”Mean reversion” is the tendency of an extreme value in a set to return to the average value (the mean) of the set over time. For example, consider an extremely lowly valued stock on a P/E ratio of 3, when the sector average P/E ratio for that stock is 10. While some stocks stay cheap forever (or even go bust), on average, over the long-term, the valuations of cheap shares tend to revert towards their averages. All things being equal, the P/E ratio of that stock may rise towards 10 over time as the valuation “mean reverts”. Mean reversion is one of the most powerful forces in the stock market, and is one of the foundational ideas behind the great, market beating history of “Value Investing” and even short term “Swing Trading”.