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This is the thing that bothers me the most about Aswath Damodaran’s recent Invest Like The Best podcast episode. He be like “you can ignore macro and just focus on business quality if you think the world is fundamentally mean reverting. But would it be so, in the future?”

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Lillian Li

@lillianmli

Jun 5

Your responses are very helpful in giving me a fuller picture btw, so thanks. I still think the deep assumptions for value investment are that the world is mean reverting and steady state progression. Haven’t read too much about when we don’t carry those assumptions anymore.

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Cedric Chin

@ejames_c

I buy the argument, and I buy the premises, but asking me to imagine a world that isn’t mean reverting and my mind instantly goes to WW2, and the transitional period between the world order before and the world order after. It is, frankly, terrifying.

7:42 AM · Jun 5, 2022Tweetbot for iΟS

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Podcast clip in question: It IS a haunting lens to view the world.

1:18

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Nothing will be the same End of compounding as we know it Badummmmmm dum

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Mathematically, a dislocation from the mean that lasts long enough is always “mean reverting”, though it’s the mean that moves to meet the new reality. I don’t see this as terrifying, because if that’s the new reality, so be it. There is no alternative.

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Further, you can be a value investor without mean reversion, if you believe valuations are not mispricings whose future corrections you can front run, but that they reflect costs of capital for the firm's ongoing and planned investments, implying low/high NPV