Is there a reversion to the mean for everything?

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TM90
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Is there a reversion to the mean for everything?

Post by TM90 » Wed Jun 27, 2018 10:35 am

As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?

dbr
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Re: Is there a reversion to the mean for everything?

Post by dbr » Wed Jun 27, 2018 10:40 am

TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again?
Interest rates will surely go up and down. That does not have to have anything to do with reversion to the mean, which is a specific technical term for some results sometimes observed in statistically analyzed data but see here: https://www.dnb.nl/en/binaries/working% ... 252978.pdf

also
https://en.wikipedia.org/wiki/Regressio ... d_the_mean
and
https://en.wikipedia.org/wiki/Mean_reversion_(finance)

bantam222
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Re: Is there a reversion to the mean for everything?

Post by bantam222 » Wed Jun 27, 2018 10:46 am

Yes, but we do not know what the mean is, we can only guess

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Pajamas
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Re: Is there a reversion to the mean for everything?

Post by Pajamas » Wed Jun 27, 2018 10:46 am

Generally yes, but the mean itself can change over time.

This works on different scales.

For instance, look at a long-term chart for an individual equity such as Amazon with various moving averages plotted.

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Taylor Larimore
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Re: Is there a reversion to the mean for everything?

Post by Taylor Larimore » Wed Jun 27, 2018 10:50 am

TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?
TM90:

Jack Bogle made a very informative speech about "Reversion to the Mean." Here is the link:

The Telltale Chart

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

alex_686
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Re: Is there a reversion to the mean for everything?

Post by alex_686 » Wed Jun 27, 2018 10:57 am

bantam222 wrote:
Wed Jun 27, 2018 10:46 am
Yes, but we do not know what the mean is, we can only guess
No, we can know what the mean is. I mean is that we can use historical analysis to figure out what the mean was for a period of time.

If you mean can we figure it out today, you are right. The mean is time varying. Funny thing about economics, there are structural changes which alter things.

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SimpleGift
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Re: Is there a reversion to the mean for everything?

Post by SimpleGift » Wed Jun 27, 2018 10:59 am

TM90 wrote:
Wed Jun 27, 2018 10:35 am
Is there a reversion to the mean for everything?
In investing and finance, there is true "reversion to the mean" in very few things, I believe.

Reversion to the mean only happens in historical data when it is a stationary series — that is, in statistical terms, when the mean and variance are fairly constant and stable. Most of the financial data we deal with in investing (and interest rates are a prime example) is non-stationary — the mean and variance in one time period do not apply to another time period.

For a recent Forum discussion of the issue: The Illusion of the "Long-Term Average" in Investing
Cordially, Todd

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Re: Is there a reversion to the mean for everything?

Post by Call_Me_Op » Wed Jun 27, 2018 11:44 am

TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?
No. What is the mean - the rate over the past 20 years, 50 years, 100 years,...?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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DanMahowny
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Re: Is there a reversion to the mean for everything?

Post by DanMahowny » Wed Jun 27, 2018 11:47 am

I'll answer with a big YES!

Reversion to the mean is my life philosophy/strategy. So far it has served me very well.
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Re: Is there a reversion to the mean for everything?

Post by H-Town » Wed Jun 27, 2018 12:00 pm

TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?
Yes in a conceptual sense. If we had some bull years (10-20% gain), there would be some loss years ahead waiting for you. If we were in a recession (15-30% loss), brighter years are a head.

TM90
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Re: Is there a reversion to the mean for everything?

Post by TM90 » Wed Jun 27, 2018 12:49 pm

Taylor Larimore wrote:
Wed Jun 27, 2018 10:50 am
TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?
TM90:

Jack Bogle made a very informative speech about "Reversion to the Mean." Here is the link:

The Telltale Chart

Best wishes.
Taylor
Thank you Taylor, very informative.

GAAP
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Re: Is there a reversion to the mean for everything?

Post by GAAP » Wed Jun 27, 2018 1:01 pm

Perhaps -- if that average actually means something. Long term RTM for equities -- history would agree. Long term RTM for bonds, not so much.

TM90
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Re: Is there a reversion to the mean for everything?

Post by TM90 » Wed Jun 27, 2018 1:01 pm

dbr wrote:
Wed Jun 27, 2018 10:40 am
TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again?
Interest rates will surely go up and down. That does not have to have anything to do with reversion to the mean, which is a specific technical term for some results sometimes observed in statistically analyzed data but see here: https://www.dnb.nl/en/binaries/working% ... 252978.pdf

also
https://en.wikipedia.org/wiki/Regressio ... d_the_mean
and
https://en.wikipedia.org/wiki/Mean_reversion_(finance)
Is see your point but why can't interest rates and "the mean" be correlated?

For example I thought returns for treasuries were higher in recent history versus a total bond fund helped by lowering of interest rates.

If interest rates rise, is it possible for treasuries to have less return then total bond and hence there is reversion to the mean?

I'm just trying to look at it through a different point of view because I'm thinking about going from a global treasury strategy to a global bond strategy.

I originally thought treasuries were good because of their safety and lower correlation with equities then corporates. This article also pushes me in that direction: https://www.reuters.com/article/norway- ... SL8N1LL3QZ

Maybe it's just splitting hairs but I'm a portfolio tinkerer, I recently switched to a multifactor fund for my portfolio and it's underperforming the msci world. I did not realise I was so bad at handling tracking error so now I'm contemplating going back to an msci world index.

That is also why I'm considering going to global bonds instead of global treasuries, I don't want tracking error because I don't think I can handle it.

Im considering going back to basics because "nobody knows nothing" and RTM.

Global stocks
Global bond

And be done with it!

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k66
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Re: Is there a reversion to the mean for everything?

Post by k66 » Wed Jun 27, 2018 2:54 pm

I only see reversion to the mean (RTM) as something that is attributable to a function when

a) it is cyclical, and
b) its boundary conditions remain static.

Market behavior is pseudo-cyclical and it's boundary conditions are not necessarily static. RTM is fun to talk about but as others have noted, is not anything that is predicable (or guaranteed).
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

gilgamesh
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Re: Is there a reversion to the mean for everything?

Post by gilgamesh » Wed Jun 27, 2018 4:37 pm

It’s also about how quickly it reverts to the mean ...in the extreme, if it takes a century for RTM, what good is that? But, it doesn’t have to be a century...much less will make it utterly meaningless. Of course there has to be RTM, but what is the magnitude of “mean” and how quickly the markets will reach it makes it a useless metric. Some assume the mean to linearly increase over time - I don’t know how true that is. Even if it’s true, as markets can stay away from this liner relationship for an indefinite amount of time, will still make it useless.

Alas, markets can stay irrational for a lot longer than a mere mortal can stay solvent.

It will be interesting if someone can point to some data on this liner increase in “mean” in RTM over time...I vaguely remember reading about it.
Last edited by gilgamesh on Wed Jun 27, 2018 4:43 pm, edited 1 time in total.

jdb
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Re: Is there a reversion to the mean for everything?

Post by jdb » Wed Jun 27, 2018 4:42 pm

Definitely yes as to my golf game. No matter how I work to improve. So probably also for most other important things in life. Good luck.

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Re: Is there a reversion to the mean for everything?

Post by willthrill81 » Wed Jun 27, 2018 4:45 pm

When it comes to returns of financial assets, I'm not aware of any 'law' that says that reversion to the mean must occur. Further, we have no idea what mean anything could even revert to. As noted above, the answer would depend greatly on the time frame over which you were calculating the mean. And it might take a very long time for that mean reversion to kick in even if it did eventually occur, so long as to be irrelevant for your personal situation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is there a reversion to the mean for everything?

Post by david1082b » Wed Jun 27, 2018 6:05 pm

S&P 500 Current 12 month EPS: 110.98

Mean: 29.76
Median: 20.38
Min: 4.17 (Dec 1921)
Max: 110.98 (Dec 2017) http://www.multpl.com/s-p-500-earnings/

In 2009 the EPS briefly went below the mean but then it bounced back well above it. The mean can grow of course the longer EPS stays above the mean. Eventually the Earth will be destroyed by the sun's fire and the S&P 500 will probably go to zero if it even exists when the Earth is destroyed (humanity may well have gone extinct by then). The mean for everything is zero in the long run. The universe prefers the near absolute zero of deep space.

golfCaddy
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Re: Is there a reversion to the mean for everything?

Post by golfCaddy » Wed Jun 27, 2018 6:18 pm

Take a look at this thread: viewtopic.php?f=10&t=251853. To the extent, mean reversion in stocks can be said to occur, it looks like it can take 60+ years.

columbia
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Re: Is there a reversion to the mean for everything?

Post by columbia » Wed Jun 27, 2018 6:28 pm

Elephant in the room for this type of conversation: international has been a dog, but will eventually roar past US, because of a reversion scenario.

That’s a curious stance (actually, it’s a repeated prediction) to take, if the rationale for a heavily (if not global) international portfolio is that one *can’t* predict future returns re: US vs international.

Note: I do have some international.

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Taylor Larimore
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Re: Is there a reversion to the mean for everything?

Post by Taylor Larimore » Wed Jun 27, 2018 6:39 pm

Bogleheads:

In his classic book, Common Sense on Mutual Funds, Mr. Bogle has a chart showing the real (after inflation) return of U.S. stocks since 1802. If we look closely, we can see that the real return of stocks has been quite volatile, but whenever they go up or down, they eventually return to the median. This is the link:

https://books.google.com/books?id=ZnEje ... 22&f=false

Best wishes.
Taylor
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Re: Is there a reversion to the mean for everything?

Post by 2015 » Wed Jun 27, 2018 7:36 pm

Probably. Investing nests within a system created by human beings. Human beings nest within the pleasure principle; that is, seeking pleasure/avoiding pain. Human beings also exist within a highly unstable system of equilibrium seeking. Hence, reversion to the mean is quite possible in all human endeavors.

bhsince87
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Re: Is there a reversion to the mean for everything?

Post by bhsince87 » Wed Jun 27, 2018 7:50 pm

No.

Did the cost of buggy whips ever revert to mean?

Or televisions?

Technology can change everything.

Or what about the value of the US tobacco crop?

Or of avocado colored GE refrigerators?

Changes in taste and popularity can have a huge impact too.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: Is there a reversion to the mean for everything?

Post by SimpleGift » Wed Jun 27, 2018 9:00 pm

Taylor Larimore wrote:
Wed Jun 27, 2018 6:39 pm
In his classic book, Common Sense on Mutual Funds, Mr. Bogle has a chart showing the real (after inflation) return of U.S. stocks since 1802. If we look closely, we can see that the real return of stocks has been quite volatile, but whenever they go up or down, they eventually return to the median.
U.S. stock returns have returned to a mean value, not because of any quality inherent in stocks or corporate enterprise itself, but because the U.S. (and the U.K.) was not destroyed by world war and their GDP growth have thus been remarkably consistent over two centuries (chart below). See this thread for more details: Mean Reversion in Long-Term Stock Returns?
There's a reason Siegel's Constant of 6.6% mean long-term return for stocks was not observed in Germany, France or Japan!
Cordially, Todd

dbr
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Re: Is there a reversion to the mean for everything?

Post by dbr » Thu Jun 28, 2018 8:15 am

SimpleGift wrote:
Wed Jun 27, 2018 9:00 pm
Taylor Larimore wrote:
Wed Jun 27, 2018 6:39 pm
In his classic book, Common Sense on Mutual Funds, Mr. Bogle has a chart showing the real (after inflation) return of U.S. stocks since 1802. If we look closely, we can see that the real return of stocks has been quite volatile, but whenever they go up or down, they eventually return to the median.
U.S. stock returns have returned to a mean value, not because of any quality inherent in stocks or corporate enterprise itself, but because the U.S. (and the U.K.) was not destroyed by world war and their GDP growth have thus been remarkably consistent over two centuries (chart below). See this thread for more details: Mean Reversion in Long-Term Stock Returns?
There's a reason Siegel's Constant of 6.6% mean long-term return for stocks was not observed in Germany, France or Japan!
So in some cases (growth of) GDP mean reverts?

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SimpleGift
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Re: Is there a reversion to the mean for everything?

Post by SimpleGift » Thu Jun 28, 2018 8:25 am

dbr wrote:
Thu Jun 28, 2018 8:15 am
So in some cases (growth of) GDP mean reverts?
An interesting question. Over the past two centuries, GDP growth has been remarkably stable, at least for countries like the U.K. and the U.S. not devastated by world war. Economic historians would likely have an answer — but there certainly appears to be something about human enterprise that has produced a stable 2%-3% real rate of GDP growth over decades and decades.
Cordially, Todd

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Re: Is there a reversion to the mean for everything?

Post by Artsdoctor » Thu Jun 28, 2018 8:34 am

TM90 wrote:
Wed Jun 27, 2018 10:35 am
As the title says, is there? I mean for example treasuries were the way to go to last years but lowering of interest rates surely helped their gains. Will there be a reversion to the mean when interest rates rise again? And will an investor be better off in a diversified index like total bond?
No. There is not a reversion to the mean for everything. Certainly in the financial world, there are things that plummet well below the mean, to zero, and never come back. This is where knowledge of financial history comes in handy, and it keeps you very humble. Ultimately, you realize that there is no such thing as certainty.

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dm200
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Re: Is there a reversion to the mean for everything?

Post by dm200 » Thu Jun 28, 2018 9:37 am

Technology advances do not revert to the mean - I have more memory and power on my smartphone than it took to send a man to the moon. I was in the IBM computer business beginning in 1967 - and mainframe computers then filled the equivalent of large rooms. The common disk storage device was an IBM 2311 which was the size of a cabinet and each heavy disk (removable) only held 7.25 Megabytes of data.

Healthcare costs keep rising - so I doubt there will be a reversion to the mean either.

dbr
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Re: Is there a reversion to the mean for everything?

Post by dbr » Thu Jun 28, 2018 9:48 am

dm200 wrote:
Thu Jun 28, 2018 9:37 am
Technology advances do not revert to the mean - I have more memory and power on my smartphone than it took to send a man to the moon. I was in the IBM computer business beginning in 1967 - and mainframe computers then filled the equivalent of large rooms. The common disk storage device was an IBM 2311 which was the size of a cabinet and each heavy disk (removable) only held 7.25 Megabytes of data.

Healthcare costs keep rising - so I doubt there will be a reversion to the mean either.
Moore's law could be an example of reversion to the mean in an exponential growth model, the same as for stock prices: https://en.wikipedia.org/wiki/Moore%27s_law

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DanMahowny
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Re: Is there a reversion to the mean for everything?

Post by DanMahowny » Thu Jun 28, 2018 10:04 am

jdb wrote:
Wed Jun 27, 2018 4:42 pm
Definitely yes as to my golf game. No matter how I work to improve. So probably also for most other important things in life. Good luck.
He speaks the truth. Work the same for me (golf)
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