Getting back to normal

Jul 25, 2018

When are things going to get back to normal?

Funny, isn’t it - things are always getting back to normal. But they are rarely normal. What’s that all about?

In math, they call this reversion to the mean. A simpler way to express this might be “the more things change, the more things stay the same.”

Lots of things have long term trends: financial markets, weather patterns, life expectancies, education costs, marriages, earthquakes, societies and the world’s economy to name just a few. The long-term direction of a trend (up or down) is not inevitable – the direction can be changed. But not often and not easily.

Suppose that for a 50-year period of time, the stock market grew at 6% per year on average. Yet there may not be a single year in 50 in which the return is exactly 6%. Some years returns are higher, others are lower. Yet on average, the return would be 6% per year (in this example).

In markets and in life, the pendulum swings from one side to the other, passing over “average” or “normal” on a somewhat regular basis, but never staying for a more than a moment in time. If you’re hoping for a smooth path or predictable timing for the swinging of the pendulum, you’re going to be disappointed.

Just know that the farther away from “normal” you get, the more likely things will swing back in that direction.

But allow me to insert a word of caution: timing the turn is really hard. Betting that the turn will come eventually is as close to a sure thing as you’ll ever get.

So what can you learn from all this?

1. Accept that things never stay the same. Back in 2009 I kept saying, “Things won’t always be this bad.” Now I find myself having to remind folks, “Things won’t always be this good.”

2. Work with (not against) the long term trends. Most investment trends revert to the mean. At least they have so far. If you want to bet on something blasting out of the stratosphere in a way nothing ever has before, go for it. Just understand the gods of finance and history are against you.

3. Pick your battles carefully. If everyone stuck with existing long-term trends, I suppose we’d still be riding horses and hunting for our food. So if you are a trend busting entrepreneurial type, bless you! We need you. Just understand that you’ll lose most of your trend-fighting battles. So pick them carefully and prepare for an uphill slog. It won’t be easy. But if this is you, you’re not looking for easy and predictable, are you?

4. Enjoy the ride. Most of us need to work with the trends. A few of us are called to work against them. Which one brings you energy, joy and fulfillment?

Your answer may help you what you need to do…while you wait for things to get back to normal.