RE:RE:LOTS OF TURMOIL & DOUBTWe humans are just not equipped for making accurate predictions about the future. We are inclined to believe in the continuation of current trends but have a hard time accepting the reality of mean reversion. What are we to do? For me, I believe in only a couple of things. 1. Everything is cyclical. 2. Over time everything reverts to the mean.
Stock prices are mean reverting just as their underlying businesses are mean reverting. Good businesses invite competition and get less good over time. Bad businesses become less bad as competition abandons the industry.
A portfolio of shares of “bad” businesses bought at cheap prices outperforms the market and outperforms a portfolio of good businesses bought at reasonable prices at the risk that at any given time about 5% of bad companies will fail (against approximately 3% for the overall market).