Mean reversion is the one thing we can, eventually, rely on to align price with value. It also runs counter to the collective thinking in markets.
Mean reversion is the idea that things – growth rates, earnings, prices, returns – eventually move toward an average. It’s what you get when short-term expectations conflict with long-term reality.
History is littered with companies once considered great, that have since fallen by the wayside. And the companies that were written off for dead often exceed their lowly expectations by briefly performing well.
It turns out, few companies are immune to the cycle of creative destruction (it’s a feature, not a bug, of capitalism). Mean reversion is what results. Tobias Carlisle explains why in his book Deep Value: Continue Reading…
