Mean reversion is a favorite investment topic here on Greenbackd (see, for example, my posts on Mean reversion in earnings, Contrarian value investment and Lakonishok, Shleifer, and Vishny’s Contrarian Investment, Extrapolation, and Risk).
The premise of contrarianism is mean reversion, which is the idea that stocks that have performed poorly in the past will perform better in the future and stocks that have performed well in the past will not perform as well. Benjamin Graham, quoting Horace’s Ars Poetica, described it thus:
Many shall be restored that now are fallen and many shall fall that are now in honor.
LSV argue in their paper that most investors don’t fully appreciate the phenomenon, which leads them to extrapolate past performance too far into the future. In practical terms it means the contrarian investor profits from other investors’ incorrect assessment that stocks that have performed well in the past will perform well in the future and stocks that have performed poorly in the past will continue to perform poorly.
The outstanding Shadowstock blog has identified five “strong candidates for mean reversion.” To see John’s Shadowstock.com analysis, click here.
Greenbackd 
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