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Contrarian Investment Strategies: The Next Generation

Overview

David Dreman is the chairman of Dreman Value Advisors, and his Kemper-Dreman High Return Fund is one of the all time highest returning funds in America since its debut in 1988. His strategy is based on an understanding of investor psychology, in particular using the insight that the market overprices popular issues and oversells unpopular ones, in short he is a contrarian investor. His book Contrarian investment Strategies: The Next Generation is another very well written book with specific strategies and reams of data to back it all up. If you liked "What Works on Wall Street" and "A Random Walk Down Wall Street" then this is another book with a very similar angle of attack. It is a fairly big book, running over 400 pages, rivaling Malkiel's great tome.

The sure thing almost nobody plays

Imagine you are looking around a deluxe, well appointed casino. Off the lavish entry foyer, there are two ample gaming wings, one hued in reds, the other in muted greens. The red wing looks more enticing, but just for now we'll have a look at the green wing as it is much less crowded.

At first you think you must be in the wrong place. The tables are almost empty, everyone is plainly dressed, the table limits aren't particularly high, but everyone seems to be sitting there behind this enormous pile of money.

Then it comes to you, everyone is winning. In fact, as you walk around you can hardly find a losing player. You know that in most casinos the odds are stacked in favor of the house, but here everyone seems to be gaining at a rate of 60% to 40%. You count again and the results are the same.

A pit boss appears at your shoulder. You ask him if this is really true, that the odds really favor the players?

"Yes, indeed. The odds in the green room usually run 60 to 40. It's been that way since we opened."

"But...most of the players must go away winners!"

"They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables at the back, they do even better, with winners running about 20,000 to 1. It's a good thing we get so few players, or they'd break the house."

Realizing that you have not a minute to lose and knowing that the few dollars in your wallet aren't going to get you very far, you hurry out to the foyer to go draw out some money.

Before you do though, you glance into the red room. The action level is much higher. Excited punters make huge bets, they frantically change their cash to chips and there is laughing and crying and entreaties to the gods of luck, but no one seems to be winning. In fact the longer you watch the more it seems that people are losing money with every hand they play. You turn to another pit boss and ask about the odds at these tables.

"60 to 40 in favor of the house", she says, "This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners."

Shaking your head at the stupidity of the players here, you leave quickly to go draw out your life savings. . . . . . .