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Bob Farrell’s 10 Rules of Investing

I have never been a big fan of rules, but every now and again we revisit brilliance that transcends time.  Bob Farrell is a Wall Street legend that rode a career through the bull markets of the late 1960s, mid- 1980s, and late 1990s.  He navigated the dramatic bear market of 1973-1974 and the October crash of 1987.  His experience produced his famous “10 Rules of Investing.”

As investors, we can lose sight of the big picture.  It’s easy to get sucked in to Fed policy, politics, short-term capital flows, and speculation.  Bob’s golden rules helps provide a rational foundation to make sound investment decisions. 

Bob Farrell’s 10 Rules are in bold.  My comments are below.

1. Markets tend to return to the mean over time

The best performing assets classes today are likely to produce lower future returns.  Conversely, poor asset class returns often are followed by periods of outsized returns.  For example, emerging market equities were essentially left for dead the past few years.  They have produced double-digit returns in 2016.

2. Excesses in one direction will lead to an opposite excess in the other direction

Number two is a piggyback off the first rule. Technology in the early 2000s and housing boom-bust cycle of the late 2000s being the most recent examples.  Markets tend to overshoot the mean.

3. There are no new eras – excesses are never permanent

The key to investing is to find areas of the market that will be desired before anyone else realizes it.  Many times this is an area that has been beaten down or out of favor. 

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Corrections can be sudden and violent.  Chasing performance usually doesn’t end well.

5. The public buys the most at the top and the least at the bottom

Being a contrarian is hard, especially during the technology era with the 24 news cycle & social media.  The time to seek risk is usually when it feels most uncomfortable (2008-2009).


6. Fear and greed are stronger than long-term resolve

Emotional biases are real and can be a huge wealth destroyer.  If you feel compelled to sell during every market downturn, you are probably invested incorrectly. 

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This has been an issue in recent years with the biggest stocks being responsible for index performance.  If there is one rule that has been mucked up by the Federal Reserve (and other global central banks) this might be it. 

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

Historically, a bear market is ~20% decline.  In my recent experience, it seems investors are more sensitive to shallow losses.  I attribute this to the financial crisis hangover, investor aversion to losses, and obsession over short-term results.

9. When all experts agree and forecasts agree – something else is going to happen

My personal favorite.  We have seen this time and again.  Interest rate forecasting the last four years has been abysmally poor.  The herd can be right, but when they’re wrong it usually hurts.

10. Bull markets are more fun than bear markets

A drink to that!

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