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Psychology and the Stock Market, by David Dreman.    If an aspiring investor is well schooled in high finance but doesn't understand other investors' psychological tendencies to gravitate toward extremes of sentiment, then he will find it difficult to achieve meaningful success.  This 1977 book was one of Dreman's first, yet I think it is still his best work on the powerful relationships between mass psychology, securities prices and successful investing.  Through cogent reasoning and a host of empirical studies, Dreman methodically illustrates how markets and individual stocks are repeatedly driven to extremes of valuation, as optimists regularly become irrationally optimistic and pessimists become unrealistically pessimistic.  After Dreman illustrates the recurring existence of these extremes, he makes the straightforward case that the way to profit from investors' mood swings is simply to buy from pessimistic investors and sell to the optimistic ones.  (You can see why Dreman's investment style is called "contrarian.")  This approach has worked quite well in the past and will remain effective as long as investors overreact to both good and bad news.  This is an excellent book to read for balance to Burton Malkeil's A Random Walk Down Wall Street (reviewed below).

ISBN: 0814454291
Format: Hardcover, 306pp
Pub. Date: Feb 1977
Publisher: AMACOM

 

(Currently out of print)