Sunday, May 30, 2010

Contrarian Investment Strategies - The Next Generation: Introduction

The founder and Chairman of Dreman Value Management (est. 1977) shares his views on how investors can beat the market with this book from 1998. In reference to the efficient market hypothesis (EMH), Dreman writes "Nobody beats the market, they say. Except for those of us who do." More on this book is available here. One of his earlier books (from 1982) has already been summarized here.

It is 1998. As Dreman writes the book, the markets continue to rise. The way the market rises reminds him of 1929. To gauge the mood of that era, he has gone back and read newspaper clippings depicting the general sentiment before the great stock market crash that preceeded The Great Depression. Upon reflection, Dreman notes that the market euphoria of today (1998) appears to surpass that of the late 20's. He also argues that the price of stocks relative to fundamentals is higher in 1998 than it ever has been.

When he wrote his book in 1982, investors were interested in art, collectibles, precious metals and diamonds. At that time, he felt that stocks were undervalued...but investors weren't interested. Stocks went on to post massive gains in the years that followed.

There are ways to determine if the market is overvalued, Dreman argues, and this book will teach investors how. The contrarian methods Dreman describes and explains throughout the book are both of a fundamental and behavioural nature. Having a good strategy only gets investors part of the way towards making more money in the market; investors also need to understand their innate psychological tendencies that will try to prevent them from carrying out a sound strategy.

Investors overreact to events, both to the upside and to the downside. This is what provides contrarian investors with the opportunities to succeed.

The first function to the strategy Dreman will provide in the book is one based on the preservation of capital. The second function will be to capitalize on market mistakes in order to derive strong returns. Since no strategy should be followed blindly, Dreman will also spend time discussing why the strategies work. The first part of the book, however, will discuss why the widely-accepted, conventional strategies just don't work.


rayhaan said...

hi saj, sure looks like a gud book after a long time! Atleast the book review is awesome. Time for a personal q does barel ever visit the blog at all? Also is there any chance that u r gonna b able to check out indian stocks in the near future , say 12months?

Saj Karsan said...

I have no idea if he visits the blog! Maybe from time to time. I'll look at Indian ADR's, but I'm not sure I have the expertise to properly evaluate Indian stocks otherwise. Maybe in 12 months things can change though; you never know!

rayhaan said...

if u r luking at indian then i guess it may be worth having a luk at SATYAM ADRs . The co. As u might b aware was involved in a billion dollar scam after its founder(who didnt have a substantial stake in d co.) confessed 2 doing hanky panky wid d a/c 's. However the indian govt. (whose implicit support atleast now i suspect it enjoys , sort of like d bail-us-out-or-else support uncle sam gives 2 sum co.s ) has revamped d board and has been in d process of sweeping the mess.2 worrying factors include recent high attrition levels among high and mid level executives(reminds d optimistic among us of mr. Buffett's solomon cleanup) and as wid any i.t co. BLOODY STOCK OPTIONS!!! on d gud news side it is expanding in latin america , won a contract by glaxosmithkline and is on a possible fastrack off world banks black list. D biggest worry is dat dey ve rescheduled publishing audited result atleast 3 times ,the last rescheduling happening in june . I hope i havent overly optimistic ,especially coz i own 20 shares myself.eager 2 hear ur views saj.

Saj Karsan said...

Hi Rayhaan,

I was actually already asked about SAY here. Unfortunately, I couldn't offer much.