Reversion to the Mean (and past it)
Markets revert to the mean over time. For example, in a coin toss game you can have a "run" of 6 heads in a row. How much will you bet you'll get another 6 heads in a row? If you keep tossing, you'll converge on the mean of 50% heads, 50% tails.
The tricky part of the game is the time to converge. Many will study different reversions and say it will take such and such a time. Invariably, their timing is wrong. Successful investors simply wait for the reversion to take place even if it takes a long time. See the story of Felicity Foresight.
For example, Warren Buffett talks of buying stocks in 1978 with a 9% dividend yield. It was a good buy at the time. But of course, over the next 4 years the yield went to 13%. He talks of the stomach acid he experienced over this interval. In 1982, stocks took off and had the best bull market ever.
As indicated below, the ratio of house prices to rents moves above the mean and then below. There are many more examples I will add.
Market Time is Flexible
Market time is flexible. A common mistake is to consider time as always constant. But we all know at times markets move quickly and much can happen in a short time (market time condensed). Other times, nothing much happens and they move sideways for long periods (market time elongated).
What affects market time? When volatility rises, market time will shorten. When liquidity or credit is withdrawn, markets become jumpy and more volatile. Liquidity leads volatility.
Source: Merrill Lynch