The reason we respect mean reversion

We bought interest sensitive, dividend paying equities in 2003 and 2009, after they had crashed lower by 50%. After soaring above reasonable value over the past three years on QE, we see evidence to suggest that the third price mean reversion process since 2000, is now in progress. The below chart of the Canadian Real Estate Investment Trust ETF (XRE) demonstrates why it pays to respect the inevitability of mean reversion cycles. Those impatient or desperate for “yield” always make the same mistake, buying and holding at every price, they then lose years of income in a matter of weeks as share prices fall back below long-term averages. As shown below, REITS have so far lost 15% since May (nearly 3 years of income in just over 2 months) and counting. Around $15 today (from a high of nearly $18 in May), the 2003 and 2009 lows brought entry opportunities around $6.00 with income yields of more than 8%–a risk/return ratio worth waiting for again. By then of course, most of those holding today will be selling in horror after losing large chunks of their capital. They will then fire their broker or long-always manager and move to cash just as prices are finally attractive. And so the cycle goes…

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

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