The Persistent Myth of Mean Reversion
No, Snapchat might not come back
7:33 pm, Los Angeles, you and me are in that jazz bar, it’s cosy, the music is not too load (because it’s jazz). I’m having a Whisky and you, a Black Russian.
Differently, Still, from BADBADNOTGOOD is played by the musicians in the background.
We start talking about stocks of course, like every Friday, and we come across this business that got your attention. It has been falling for years now, you think that it’s might be an opportunity, it even reminds you of my recent article on Glintt, but then I stop you, because something is different this time. I start this way:
« There’s this idea around here that keeps coming back and I don’t know why — especially among retail investors, but let’s be honest, even some tired pros fall for it... It is this good old fashion belief that if a stock has dropped a lot, it’s bound to bounce back. Because I believe that it’s “too low” and will eventually return to some kind of “normal” price. »
*Sip* I continue…
I’m gonna be totally honest with you: that “normal” price? It doesn’t exist in the real world. And no, stocks are not rubber bands.
Here’s the reality if you ask me…
People often confuse statistics with markets, we are not in a balance sheet, life is not math. Sure and I admit it, in theory, certain things revert to the mean — like temperatures, sports performance, or maybe your sleep schedule. But stocks? Stocks represent businesses, in case you forgot it. And businesses don’t revert, they evolve my dear friend. Like this band right here that is playing for us. Business grow. Business break. Sometimes, they even die… just like us… (you’re welcome).
I can talk about Kodak for instance. Once a giant, digital came along: management froze, or ignored it, forgot what were their names. Either way — the business collapsed. The stock never “recovered,” because the business never recovered. That’s it, you can create all the theory you want in your head, that’s what happened and …
Then you stop me: « But it doesn’t happen that much »
Me: « Ho you sure? » *Sip*
Peloton. During COVID, it was printing money on stationary bikes. Post-COVID, those same bikes are gathering dust in spare bedrooms or being flipped on Craigslist. The stock is down 95%. And yet, at every -20%, hopeful buyers jumped in thinking: “Surely it’ll come back.” Don’t be this person please.
This kind of reaction is not analysis.
But here’s the problem: when you think in terms of mean reversion, you’re anchoring your thesis to the past. You’re looking at a former price like it’s some kind of north star — instead of asking if the business still has a future. Markets don’t care what a stock used to be worth. They care what it’s worth now, and where it’s headed. So ask yourself:
Is the company still making money?
Is it burning cash just to survive?
Are insiders buying in, or quietly exiting stage left?
Because these are the questions that matter.
When all you have is a chart and a dream — when your entire logic boils down to, “Well, it used to be at $60” — you’re not investing. You are more like bargaining. And stocks that fall 70, 80, or even 90%? Sorry but no, they do not always bounce back. because sometimes they will flatline. Silently, yes, permanently, still. Sooooooo…. maybe next time you’re staring at a bloody chart, don’t ask:
“When will it go back up?”
Ask:
“Should it back up. Why, how, when?”
At some point, if your only argument is price…you’re not buying value. I can say you’re buying your denial. Don’t fall for that.
*music continues*
This analysis is for informational purposes only and does not constitute financial advice or investment recommendations. Investing in financial markets involves risks, including the risk of loss of capital. Always do your own research or speak with a qualified advisor.