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By James J. Clarke, Portfolio Manager & Director of Fundamental Research at Brandywine Global Investment Management.

Trees do not grow to the sky.

At the core of our value investing philosophy is the concept of regression to the mean. Let us start by grounding that in some foundational economic concepts. We also will complement the explanation of regression to the mean as nature practices it.

At any time, there are companies or industries earning substantially more or less than the economic norm. Similarly, there are always some countries where the currency makes goods very expensive in dollars and others very cheap. As equity investors, we look for companies that have been sold down to well below their intrinsic business value, and we have found them in just about every industry and country at one time or another.

These prices do not exist in isolation. They trigger economic responses. For example, that new industry earning 50% return on equity attracts competitors, which ultimately brings down the return. A cheap currency brings tourism and investment to the country, creating demand for that currency. The company that is out of favor can get taken over or replace its management, igniting change.

Countervailing economic forces bring extremes back into line. That is regression to the mean and that is how value investors typically make their money.

On the first page of Security Analysis, author Benjamin Graham, a Columbia University Class......................

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