And, when something has never happened before, you ignore it at your peril. Economists expect that there will be reversion to the mean because when a company or industry seems to be making excess profits, others will enter the industry. As more and more resources flow to the industry, prices will rise while competition will force profit margins down and equilibrium will be restored. Of course, when a segment does poorly, resources will flee to more profitable ventures, asset prices fall until the remaining investors can expect market returns on their capital. Markets could not work without this self-adjusting mechanism.
Stock markets show very strong reversion to the mean.
Even the strongest runs eventually end. Unfortunately, we don t know when a run will end, just that it must. But, any strategy that fails to anticipate reversals is doomed to fail. Projecting recent past experience One of the biggest mistakes that investors make is to project recent experience forward. Unfortunately, it s just human nature to feel that when the market is going well, it will continue up forever.