Mean Reversion

Mean reversion is the idea that if the value of some random variable (like investment returns) is significantly different from the overall mean value of that variable that the random variable will revert over time to that long term mean value. Basically, if a lifetime 0.200 hitter in baseball suddenly bats 0.400 over a few weeks stretch, it’s likely his batting average after that stretch will drop back down to approach what his overall batting average is. In other words, bad hitters generally will always be bad hitters even if they have a few good weeks. Exceptions exist, of course, but in general, mean reversion is a real thing.