Reversion to the Mean

The core mechanism behind value investing: markets tend to overproject current trends into the future, causing fast-growing businesses to be overvalued (the trend is assumed permanent) and temporarily struggling businesses to be undervalued (the struggle is assumed permanent). Over time, both types revert toward normal performance, and patient investors who buy the undervalued ones can capture that recovery. Joel Greenblatt’s friend Richard Pzena articulated this framework in a 2005 Columbia Business School guest lecture that Joel Greenblatt called one of the most accurate guides to successful investing.

Where this appears

• In 2005, Joel Greenblatt Taught… (tweet) — framed as the central mechanism in Pzena’s guest lecture
• Joel Greenblatt — taught the concept at Columbia
• Richard Pzena — the guest lecturer who articulated the framework