Mean reversion
TradingDefinition
The tendency for prices, valuations, or other financial variables to drift back toward their long-run averages over time. Foundation of value investing, statistical arbitrage, and many quantitative strategies.
Works on slow-moving variables (P/E ratios, real interest rates) over multi-year horizons. Doesn't work on fast-moving directional momentum. The big risk: timing — "markets can stay irrational longer than you can stay solvent."
Works on slow-moving variables (P/E ratios, real interest rates) over multi-year horizons. Doesn't work on fast-moving directional momentum. The big risk: timing — "markets can stay irrational longer than you can stay solvent."