Bob Farrell’s Top Ten Investment Rules

Reginald A.T. Armstrong •


Bob is a Wall Street veteran with over 50 years of experience in the investment business. He started as a technical analyst at Merrill Lynch in 1957. Recently Lance Robert’s website, realinvestmentadvice.com, reviewed Bob’s ten investment rules that have come from his decades of experience with all sorts of markets: dull, bull, bear, bubbles, and crashes. I thought I would share with you a short version of these Top Ten Rules. Feel free to go to Lance’s website for a more in-depth illustrated version.

  1. Markets tend to return to the mean (average price) over time. Basically, this means that after a strong uptrend or downtrend, prices tend to move back toward the long-term average.

  2. Excesses in one direction will lead to an opposite excess in the other direction. Similar to above. It is not a coincidence that it took the Nasdaq Index over 15 years to break even after the bubble top of 2000.

  3. There are no new eras—excesses are never permanent. “This time is different” are the four most dangerous words in investing.

  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Corrections are as ugly as advances are exciting.

  5. The public buys the most at the top and the least at the bottom. Greed and fear drive the investing public far more than logic.

  6. Fear and greed are stronger than long-term resolve. This is a corollary to number 5. It is easy to say you are a long term investor when your account is rising; much more difficult when you find yourself down 40%.

  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. A rally that has few stocks rising shows modest conviction and is more indicative of a market about to falter. Conversely, a rally that encompasses a broad number of stocks tends to be indicative of a “healthy” bull run.

  8. Bear markets have three stages—sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Bear markets often start with a sharp, swift decline, then a sharp rebound, then the longer, grinding down of the third stage.

  9. When all the experts and forecasts agree, something else is going to happen. If everyone expects something “unexpected” to happen, the greater likelihood is it doesn’t. By definition, a “black swan” event is something few see coming, but after the fact, many say it should have been foreseen by everyone.

  10. Bull markets are more fun than bear markets. Psychologically, it is easy to invest in a bull market; after all the market confirms your “skill” and “brilliance” by going up. In a bear market, fear, panic, and even depression take over as nothing seems to go your way.

Mr. Farrell’s rules are not meant as hard and fast rules. There are always exceptions. Nonetheless, these are good rules to keep in mind for your long-term investing success.

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