mickeyd
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
"REVERSION TO THE MEAN:
Clearly Sir Isaac Newton's revenge on Wall Street is at work here! Reversion to the mean. Again! What goes up (above the market mean) must go down (below the market mean). This law of gravity which affects all broad classes of stocks (large vs. small, U.S. vs. international, etc.) is the classic manifestation of the eternal dynamics of the stock market's extraordinary ability to arbitrage present reality against future expectations.
RTM may take place slowly or quickly; it may take place in spasms or over cycles; but take place it does. And it can correct long-standing imbalances in a trice. For example, the reversion to the mean that took place last year, up with Value, down with Growth, brought these two market segments almost to equivalence since 1989, the second year of the 11-year ascendancy for growth stocks. The record for that period now shows annual returns of +16.6% for Growth, and +15.4% for Value.
In the very long run, the cycles have ironed themselves out and, at least in my view, there is no reason to expect either style to outpace the other over time (despite the important tax advantage for the growth investor). And the 1937-2000 record is witness to the profound pervasiveness of RTM. Despite all the cycles, the record for the past 63 years shows these annual rates of return: Growth, +11.8%; Value, +11.9%. Now to be sure, some brilliant academics disagree with my conclusion. In their seminal 1992 paper, Professors Fama and French showed that low p/e, low market-to-book stocks had provided higher returns than high p/e, high market-to-book stocks. But I would observe that their study, which covered the period 1963-1990, shares a common limitation with every other study of investment returns that has ever been undertaken. It was period dependent. And it happens to have coincided quite neatly with the era of Value investing that took place from 1968 through 1989. Yet for ten long years following their study, it was Growth that, by a wide margin, sat in the drivers? seat.
I'm a firm believer that RTM is a pervasive investment principle. So place me in the camp of those who believe that neither strategy, Growth or Value, has an inherent long-term edge. Neither strategy, then, has the durability of a star. Both are comets. comets with long tails, but comets nonetheless. Yet as we observe these extended cycles of mean reversion, it must occur to you that investors ought to be able to capitalize on them, riding one horse until it tires, then leaping to the other.
Sad to say, too many mutual funds and mutual fund investors are doing the exact reverse of that strategy, waiting nervously as the cycle develops, finally succumbing to temptation and jumping aboard as it approaches its peak, only to suffer the consequences when the seemingly inevitable RTM takes place. And doing the reverse takes more courage and foresight than most of us have. Speaking for myself, I have the ability to forecast neither how much of this recent reversion to the mean in favor of Value remains, nor when it will end. If you are smart enough to know, please be my guest and act accordingly. Good luck!" J.Bogle
Clearly Sir Isaac Newton's revenge on Wall Street is at work here! Reversion to the mean. Again! What goes up (above the market mean) must go down (below the market mean). This law of gravity which affects all broad classes of stocks (large vs. small, U.S. vs. international, etc.) is the classic manifestation of the eternal dynamics of the stock market's extraordinary ability to arbitrage present reality against future expectations.
RTM may take place slowly or quickly; it may take place in spasms or over cycles; but take place it does. And it can correct long-standing imbalances in a trice. For example, the reversion to the mean that took place last year, up with Value, down with Growth, brought these two market segments almost to equivalence since 1989, the second year of the 11-year ascendancy for growth stocks. The record for that period now shows annual returns of +16.6% for Growth, and +15.4% for Value.
In the very long run, the cycles have ironed themselves out and, at least in my view, there is no reason to expect either style to outpace the other over time (despite the important tax advantage for the growth investor). And the 1937-2000 record is witness to the profound pervasiveness of RTM. Despite all the cycles, the record for the past 63 years shows these annual rates of return: Growth, +11.8%; Value, +11.9%. Now to be sure, some brilliant academics disagree with my conclusion. In their seminal 1992 paper, Professors Fama and French showed that low p/e, low market-to-book stocks had provided higher returns than high p/e, high market-to-book stocks. But I would observe that their study, which covered the period 1963-1990, shares a common limitation with every other study of investment returns that has ever been undertaken. It was period dependent. And it happens to have coincided quite neatly with the era of Value investing that took place from 1968 through 1989. Yet for ten long years following their study, it was Growth that, by a wide margin, sat in the drivers? seat.
I'm a firm believer that RTM is a pervasive investment principle. So place me in the camp of those who believe that neither strategy, Growth or Value, has an inherent long-term edge. Neither strategy, then, has the durability of a star. Both are comets. comets with long tails, but comets nonetheless. Yet as we observe these extended cycles of mean reversion, it must occur to you that investors ought to be able to capitalize on them, riding one horse until it tires, then leaping to the other.
Sad to say, too many mutual funds and mutual fund investors are doing the exact reverse of that strategy, waiting nervously as the cycle develops, finally succumbing to temptation and jumping aboard as it approaches its peak, only to suffer the consequences when the seemingly inevitable RTM takes place. And doing the reverse takes more courage and foresight than most of us have. Speaking for myself, I have the ability to forecast neither how much of this recent reversion to the mean in favor of Value remains, nor when it will end. If you are smart enough to know, please be my guest and act accordingly. Good luck!" J.Bogle
