By Ben Carlson, CFA
A Wealth of Common Sense
Regression to the mean has to be one of the philosophical underpinnings of any decent investment strategy.
Since nothing works all the time, you have to be willing to bet that the good times won’t last forever, but neither will the bad times. Using this framework to guide your actions allows you to lean into the pain when things aren’t going well and avoid getting overconfident when things are going gangbusters.
In theory, regression to the mean explains the reasoning behind the oldest investment advice in the world—buy low and sell high. Essentially, regression to the mean is the idea that markets are cyclical.
If market cycles and regression to the mean exist, why is it so difficult to predict what transpires in the markets?