Bob Farrell is a Wall Street legend.
He spent decades working for Merrill Lynch as the chief stock market analyst and senior investment advisor. He is widely recognized for his acumen as a trader and technical analyst. He is best known for understanding the patterns of investing and some might say he indirectly helped pave the way for the formal study of behavioural finance.
Like all good traders, Bob Farrell knew people and the emotions of investing.
Based on his seminal work, Bob Farrell created 10 rules for investing. These rules are still passed around by investment professionals today.
One look at the world and it’s obvious why Bob Farrell’s rules are especially important for today’s investor.
It’s only February, 2020 and so far we’ve witnessed wildfires in Australia, a brush with WWIII, risk of a global coronavirus pandemic, Presidential impeachment and a growing battle between the left and right wing political parties in America and worldwide. Meanwhile, the S&P 500 keeps pushing up against all-time highs, Tesla just went parabolic and cannabis stocks have cratered. Are we risk on or risk off? What gives?
May 28, 2020 Update: Well, we had a pandemic, markets crashed and have since recovered in a v-shape, unemployment has skyrocketed to Great Depression levels and the economy has collapsed. The political divide widens and inequality expands. And we’re not even half way done!
Who could be blamed for not knowing what to do. In 2020, it seems like Bob Farrell’s 10 rules for investing area as relevant than ever.
Here are his rules:
- Markets tend to return to the mean over time
- Excesses in one direction will lead to an opposite excess in the other direction
- There are no new eras — excesses are never permanent
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
- The public buys the most at the top and the least at the bottom
- Fear and greed are stronger than long-term resolve
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
- Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
- When all the experts and forecasts agree — something else is going to happen
- Bull markets are more fun than bear markets