When you meet someone who has been around markets for several decades, it’s a good idea to ask questions and see what you can learn.

When that person is contrarian investor David Dreman, an early pioneer of behavioral finance and quantitative investing whose investment performance has beaten the market for at least decade, you should jump at the chance.

I recently spent several hours talking with Dreman about what he’s learned in a lifetime of investing, what he thinks of the current markets, and his favorite sectors.

Dreman has a lot of wisdom to share because his first experience with markets came in childhood at side of his father, a commodities trader, on an exchange floor back in the days when prices were updated on chalk boards.

“My father loved to discuss markets, so I heard a lot of market talk,” Dreman says. “He was a contrarian, and he used to tease me that I got all my contrarian ideas from him.”

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Now 78, Dreman is the chairman of Dreman Value Management, whose Dreman Contrarian Small Cap Value Retail Fund DRSVX, -1.05% has outperformed competing funds by 1.87 percentage points a year annualized over the past 10 years, according to investment researcher Morningstar.

Here are six key insights from Dreman that help explain why he outperforms, and how you can have a shot at it, too. It’s not easy, because you and your emotions will inevitably be your worst enemy. But Dreman explains how to deal with that.

1. Even the pros are too emotional — and there’s money in that

Most professional investors have well-honed analytical skills developed in some of the best business schools. But don’t kid yourself. When markets hit extremes, the analysis and the numbers go out the window as emotion takes over, Dreman says, summing up some of the behavior finance research from his most recent book, “Contrarian Investment Strategies: The Psychological Edge.”

You can profit from that by taking the other side of the bet.

“A lot of market decision making is psychological. It is not financial. A lot of financial people forget their numbers in bull and bear markets,” Dreman says. This is because people regularly overreact to news -- good or bad -- and extrapolate it too far into the future. “A company can be blazing hot, and people just lose all track of how it’s going to keep growing. They think it is going to just keep growing forever.” Likewise, when a bout of bad news hits, investors get stuck on negative, and this colors their analysis.

Dreman says studies show that when people get carried away emotionally like this, it affects how much they are willing to pay for things, including stocks, and not in a good way. Investors who fall in love with stocks can convince themselves to pay a hundred times what they’re worth, as we saw during the tech bubble. Likewise, get too negative, and they’ll only pay as little as 10%.

Betting against the crowd and buying what the herd hates when it’s so negative is the heart of contrarian investing.

2. Contrarian stocks skew the odds in your favor

And not just because they are cheap. Here’s a more nuanced reason: The impact of positive surprises on loved and hated stocks is asymmetrical, or out of whack.

A positive surprise at a high valuation, popular name will bring a little stock outperformance for a few months. Then the effect fades over the next several quarters, on average. In contrast, a positive surprise at an out-of-favor company sparks much bigger upside because no one expected it. Follow-on strength persists.

As Dreman puts it: “If you bet against consensus and a surprise comes along, you do better than if you bet with consensus and a surprise comes along.” In other words, “Chasing excitement doesn’t work.”

3. The crowd and your emotions will influence you

Your emotions are going to constantly tell you that you are wrong. And contrarian investing is lonely — even for professional investors. “There is career pressure,” says Dreman. “A lot of firms push analysts into what’s popular. There’s enormous pressure to buy the popular stocks.”

He cites tech stocks during the late 1990s bubble as a classic example. “You could show by any measure that they were wildly overvalued. But mutual funds wanted them because everyone knew them and everyone else wanted them.”

Instead, contrarians more often own stocks that no one else is talking about.

Case in point: Dreman was negative on tech stocks during the late 1990s. There was no way he would hold two tech darlings of the time: Brocade Communications Systems US:BRCD and QLogic US:QLGC . But now that they are both beaten down, cheap and way out of the headlines, his small cap fund owns them both.

Or consider this. I guarantee you that you’ve never heard of the biggest position in the Dreman mutual fund at the end of last year. It wasn’t in social networking or cloud computing or any other headline-grabbing sectors. It was American Axle & Manufacturing Holdings AXL, -6.85% , which makes car parts.

4. Follow this simple rule to take emotion out of the equation

I remember the David Dreman of the 1990s, when he’d take large positions in high-profile, out-of-favor names, and publicly fight the good contrarian fight, making his case in the press. At the time, a favorite stock was Philip Morris International PM, -1.74% because large court awards to smokers looked like they might bankrupt the industry. The awards were scaled back, and Philip Morris went on to produce monster gains.

The problem with taking concentrated positions like this in contrarian names is that it can be emotionally draining, and you run the risk of getting frightened out of a name at exactly the wrong time — when the negativity is at its peak.

To avoid this, Dreman now prefers to own many small positions in the cheapest stocks. He limits position size to around 1%. So his mutual fund, for example, will have well-over 100 names. “There is a lot less angst,” Dreman says.

But this also casts a wider net in the market, which increases the odds of benefiting from that asymmetry of surprise — the fact that positive surprises boost cheaper, out-of-favor stocks more than expensive, popular stocks. Like a casino, which may lose any individual bet but still win in the end, the odds are in Dreman’s favor.

But how does Dreman follow news flow for so many companies? He doesn’t. “It is almost like an index fund,” he says. He sells when stocks rise enough to move out of the cheap zone, though he’ll try to time sales to book tax-advantageous long-term capital gains for investors.

5. Don’t buy a stock just because it is down

Dreman won’t share all of the secrets of how he screens for contrarian names, but here are the basics:

His system favors the bottom 20% of stocks, as measured by valuation metrics including price to earnings, price to cash flow, and price to book. But it avoids companies with super-low valuations, like stocks with price earnings ratios in the extremely low single-digits, because that signals high-risk. Ditto for companies with excessive debt.

6. Buy banks, and avoid Facebook and Twitter

Dreman has the value investor’s natural reluctance to make market calls — because market timing is tough.

“Studies show market timers lose money, and day traders are the worst,” he says. He suggests stocks for a multi-decade time horizon. Dreman is wary of bonds, because he thinks significant inflation is inevitable, given how much money that central banks around the world are creating.

He’s intrigued by energy, but cautious because of all the uncertainties. In contrast, he likes banks. They still look cheap. Investors remember their role in the subprime meltdown. Yet the banks have made a lot of progress in strengthening their balance sheets. “We probably have the strongest banking system that we have had in a long time,” Dreman says.

He singles out Wells Fargo WFC, +0.08% and PNC Financial Services Group PNC, -0.10% , even though they are only smallish positions in his firm’s mutual fund. In contrast, the fund added Old National Bancorp ONB, -0.07% as a new position during the last quarter, and it’s a much larger position than Wells Fargo or PNC. Other large bank positions include Wintrust Financial WTFC, -2.82% , Hancock Holding US:HBHC and Fulton Financial FULT, -0.20% , as of the end of 2014, the latest time for which portfolio information is available.

Outside of banking, Triumph Group TGI, +7.81% in aircraft components, is a new position from the fourth-quarter.

What stocks should you be wary of, because owning them is like “chasing excitement?” Surprisingly, not Apple AAPL, -3.17% , despite the recent gains, and all the attention it gets. It still comes up as cheap enough to own. Instead, Dreman questions whether social media stocks including Facebook FB, -0.89% and Twitter TWTR, +2.03% can keep producing enough growth to satisfy investors paying a premium for those stocks. But if you own these stocks, don’t get too depressed that this investor icon disagrees with you.

“Value investors are always skeptical,” Dreman says. “And they are wrong a lot of the time.”

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a New York-based financial writer who publishes the stock newsletter Brush Up on Stocks..