, and contradictions. Although at some point, it started to feel like a rant to me.

Dreman does share his secret sauce later – describing how stocks based on his strategy tend to do well over a long period of time and also remain relatively unscathed during periods of high volatility.

I get that this book is a reprint edition of 2012 thus data of most of the surveys referenced is dated up to 2010 alone. I was interested to look for data within the last few years where growth stocks and mega caps like FAANG have been the hot picks. It’s relevant cause they have traded at expensive multiples thus my guess is that Dreman’s strategy would have always excluded them and robbed the investor of crème de la crème.

I found a fund which runs a portfolio based on David Dreman’s contrarian principles and it seems to have under-performed the market by ~53% since 2003.
https://www.validea.com/contrarian-in...

Nonetheless, the book served as a good refresher of certain key fundamentals.

This book can use a good amount of editing. It's so lengthy; the principles that author wanted to convey can be explained and elaborated in detail in 25% of the book length. It goes round in circles, instead of being a progressive narrative; you find yourself repeatedly reading about the same stuff. However, there are some useful observations and practical guidelines scattered in the book. If you're a quick reader and be selective about the chapters, this book can help. If you're like me, with a bit of OCD to read every page in order, you'll end up wasting quite a bit of time.

A little lengthy and repetitive - but GREAT information. If I can verify the data from other sources, I'll definitely be putting this into practice ASAP!

The first 60% is solid investing advice.
The last 40% is more of a rant against regulators, investment banks and unfair trading relationships. The diss track on Goldman is perhaps the most epic dis on any investment banks that I have ever read. Good stuff! Also, Dreman completely exposed Greenspan with absolute no mercy... RIP, Greenspan. It takes a lot of courage to go after ex Fed Chairman like that. Respect!

The last chapter is devoted to international trade (China) and the outlook of America in the coming decades. To my surprise, Dreman almost laid out the ongoing China vs. US trade war play by play in his book. It is actually scary how accurate his call was on this issue from 2011.

The book is to be honest a little bit on the long side. If you are reading it for investing advice, you might as well stop at the 60% mark. The last 40% is just his takes on different issues. Very fascinating read!

This is Joel Greenblatt's first recommendation in one of my favorite investing books, The Little Blue Book That Beats The Market. In some ways, I loved it - the contrarian strategy itself is well argued, and I will compile by own list of the the 30 or so 'Psychological Guidelines' in the book to keep near. However, it also felt about 200 pages too long for my taste as a novice investor. Maybe that's because I was sold quickly on his strategy because of other things that I had already read, but it became information overload by the end. Worth having in your library, read the guidelines and the chapters that look interesting, and the rest for reference.

Counterintuitive strategies for investing

Very solid contrarian strategies for two thirds of the book. Good data and evidence is presented to show why these strategies work over time. Tips highlight what to look for and how to counteract psychological traps. The last portion of the book goes into macro economics and a little off topic, in my opinion, but some interesting views that have come to past (since 2011) were worth the read.

I am happy to have read this book derived from a booklist from Patrick O'Shaunessy. There are some key insights which have helped me to understand a few concepts that I would not have otherwise thought of. If you are a value investor and in need of articulating a few turn of phrases, concepts, or market behaviors then this book may have what you are looking for.

Dreman presents ample statistical evidence for the effectiveness of contrarian strategies and condenses his derived insights into psychological guidelines to help ordinary mortals to overcome their built-in (intuitive) inclinations and common-sense but erroneous preconceptions. This could have been achieved in a more concise fashion, but overall quite an enjoyable book.

While it's an epic, 200 page rant against EMH, the fact that the book was published in 2011 basically marked the top for the author's favored strategy and anyone who attempted to follow would have badly underperformed for the next 10 years. Ultimately, far too many pages to make too limited a point.

You already know most of what you read, if you are a value investor. However reading the book will give you a restraint on what and when to involve in a trade.

I agreed with much of this, but it didn't seem too relevatory

About 75% of this book is fluff, it seems a lot of books today don't have a good editor to cut out the junk.

A must read book for those interested in contrarian and behavioral investing. The author has many psychological guidelines that will help one become a better investor.

A dry exploration of behavioural finance that feels like “Thinking Fast and Slow for Investing”

Some useful sections, but most people will probably prefer the Intelligent Investor or Greenblatt’s books

I found the "psychological guidelines" valuable. All active investors should read the book.