There are probabilities of success and failure in the market as surely as there are in gambling. But Dreman argues that the odds in the market can be put in your favour. This book is about how to do just that.
The professional money manager is often described as someone who should manage your money. Armed with the best team of analysts money can buy, he is expected to be able to buy low and sell high. Unfortunately, in practice this is not how it turns out. Dreman offers a slew of statistics demonstrating that the vast majority of managers under-perform their benchmarks.
As it became known several decades ago that managers could not beat the market, Efficient Market Hypothesis (EMH) emerged as a convenient explanation. Using computational power that was not previously possible, academics were able to "prove" that market prices were "correct" and that market-beating returns were not possible.
Dreman argues that this theory is built on a foundation of hot air, and likens it to the generations of scientists that believed the earth was at the centre of the universe. When situations occurred that seriously questioned the integrity of the theory (for EMH, the 1987 one-day point drop; for astronomers, the observation of planet locations inconsistent with their revolution around the earth), new parameters were added and the theory was made more complex to try to explain these phenomena.
Dreman sees the main problem with EMH is its built-in assumption that market participants behave 100% rationally. Psychology, however, affects all of our investment decisions. By understanding the behavioural traits that affect our decisions, however, investors put themselves in a position to put the odds in their favour.