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I Am Tired Of Shiller, 'Reversion To The Mean' And Such Nonsense

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April 07, 2012 – Comments (5)

TMF has published yet another article publicizing the charts of Mr. S, claiming that we are thus and so from the mean, and that we are bound to revert to what his charts says where we should be, on average. The current article involves the S&P 500 yield.

What nonsense.

TMF has stated, correctly in my view, that past performance is no guarantee of future performance. I cite as my example FAIRX. Why should not this truism also apply to the equities in general? Is not the direction of same determined on the psychology of the herd investor, market makers, hedge funds, and such?

There are many folks who claim to have a crystal ball about the future direction of equities, gold, and such. Why should Mr S' charts have any more veracity than a 'Magic 8 Ball'?

 

5 Comments – Post Your Own

#1) On April 08, 2012 at 4:32 PM, Mega (99.96) wrote:

Of course any historical data set is merely a representation and simplification of underlying reality.  If you have a profound understanding of reality, simplification can be counterproductive.

What is your preferred macro approach (if any) and why is it superior to S&P 500 dividend yield and earnings yield mean reversion? 

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#2) On April 08, 2012 at 5:31 PM, goalie37 (90.44) wrote:

I agree with you.  There are many things the market "should" do, but that rarely seems to coincide with what the market actually does.

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#3) On April 08, 2012 at 7:54 PM, Frankydontfailme (27.26) wrote:

"Of course any historical data set is merely a representation and simplification of underlying reality.  If you have a profound understanding of reality, simplification can be counterproductive."

Do you mean to say, 'any historical data set is merely a representation and simplification of underlying past reality'?

Nonethless, I don't disagree with your point, and it's safer to assume eventual mean reversion as opposed to a "paradigm shift".

That being said, mean reversion can be a long nasty process. Markets can trend away from the mean for longer than seems reasonable. 

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#4) On April 09, 2012 at 12:43 PM, leohaas (32.11) wrote:

Could you provide a link to the story you are referring to? All I see on the Fool home page is a Robert Shiller story about home prices...

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#5) On April 13, 2012 at 8:50 AM, Melaschasm (57.38) wrote:

A reversion to the mean for stocks and realestate almost always occurs.  While there are exceptions to the rule they are so rare that the burden of proof should lie with those who believe a reversion to the mean will not occur.

Personally I do not think that there have been enough reports about a reversion to the mean.  If people would sell during market peaks, and buy during market bottoms they would be much better off financially.  Unfortunately, many people tend to buy at the market top and sell at the bottom.

Is there a specific reason why you do not expect a reversion to the mean this time? 

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