Mean reversion is the most ironclad rule in financial markets

By | Investing, Mean Reversion

(Excerpt from What Works In Wall Street by James P. O’Shaungnessy)

The most ironclad rule I have been able to find studying masses of data on the stock market, both in the United States and developed foreign markets, is the idea of reversion to the mean. If the general market has enjoyed outstanding results over a 20-year period, we generally spend the next 20 years reverting downward to its long-term average annual return. If, on the other hand, markets have generated disappointing results over the previous 20 years, they go on to do quite well in the ensuing 20-year period.

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