"Reversion to the mean is one of the most common stories in history. It is the main character in economies, markets, countries, companies, careers – everything."
Morgan Housel, The Collaborative Fund"

Lesson #2: Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.

The five lessons, continued

I finished last month’s Absolute Return Letter – the first in this series – arguing that wealth in society cannot outgrow nominal GDP forever. Over the long run, the two must grow 1:1. The fact that wealth, particularly US wealth, has grown much faster than GDP since the Global Financial Crisis, implies that the ratio of wealth-to-GDP must mean revert at some point, and mean reversion is precisely what this month’s Absolute Return Letter is about.

Morgan Housel, the author of “Five Lessons from History” opens his thoughts on Lesson #2 with the following words:

What kind of person makes their way to the top of a successful company or a big country?
Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.
What kind of person is likely to go overboard, bite off more than they can chew, and discount risks that are blindingly obvious to others?
Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.

I am sure you know one or two people in your circles who fit this bill quite well, but I cannot think of anyone better than Elon Musk of Tesla (who is also mentioned by Morgan Housel). Elon Musk is admittedly a genius, but he is also an accident waiting to happen. Taking on VW, GM, Ford and Toyota at the same time as he plans to colonise planet Mars, should be enough to raise your eyebrows. This month’s Absolute Return Letter is not about Elon Musk, though, but about the little, greedy devil that grows in most of us; the devil that tells us to buy when we ought to sell.