…but before we do that, allow me to elaborate a bit on it.
Regression to the Mean (RTM) is the tendency for trends to flip with the passage of time; it’s nature’s way of levelling the playing field. Most things on Earth revert to the mean over time and this includes investing as well.
It means that whenever you hope that a very high investment return would continue, the odds would be overwhelmingly against you.
I, personally, always want to consider the
statistical phenomenon RTM as a possible cause of an observed change in my decision making process.
Admittedly, that’s easier said than done, since our mind is strongly biased towards causal explanations and doesn’t deal well with “mere statistics”.
RTM has an explanation but it doesn’t have a cause, and this makes it
far from obvious and doubly important to be sensitive to its frequent occurrences:
Because of RTM, weather fluctuates around a mean.
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