Reversion to the mean is so truthy

Aaron Pressman

The oldest adage in investing must be what goes up must come down. It’s appealing in a simplistic, gut-check sort of way but it’s totally wrong. Everything from the economy to the stock market to the price of movie admissions has gone up, up, up for a long, long time despite occassional hiccups. A slightly more refined and truthier (to quote Stephen Colbert) version of the saying is that markets tend to revert to the mean. Usually it’s cited to argue that a market will return to its average performance or valuation level, i.e. that a strong performing market will weaken.

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