CHAPTER 8MEANS AND MEAN REVERSION
Once you have a good base number set—whether that set is a simple dollar price or some sort of a ratio—one way to put the data into long-term perspective is with a mean, or arithmetical average.
The mean is simply the average of the data for a certain period of time. Figure 8-1 shows price to prior peak earnings from 1870 to September 2011, with the simplest mean line imaginable. Half the data points are above the line, and half below it.
Figure 8-1: Standard & Poor’s 500 Index (S&P 500) Price to Prior Peak Earnings With Mean Line, 1870–Present.
With the exception of a short blip in 2008, we have been above ...
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