Even though a strategy works most of the time and generates excellent retums, no strategy works consistently. The fast-track, aggressive growth stocks will, on occasion, knock the stuffing out of low-P/E or other contrarian methods for several years at a clip-somedmes longer. But over time, its simply no contest. Still, human nature being what it is, our expectations are almost always too high.

Even when we look at the record of these superb retums (which encompass both bull and bear markets over decades), we are still disappointed that a contrarian strategy doesnt win each and every year. The probability is zero that any investment strategy would, just as it is that youll win a hundred straight hands at blackjack. Its obvious-if we were totally rational data processors. But we are not. We demand the impossible, and repeatedly make poor decisions in pursuit of the unattainable.

Take the following example of how easily a winning strategy can be abandoned. In 1988, growth investing sha ly outperformed the value approach. Many value managers trailed the S&P 500 by 14% or 15%- when the market was ahead 33%. These strategies continued to underperform for several years. The chant went up from some consultants and sophisticated clients that value was dead. "Contrarian strategies might have worked well in the past," they said, "but now, with almost everyone using them, they just arent effective anymore."

Then, contrarian strategies did the unthinkable-they unde er-formed in the bear market of 1990. How could this happen?

Again, it was simply the laws of probability. Contrarian stocks have an excellent record of doing better in bear markets, but this doesnt mean they will do so every time (they dont have to in order to get the well-above-average retums we saw in bear markets in Figure 7-5). Still, when this happens, consultants and professionals, as well as individual investors, believe the strategies have lost their edge. Large numbers of investors, from giant institutions to individuals, abandoned them at this point, which happened to be right at the bottom of their performance cycle. From then on, these strategies outpaced the market handily for years.

My own experience, as well as that of many other contrarian money managers, is similar. Over the past twenty-five years, Ive seen this same syndrome occur virtually every time contrarian styles unde erform the market for any length of time. If you can shmg off the few bad periods, you should do very well. However, the psychology to follow through is much more difficult than it may appear.

Though the strategies are simple and easy to use, the influence of immediate events is very powerful. We will look at why most people cant

shake off these influences and at some of the principles that can help you to do so in chapter 10. But before we do that, lets look at a new contrarian strategy just off the drawing board, which has some unique advantages for investors, and some additional variations and altematives you can add to your arsenal.

New, Powerful Contrarian Approach

HEN I wrote Contrarian Investment Strategy in 1980, I stressed the low-P/E strategy because it was the best documented way to beat the marltet at the dme. As we have seen, there are a number of other contrarian methods that should produce top-notch results. All the strategies we viewed in the last chapters, however, relied on buying companies that investors put at the absolute bottom of their dance cards, by price-to-value measurements. Since the psychological forces that drive people toward the best and away from die worst stoclts are predictable, these same influences should worlt to our advantage in a variety of other situations.

Are there other contrarian strategies that will perform well in investment marltets and elsewhere? Yes. In this chapter, well examine a new strategy that worlts on exactly the same behavioral principles, but in a very different way. This method will allow you to participate in virtually every major industry in a manner similar to an index fund. Unhlte an index fund, however, it should provide well-above-market retums.

Finally, well also look at a number of ways to use contrarian strategies that require httle rehance on judgment, the weakest hnk in the investment decision-making process, yet which will still provide superior performance over time.

These additional methods may not be suitable for every investor, but you should be aware of them, since diey represent some of the latest results from new research. Happily, there now is sohd support for strategies that are a valid altemative to the contrarian methods weve been looking at. These methods will meet the needs of people who would like a simphfied approach.