Contrarian investment strategies

What this book actually teaches

David Dreman's argument is that low-expectation stocks — the unloved, the out-of-favor, the ones trading at depressed price-to-earnings, price-to-book, price-to-cash-flow, and price-to-dividend multiples — systematically outperform the market over long horizons, and high-expectation "growth" stocks systematically underperform. Dreman, who managed money at Dreman Value Management and wrote a long-running Forbes column, built the book on decades of data showing the same pattern: the market overreacts to news and overpays for growth.

The core arguments come in three layers. First, the empirical case. Dreman compiles results from his and others' studies showing that quintile portfolios sorted on P/E, P/B, P/CF, and P/D — the cheapest 20% versus the most expensive 20% — produce a consistent return spread of several percentage points per year over rolling decades. He treats this as the central fact a serious investor has to reckon with: cheap beats expensive, on average, by a meaningful margin, and the pattern holds across market cycles.

Second, the behavioral explanation. Dreman draws heavily on Kahneman and Tversky's work — he was one of the early popularizers of behavioral finance for retail investors. The thesis: investors over-extrapolate recent earnings trends, overreact to news (positive and negative), overweight vivid narratives over base rates, and chase glamour stocks because the stories are more compelling than the multiples. Analyst forecasts, he shows with his own data, are systematically too optimistic and miss reality by wide margins — yet the market continues to price stocks as if the forecasts were trustworthy.

Third, the practical contrarian framework: buy the lowest-quintile stocks on multiple value measures, hold across the multi-year periods needed for mean reversion, diversify across sectors so a value tilt doesn't become a single-industry bet, and rebalance on a schedule rather than on news. Dreman is explicit about the temperamental cost — contrarian strategies underperform for stretches that can last years, and most investors abandon them at exactly the wrong moment.

Who this is for: long-horizon investors willing to hold unfashionable stocks through extended underperformance, and any investor trying to understand why value investing as a discipline has produced the long-run record it has.

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About David N Dreman

Read more from David N Dreman and explore the full bibliography on ClearValue Books.