This leads to two rules central to good value investing: Over time, undervalued stocks beat expensive stocks and the market. The reason? Stock prices mean revert to value. Expensive stocks go down. Undervalued stocks go up. This is why value investors like Icahn and Buffett beat the market. Returns on equity and earnings growth rates mean revert, too. High returns on equity go down. High rates of earnings growth slow. Low returns on equity rise. Low or negative earnings growth improve.
