When Betting on Yo-Yoing Share Prices, Remember There Are Strings Attached
What goes up must come down. What goes down must bounce back.</br></br>As stock prices move higher and lower, many investors cling to the belief that any stock-market suffering will ultimately be rewarded. That's why they hang on to losing stocks and buy on market dips. More important, this belief gives investors the tenacity to invest for the long haul.</br></br>"There's a tendency to believe that good times will follow bad and bad times will follow good," says Steven Thorley, a finance professor at Brigham Young University's Marriott School of Management. "It's a notion of fairness."</br></br>But does the stock market really work this way? At issue is "mean reversion," the idea that there is a some sort of average to which share prices tend to return. Just as trees don't grow to the sky and the meek are supposed to inherit the earth, so there's a conviction that neither good markets nor bad markets can go on for too long.</br></br>It's not surprising that investors want to believe in reversion to the mean, because it makes the stock market seem less fickle. But it also means we could be in for some rough times.