David Dreman's Contrarian Strategy: Profiting From the Market's "Mistakes"

by Wayne A. Thorp

Those who subscribe to the theory of efficient markets believe that the market, as a whole, behaves rationally most of the time. However, most investors know, from experience, that investment decisions can be affected by emotions.

Contrarian investors seek to understand and profit from the market’s emotional misjudgments by going against the crowd—seeking out-of-favor stocks and avoiding high-flying “vogue” stocks that have been swept up in market euphoria. Eventually, the market rediscovers out-of-favor stocks and lets the high fliers fall back to earth.

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David Dreman is a renowned contrarian investor who has long studied the psychological underpinnings of the overall stock market and its impact on valuation levels. He sees stocks and markets driven by emotions that often push prices from their intrinsic or “fair” value.

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