Skip to Content
Personal Finance

How to Invest Like a Contrarian

The value-stock guru David Dreman talks about his new book, lessons learned, and what he sees in today's market.

Mentioned: ,

If you're the kind of investor who believes in the wisdom of crowds, David Dreman has a thing or two he'd like to say to you. Since the 1970s, Dreman, chairman and managing director of Dreman Value Management, has been championing a value-oriented investing philosophy that favors stocks with low P/E ratios. In his newly released Contrarian Investment Strategies: The Psychological Edge, an update of his 1998 best-seller Contrarian Investment Strategies: The Next Generation, Dreman explains the psychological principles underlying his approach and how emotions can lead investors astray. He shared his insights on the past, present, and future with Morningstar.com.

In your book you write that both professional and amateur investors are subject to strongly held feelings and emotions that skew their perceptions of probability. Is there any way to help investors control these impulses, or are they an inescapable part of human nature?
The impulses are very powerful on all classes of investors, and because they are emotional, they recur repeatedly. Because of these emotional forces, investors often cannot learn from the past. However, the book provides several dozen rules that, if followed, will prevent readers from making most of the costlier mistakes that are so common in the marketplace. The answers often appear to be easy to understand. But carrying them out is far more difficult because of the emotional forces I described in the text. 

One of our most important rules is to buy stocks that trade at below-market P/E multiples. Academic studies, and our own, ranging over 65 years show that low P/Es and other contrarian strategies have consistently outperformed the market over time. A second important rule is not to rely on finely tuned earnings estimates. Although most analysts believe that if earnings come in even 3% under estimates, a stock can fall sharply, the average consensus miss since the early 1970s has been closer to 50%.

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.