Anyone who is a regular reader of David Rosenberg’s daily missives has likely noticed that he refers to Bob Farrell’s 10 market rules fairly often. Farrell is an investment legend and former Chief Market Analyst at Merrill Lynch. If you’re an investor his 10 rules are rules to live by:
1. Markets tend to return to the mean over time
2. Excesses in one direction will lead to an opposite excess in the other direction
3. There are no new eras — excesses are never permanent
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
5. The public buys the most at the top and the least at the bottom
6. Fear and greed are stronger than long-term resolve
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is going to happen
10. Bull markets are more fun than bear markets.
Update – Speaking of Rosenberg – he’s offered his own set of rules:
1) In order for an economic forecast to be relevant, it must be combined with a market call.
2) Never be a slave to the data – they are no substitute for astute observation of the big picture.
3) The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
4) Fall in love with your partner, not your forecast.
5) No two cycles are ever the same.
6) Never hide behind your model.
7) Always seek out corroborating evidence.
8) Have respect for what the markets are telling you.
9) Be constantly aware with your forecast horizon – many clients live in the short run.
10) Of all the market forecasters, Mr. Bond gets it right most often.
11) Highlight the risks to your forecasts.
12) Get the US consumer right and everything else will take care of itself.
13) Expansions are more fun than recessions (straight from Bob Farrell’s quiver!).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.