Mean reversion (statistical)
InvestingDefinition
The statistical phenomenon that extreme observations tend to be followed by readings closer to the average. Different from "trend reversal" — applies to long-run averages, not necessarily short-term swings.
Earnings, P/E ratios, and profit margins all mean-revert over multi-year horizons. Short-term price moves often don't mean-revert (momentum). Mean reversion drives value-investing alpha; momentum drives momentum-investing alpha. They're partially compatible because they operate on different timeframes.
Earnings, P/E ratios, and profit margins all mean-revert over multi-year horizons. Short-term price moves often don't mean-revert (momentum). Mean reversion drives value-investing alpha; momentum drives momentum-investing alpha. They're partially compatible because they operate on different timeframes.