Like many disciplines the investment world is full of lingo. Some of it has meaning, most of it can be explained simplistically and 100% of it is hogwash to make folks feel and sound smarter than they actually are! (He who cannot laugh at himself…)

One such item of investment-speak is the “reversion to the mean” theory or the idea that over the long-term individual assets and/or asset classes will provide a rate of return consistent with its average return. Should this theory hold true the coming years ought to mark a reversal of “The Lost Decade” by presenting a wonderful opportunity for investing in equity markets.

Brian M. Barish, President of Cambiar Investors LLC, lays out the case rather succinctly in this excerpt from Cambiar’s 4/30/10 annual report:

“Why was this decade such a debacle for financial returns? This rhetorical question will likely generate impassioned views in many quarters. Our gut feeling is that a complex analysis of politics and global imbalances misses the core problem – financial markets and individual businesses began the decade grossly overvalued and overconfident in their prospects and acumen in varying degrees, respectively. These are not independent variables; they are in fact rather self-reinforcing. Overvaluation tends to breed overconfidence and a certain capriciousness about key decisions by business leaders and financial market operatives. Ultimately, the catastrophic losses of the 2007-8 time period can broadly be traced to poor capital allocation and risk assumptions. As we look forward to a new decade, have these demons been expunged by the desultory results? We won’t know that for awhile, but the anecdotal evidence would suggest that as a new decade commences, that attitudes towards capital stewardship, risk management, and associated business decision making have been profoundly altered. Perhaps not coincidentally, the same self-reinforcing dynamic of valuations and associated confidence have come full circle. In December 1999, the S&P 500 traded at a price to earnings multiple of 30x trailing earnings at the tail end of an economic cycle and with little if any slack in the broader economy, suggesting that such earnings would be quite vulnerable in an economic pullback. In April 2010, the same index traded at 15x trailing earnings at the front of an economic cycle and with enormous amounts of idle economic capacity.”