Regression Line for Major Stock Market Indexes
Mean Reversion :
Would like to reiterate here that the " regression line " is just a "statistical phenomena " same as other indicators in Technical Analysis where we are just using past price trend or movement to manipulate or so call " forecasting " the future price movement.
Whereas "mean reverting " is just a situation that showing market move in "cycles " and tends to revert to mean if there is any "over-shooting " in both directions ( where everyone is either too optimistic or pessimistic ).
Concept Explained: by Investopedia
What is the 'Mean Reversion'
Mean reversion is the theory suggesting that prices and returns eventually move back toward the mean or average. This mean or average can be the historical average of the price or return, or another relevant average such as the growth in the economy or the average return of an industry.
BREAKING DOWN 'Mean Reversion'
This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performances have greatly differed from their historical averages. However, a change in returns could be a sign that the company no longer has the same prospects it once did, in which case it is less likely that mean reversion will occur.
Per cent returns and prices are not the only measures considered mean reverting; interest rates or even the price-earnings ratio of a company can be subject to this phenomenon.
A reversion involves the return of any condition back to a previous state. In cases of mean reversion, the thought is that any price that strays far from the long-term norm will again return, reverting to its understood state. The theory is focused on the reversion of only relatively extreme changes, as normal growth or other fluctuations are an expected part of the paradigm.
The mean reversion theory is used as part of a statistical analysis of the market conditions, and can be part of an overall trading strategy. It applies well to the ideas of buying low and selling high, by hoping to identify abnormal activity that will, theoretically, revert back to a normal pattern.
The return to a normal pattern is not guaranteed, as an unexpectedly high or low could be an indication of a shift in the norm. Such events could include, but are not limited to, new product releases or developments on the positive side, or recalls and lawsuits on the negative side.
Even with extreme events, it is possible security will experience a mean reversion. As with most market activity, there are few guarantees on how particular events will or will not affect the overall appeal of particular securities.
Mean Reversion Trading
Mean reversion trading looks to capitalize on extreme changes within the pricing of a particular security, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and save at the occurrence of an abnormal low.
As above mentioned, stocks price for some companies will not revert to mean if these companies are having "fundamental problem ". Basically, I use this chart for a much longer and broader perspective on "portfolio's asset allocation " rather than an individual stock analysis which is much more complicated and required one to look at company's fundamental and macro analysis.
Alternatively, we may also use the market fundamental ratio e.g PE / PB level as compared to their long term mean value as a guide of market valuation.
Regression Line for Major Stock Market Indexes
Here you go .....
Although the STI is still moving below “regression line “, but one needs to bear in mind and take note that the world stock market is such a complicated and intricated, anything happens in other parts of the world will definitely affect the price move of STI.
Remember the W.W.W ( Watch List, War Chest, Wait patiently )
Below link to a pdf file that written by Mark Yusko (Former head of the endowment at the University of North Carolina) has great detail on investment strategies and philosophy from one of the renowned value investor – Seth Klarman :
( you may just read till page 32 on value investing )
These are some of the quotes from the paper :
- There’s no such thing as a value company. Price is all that matters. At some price, an asset is a buy, at another, it’s a hold and at another, it’s a sell.
- Jesse Livermore famously quipped that “I made all my money from my sitting” and Klarman would agree to say, “There's something validating about the message that it's okay to do nothing and wait for opportunities to present themselves or to pay off.” Thus, Patience is not only a virtue, but the cornerstone of a Value culture and the bedrock of the Value structure.
- “In reality, no one knows what the market will do. Trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.” We have seen time and time again the market confounds the pundits and predictors. It will rally when everyone is convinced it will fall, and it will crash when everyone believes the good times will never end. John Maynard Keynes famously commented, “The market can stay irrational longer than you can stay solvent.” We know the perils of trying to take a position that is dependent on short-term market moves.
- There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate and invest with the margin of safety.
- It is precise because we do not, and cannot, know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.
- A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck or extreme volatility in a complex, unpredictable and rapidly changing the world.
- While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.
- “The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions. I think markets will never be efficient because of human nature.”
Quote Of The Day :
“Investing is the intersection of economics and psychology. The analysis is actually the easy part. The economics, the valuation of the business isn't that hard. The psychology, how much do you buy, do you buy it at this price, do you wait for a lower price, what do you do when it looks like the world might end, those things are harder. Those you learn from experience and by having the right psychological makeup.” by Seth Klarman