"Those who are now in decline may regain their splendor in the future. Those who are favored now may be eclipsed in the future." On the title page of "Securities Analysis", Horace's poem explains the mystery of mean reversion.
As Howard Marks, co-founder of Oaktree Capital, said in "Cycles", when a thing is in cyclical fluctuations, it will be either higher than the mean or lower than the mean most of the time. Finally, after the deviation reaches the extreme, it will turn around and return to the mean. As the saying goes, great prosperity must lead to decline, but failure will prosper. Prices will eventually return to their long-term average. This is the mean return of financial markets.
American investment guru Malkiel likened mean reversion to the law of gravity in the financial market. He used a large number of historical events in "A Walk on Wall Street" to illustrate that the existence of this "law of gravity" must be kept in mind at all times.
Precisely because of the existence of mean reversion, in the long run, stock prices always fluctuate around the value center. For many ordinary investors, it is very difficult to continue to beat the market and obtain excess returns. Therefore, Malkiel suggested that when constructing an investment portfolio, instead of laboriously researching individual stocks, ordinary investors should choose overall stock market index funds that cover a wide range of stocks, which can not only conveniently invest in a "basket" of stocks and achieve diversified investments, but also obtain the market's average returns at a relatively low cost. The return pursued by the
index fund is the average return of the target market, which is also what we often call beta return. Many investors may think that the average return is "mediocre", isn't it easy to surpass? In fact, when we sort through the A-share data from 2012 to 2021, we can find that only 29.2% of the stocks outperformed the Shanghai and Shenzhen 300 Total Return Index in 10 years. It can be seen that beating the market average return is not an easy task.
Market fluctuations are ultimately the resonance of actual value and price changes. When the long-term market development trend is upward, the value center slowly rises, prices fluctuate around the actual value, and the corresponding index will also develop in an upward spiral. As long as we sow the seeds patiently and work hard with time, I believe we will be able to reap our own share of the gifts.
"The winter solstice brings the sun and spring comes again." The winter solstice has arrived, and spring can be expected.
E Fund Index wishes you a good night.
Planning: Ding Jianming Hou Zhihong
Copywriter: Zhang Yixue Yang Wanyu
Anchor: Liu Yingjie
Editor: Li Ruoyu Yu Hongbo
