mean reversion
Investment strategist Michael Mauboussin explains how investors could generate more accurate valuations and improve their investment decision making by avoiding common behavioral pitfalls.
With short-term forecasts, random walks tend to outperform the accumulated wisdom of professional forecasters. That estimation uncertainty is not reduced for long-term forecasts either, because mean reversion cannot overcome the effects of compound interest. Luckily, there is a range of techniques, from simple to sophisticated, that can help long-term investors with this challenge.
This post uses long time scales of the S&P 500 as a test case for discussing the major tenets of rescaled range analysis, a favorite technique of fractal market analysis, chaos theoreticians, and some technical analysts.