Contrarian Investment Strategies

What this book actually teaches

David Dreman's Contrarian Investment Strategies: The Next Generation (1998) is the third iteration of his core thesis, first argued in the late 1970s, that investor psychology systematically creates mispricing in equities that disciplined contrarians can exploit. The book argues that Wall Street analysts and institutional investors are subject to predictable cognitive errors — overreacting to recent events, anchoring on consensus forecasts, and chasing momentum — that cause them to overprice popular stocks and underprice out-of-favor ones. The contrarian play is to buy the latter: low price-to-earnings, low price-to-book, low price-to-cash-flow stocks that the market has abandoned.

Dreman grounds this argument in behavioral finance research, drawing on the work of Kahneman and Tversky, and in his own long-term performance data. The book's empirical core is a study of roughly 1,500 stocks across several decades showing that stocks in the lowest quintile of P/E ratios consistently outperformed the market, while those in the highest quintile consistently underperformed — not just once, but across multiple market cycles. He argues this pattern persists because the behavioral errors that drive it are not correctable by education alone: investors know they shouldn't chase hot stocks and buy them anyway, because the psychological mechanisms that produce the error are faster than the rational override.

A meaningful portion of the book addresses why the strategy is psychologically difficult to execute even when investors intellectually accept the argument. Buying unpopular, beaten-down stocks means buying things your peers are selling, tolerating underperformance that can last years, and holding through negative news cycles on companies the market already dislikes. Dreman treats this execution gap as the primary reason the mispricing persists — the strategy is arbitrageable in theory but not in practice for most investors.

The main weakness is vintage: the 1998 edition doesn't account for the scale of capital that entered value strategies after the dot-com crash or the extended period after 2010 where value underperformed growth by historically unusual margins. Dreman's empirical case was built on data where value was genuinely neglected; that period ended. The book also skews toward individual stock selection and offers less guidance on how to implement the strategy through funds or ETFs, which is how most investors would actually apply it today.

For investors who want to understand the behavioral case for value investing at depth — not the Graham accounting framework, but the psychological argument for why mispricing occurs and persists — this is one of the more rigorous single-volume treatments available.

Read next

About David N Dreman

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