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Yup, I should have included the link you posted for a complete picture. The value of the stock allocation metric is in that it seems to be the strongest mean t

Yup, I should have included the link you posted for a complete picture. The value of the stock allocation metric is in that it seems to be the strongest mean that the stock reverts to, in the sense that it has strongest predictive power. It is not that surprising because it uses to the raw supply/demand dynamics.

DavidSJ 7y ago
But the author’s point is it’s only predictive in hindsight, due to reversion to the mean of the past data (since investment allocation is basically just measuring price over the short run), not to some objective mean that also applies to the future.
- YjSe2GMQ 7y ago
  Well that's the hypothesis - that since reversion to the mean stock allocation has always happened it will continue to happen. There's things that can invalidate the assumption, like the widespread common wisdom of HODLing index ETFs (till retirement, no matter what). If the hypothesis is false we could see stock market allocation go all the way up to 80%, or even beyond. Am I wrong?
  - DavidSJ 7y ago
    The author was not presenting it as a serious hypothesis. They were showing how compelling it looks at first glance, and how deceptive that naive analysis is, because of the unfair advantage the chart gets (in the sense that it inherently looks better than its predictive value). They did this to knock down many other valuation-based measures, not to advocate for this one. Reversion to what mean, is the author’s point. The mean for the twenty years between 1900-1920 is different from the mean for 1900-1940, is different from the mean for 1900-1960, etc. The mean is continually shifting. All data sets revert to their own mean, on average, by definition. The mere fact that a data set does so is tautological and thus provides no evidence — no confirmation of any scientific hypothesis. Edit: see my other comment for the quote of what I consider the key passage in the article.

DavidSJ 7y ago

But the author’s point is it’s only predictive in hindsight, due to reversion to the mean of the past data (since investment allocation is basically just measuring price over the short run), not to some objective mean that also applies to the future.

YjSe2GMQ 7y ago
Well that's the hypothesis - that since reversion to the mean stock allocation has always happened it will continue to happen. There's things that can invalidate the assumption, like the widespread common wisdom of HODLing index ETFs (till retirement, no matter what). If the hypothesis is false we could see stock market allocation go all the way up to 80%, or even beyond. Am I wrong?
- DavidSJ 7y ago
  The author was not presenting it as a serious hypothesis. They were showing how compelling it looks at first glance, and how deceptive that naive analysis is, because of the unfair advantage the chart gets (in the sense that it inherently looks better than its predictive value). They did this to knock down many other valuation-based measures, not to advocate for this one. Reversion to what mean, is the author’s point. The mean for the twenty years between 1900-1920 is different from the mean for 1900-1940, is different from the mean for 1900-1960, etc. The mean is continually shifting. All data sets revert to their own mean, on average, by definition. The mere fact that a data set does so is tautological and thus provides no evidence — no confirmation of any scientific hypothesis. Edit: see my other comment for the quote of what I consider the key passage in the article.