Mean reversion is one of the most powerful and reliable drivers of long-term capital markets returns. It’s like a pendulum. When valuation levels get high (or low) by historical standards, they’ll usually swing back to past norms, often overshooting as a pendulum might. To be sure, mean reversion works its magic slowly, so one can often wait a long time for values to revert.

One challenge with relying on mean reversion is that we don’t know what the “right” mean is. Stocks today look cheap relative to the “mean” of the last 20 years, but expensive relative to the “mean” of the last 100 years. So, which is right?