Most things in nature, as well as financial markets, tend towards their long-term mean.

For example although it is possible for share prices to hit new peaks as they did at the height of the Dotcom boom of the late 1990s, mean reversion says they will correct downwards so that valuations sit closer to the long term average (measured as say a long-term price to earnings ratio). The hard part is working out when this will happen. Equally cheap markets may not stay cheap for long as once investors discover them they buy in and drive prices back up towards their long term fair value.

READ MORE