Bob Farrell's 10 Rules for Investing - Market Watch

Summary:
10 Rules for investors by Bob Farrell (chief stockmarket analyst, Merril Lynch). 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. (Published: 11/06/08)

Notes:

• investment rules
• tailor-made for tough times, allowing you to stick to a plan just when you need it most
• a rulebook is important in any market climate
• but: it tends to get tossed when stocks are soaring
• sage investors warn people not to confuse a bull market with brains
• Bob Farrell
• pioneered technical analysis in the late 1950s
• rates a stock not only on a company's financial strength or business line but also on the strong patterns and line charts reflected in the shares' trading history
• also broke new ground using investor sentiment figures to better understand how markets and individual stocks might move
• 10 rules
1. Markets tend to return to the mean over time
• when stocks go too far in one direction, they come back
• both euphoric and pessimistic markets can cloud people's heads
• "It's so easy to get caught up in the heat of the moment and not have perspective. Those that have a plan and stick to it tend to be more successful."
2. Excess in one direction will lead to an opposite excess in the other direction
3. There are no new areas - excesses are never permanent
• many investors try to find the latest hot sector
• soon a fever builds that "this time it's different."
  
• never really is
• when that sector cools, individual shareholders are usually among the last to know and are forced to sell at lower price
• it's very hard to switch and time the changes from one sector to another
• find a strategy that you believe in and stay put
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
• a popular sector can stay hot for a long while, but will fall hard when a correction comes
5. The public buys the most at the top and the least at the bottom
• many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction
6. Fear and greed are stronger than long-term resolve
• investors can be their own worst enemy, particularly when emotions take hold
• it's critical for investors to understand how they're cu
• if you can't handle a 15% or 20% downturn, you need to rethink how you invest
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
• markets and individual sectors can move in powerful waves that take all boats up or down in their wake
• there's strength in numbers, and such broad momentum is hard to stop
• in these conditions you either lead, follow or get out of the way
• when momentum channels into a small number of stocks, it means that many worthy companies are being overlooked and investors essentially are crowding one side of the boat
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
• "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"
10. Bull markets are more fun than bear markets