Can You Predict a Good Time to Buy and Sell Stocks?
Over the past year, we have shared a variety of videos from strategic partner Dimensional Fund Advisors, as we feel they provide important insights into Dimensional’s way of thinking and highlight the similarities between Dimensional and Yeske Buie. To continue illustrating our connection, we share a video that features Dimensional’s Vice President of Research, James Davis, PhD explaining the theory of Mean Reversion. As Davis explains, mean reversion is “the idea that higher than average returns will be followed by lower than average returns, and lower than average returns will be followed by higher than average returns.” This theory excites some investors because the ability to anticipate these cycles would allow them to buy or sell securities at advantageous times. However, Yeske Buie and Dimensional know that there is simply not enough evidence to support that these kinds of patterns exist or serve as profitable trading strategies. As Dave notes in our piece titled, “How to Pick Hot Stocks: Secrets of a Stock Picker”, we believe that it’s not enough to simply rely on historical data alone to develop or propose any technique for investing, which serves as the basis for many of these techniques.
To test the existence of the Mean Reversion theory, Davis conducted an experiment across 15 different stock markets, including the United States, and comes to a conclusion to answer the question, Can You Predict a Good Time to Buy and Sell Stocks?
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