Reversion to the Mean

What goes up...may come down...

One of the most overlooked forces in investing isn’t a headline or a catalyst—it’s a statistical reality: reversion to the mean.

Markets, sectors, and even asset classes don’t move in straight lines. Over time, valuations, returns, and sentiment tend to revert to their long-term averages.

Right now, we’re seeing multiple long-term valuation indicators flashing caution:

The Buffett Indicator (total market cap to GDP) is near historic highs. The stock market is currently valued at ~$59T—200% of GDP. This is higher than in 1929, 1999 (Dot-Com), or 2008 (GFC). The higher this ratio climbs, the lower future returns tend to be.

The Shiller PE Ratio (cyclically adjusted Price to Earnings) is over 34, pointing to stretched earnings multiples where the mean is ~17. It doesn’t predict crashes—but again, it does suggest that buying at these levels has historically led to lower long-term returns over the next 5-10 years.

So what does this mean for investors?

Reversion to the mean doesn’t happen overnight. Frothy valuations can persist longer than expected, especially when many investors are exhibiting significant FOMO (fear of missing out). But when these indicators align, it’s a signal: this is not the time to chase hype.

Our approach stays grounded:

✔ Avoid buying into overvaluation—focus on value and cash flow
✔ Stay diversified to cushion against sector or asset-specific pullbacks

At Iron Valley Investments, we believe discipline always matters—even if the market forgets for a while. Reversion to the mean is never exciting—but it’s where smart money quietly positions itself.

This newsletter is for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Iron Valley Investments is a registered investment adviser in the State of Pennsylvania. Registration does not imply a certain level of skill or training. A copy of Iron Valley Investments current written disclosure statement discussing Iron Valley Investments business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Iron Valley Investments upon written request.