Bob Farrell’s Ten Investing Rules

Thursday, April 22nd, 2010

Today, I would again like to focus on words of investment wisdom that are timeless and especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and the October 1987 crash.

Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture (August 2008) and MarketWatch (June 2008).

1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but also leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the six years prior to the crisis, only to plunge by more than 60%.

As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that the reflexive rebound is nearing maturity. We have yet to see the long-drawn-out fundamental portion of the bear market.

9. When all the experts and forecasts agree – something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

Going against the herd, as Farrell repeatedly suggests, can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.

Tags: Bear Market, Bob Farrell, BRIC, Emerging Markets, Eras, Exact Words, Excesses, Heat Of The Moment, Investment Wisdom, Juncture, Legendary Status, Merrill Lynch, Mid 1980s, Overshoot, Pessimism, Row Seat, Rubber String, Stage Wall, Stock Market Analyst, Stock Markets, Wall Street Gurus
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Bill Gross: Hmmmm? (Investment Outlook June 2008)

Monday, May 26th, 2008

May 26, 2008 – Pimco’s Bill Gross makes a most humorous analyses, drawing parallels that the hordes are marching on the new Rome (America), and that its time to act. Make sure you read this must read, the June 2008 Investment Outlook, by Bill Gross. At the end, Gross puts forth his recommendations.

What this country needs is either a good 5 cent cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” -”what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher – Democrat or Republican – should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.)

It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense or self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up-physically, intellectually, and institutionally-and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.

Bill Gross – Investment Outlook – June 2008 – “Hmmmmm”

Tags: Bill Gross, BRICs, Emerging Markets, energy, EUM, Fixed Income, Hordes, inflation, Investment Wisdom, Markets, philosophy, PIMCO, risk, Value
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The Tide Goes Out

Sunday, March 23rd, 2008

Mar. 23, 2008 – For a certain strata of Wall Street denizens, the writings of Oaktree’s Howard Marks’ are equally anticipated to those of Warren Buffett’s.

Marks is the chairman of Oaktree, the low-profile but powerful L.A-based firm that manages more than $50 billion in alternative investments, mostly in fixed-income strategies. He’s been writing memos to clients since 1990, but a cult following developed after a missive he penned on Jan. 1, 2000 titled “bubble.com.” A few months before tech stocks imploded, Marks sounded a warning. “To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train,” he wrote. “To say they have benefited from a boom of colossal proportions and should be examined skeptically is something I feel I owe you.”

This is a fascinating read from one of the most important people in the market, and we feel that it is a must read. It is broken out into several well defined subsections, and we are sure that you will find it eloquent and enlightening. Here are some excerpts from March 18, 2008, The Tide Goes Out.

In the simpler but still not totally stable financial world I entered forty years ago, stability was desired in financial institutions. So, for example, banks and insurance companies were allowed to carry a loan or a bond at cost on their balance sheets as long as it was (a) fundamentally unimpaired and (b) intended to be held to maturity. Even if its market value fell temporarily, it was assumed that a creditworthy claim would be repaid in full at maturity. Thus, price fluctuations were ignored as long as fundamentals were sound.

More recently, “transparency,” “accountability” and “market signals” became more highly prized. A lot of this had to do with skullduggery unearthed at companies like Enron. As a result, accounting increasingly came to require that assets be valued at actual or estimated market prices. I’d had a preview of this in 1990 when, as part of efforts to “get” the high yield bond industry (and Drexel and Milken), S&Ls were required to market price their holdings of high yield bonds – dooming many of them in a time of price weakness. . . .

In 1990, when high yield bonds had the brush with difficulty described above (meaning spreads widened to 1,100 basis points, and a law was passed that required S&Ls to reflect price declines on their balance sheets), I was asked to brief the board of TCW on the risks. I presented a parable about a regulated financial institution that went bankrupt under the weight of mark-to-market accounting. I joked with Bill Spencer, who was president of Citibank when I worked there, that in the 1980s, that could have been Citibank if it was required to recognize mark-to-market losses on real estate loans. Guess what: today that’s the rule.

Read on, you’ll be glad you did. The Tide Goes Out.

Thanks, Mr. Marks.

Tags: Banks, Basis Points, CDS, Credit, Credit Market, Desc, DUG, Economy, Excerpts, Fixed Income, high yield, Investment, Investment Wisdom, Market Losses, Markets, Real Estate, risk, spreads, Value, Wall Street, Warren Buffett
Posted in Bonds, Credit Markets, Markets | 1 Comment »

Warren Buffett’s Annual Shareholder’s Letter

Friday, March 7th, 2008

Mar. 7, 2008 – Warren Buffett’s annual shareholder’s letter is the fountainhead from which legions of investment professionals glean insight from the world’s richest man ($62-billion net worth – according to Forbes 2008) and the single most successful investor in history.

Whether you’re a novice or a pro, this letter is full of the mindset and humour that are pre-requisite for long term investing success.

Click the image below for this year’s letter:

Tags: humour, Investment, Investment Wisdom, Warren Buffett
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George Soros: The Worst Market Crisis in 60 Years

Friday, February 22nd, 2008

February 22, 2008 – George Soros, the infamous hedge fund manager who broke the British Pound, penned an article for FT.com, in which he posits that this crisis, unlike many of its peers, which occur every 4-10 years, is actually the end of a 60 year period of credit expansion led by the once dominant greenback. Here are a few excerpts from The Worst Market Crisis in 60 Years, by George Soros:

…the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

 

…Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

 

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

And finally,

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

Soros concludes that there is a danger that US protectionism could disrupt the global economy and plunge the world into a recession or worse.

Source: The Worst Market Crisis in 60 Years, George Soros, FT.com 

Tags: Banks, BRICs, Central Banks, China, Commodities, Counterparties, Credit, Credit Default Swap, Credit Market, Currency, Dollar, Economy, Emerging Markets, Excerpts, Fed, Federal Reserve, FT.com, Hedge Fund, Hedge Funds, India, inflation, International, Investment, Investment Banks, Investment Wisdom, Markets, Mortgage, oil, Recession, risk, Term Bond, Trillion
Posted in Bonds, Commodities, Credit Markets, Markets, Oil and Gas | 1 Comment »

Eastern Promises – Opportunity in Agricultural Commodities

Saturday, February 16th, 2008

Feb. 15, 2008 – Joe Friesen and Marcus Gee of the Globe and Mail published an excellent article Eastern Promises on how demand for all things agricultural commodities are being driven by growth from Emerging Markets. The piece features commentary by Don Coxe, Chief Investment Strategist, BMO Capital Markets, on food and the agricultural boom. This piece features lots of anecdotal and empirical information.

Here are some excerpts:

India’s consumption of pulses — yellow peas, lentils, chick peas, green peas — has doubled in a year. In a country where millions are strict vegetarians, pulses are an essential protein source that go into the preparation of dal, which is cooked every day in millions of homes. India’s struggling, still backward farm industry can’t keep up with the demand.

 

“It’s not our part of the world that changed things, it’s the millions of people over there that are no longer content to get along with a bowl of rice and a few loaves of bread. They’re adding meat and dairy to their diet and we aren’t producing enough feed grains, enough vegetable proteins, to supply their need,” said Donald Coxe, global portfolio strategist for Bank of Montreal.

“Milk is the new oil. Milk demand worldwide is rising faster than oil demand. That’s because of the new Asian middle class.”

“Western Canadian farmers, unless they have an all-out crop failure, are going to have the biggest year in their history,” Mr. Coxe said.

Mr. Coxe said the rise in living standards in India, China and other parts of the developing world, as well as the sudden explosion in demand for corn to make ethanol for gasoline in the U.S., have put a squeeze on markets that’s making all cereal crops and vegetable proteins more expensive.

“So the way I sum it up,” Mr. Coxe said, “is the world is roughly in the position of a family that gave their son who was going to Las Vegas all the money they had and told him to put it on the dice table. He has rolled four consecutive sevens. He has left all the money on the table and now he’s rolling the dice again.”

“We are facing the real possibility of the worst global food crisis for which we have records.

“When people ask me what’s the biggest threat facing China — it’s food price inflation. The consumer price index in China (6.5 per cent) is now the highest rate in many, many years. If you take the food inflation out of it, their inflation rate is closer to 1 per cent.”

Tags: Agricultural commodities, Agriculture, Asia, BMO, Canada, China, Commodities, Consumption, Don Coxe, Donald Coxe, Emerging Market, Emerging Markets, Excerpts, Food prices, Grain, India, inflation, Information, Investment, Investment Wisdom, Markets, Middle Class, oil, risk
Posted in Commodities, Emerging Markets, Markets, Oil and Gas | No Comments »

Byron Wien’s ‘5 Sure Things’

Tuesday, January 29th, 2008

Jan. 29, 2008 – This is irresistible. During periods where there seems to be such confusion in the market, we could certainly all use a dose of clarity. 

Byron Wien, Chief Global Strategist, Pequot Capital, and one of a few prolific market forecasters, shares his 5 ‘Sure Things’ for this turbulent market:

I’m getting older now, so I only invest in sure things. I don’t invest in things that only “might” work out. So let me give you five sure things.

• Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
• Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year. The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies.
• Cotton is going to be the commodity of choice because the world’s standard of living is increasing and the places where it’s increasing fastest are warm and they don’t wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that’s all you have to know.
• Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the seven percent that they did last year.
• As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we’re in the agricultural area with Potash Corp (POT) and a lot of energy stocks.
• Large caps such as Schlumberger (SLB). Smaller caps such as National Oilwell Varco (NOV) and Ultra Petroleum (UPL). In technology, Qualcomm (QCOM). Finally, in adult education we think that a lot of people will be laid off and they’ll be trying to improve their skills so we would buy the Apollo Group (APOL).

Prior to his current position as Chief Investment Strategist at Pequot Capital, Byron Wien was Chief Global Strategist at Morgan Stanley.

Tags: Agriculture, Canadian Stocks, Commodities, Commodity, COT, Currency, Dollar, Economy, Emerging Markets, energy, energy stocks, EUM, Gold, India, Investment, Investment Strategy, Investment Wisdom, oil, Russia, Thesis, US Stocks, Value, Yuan
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Recession and Bear Markets – Bespoke Reference

Friday, January 25th, 2008

Tags: Bear Market, Bear Markets, Blog, Chart, Economy, Investment, Investment Wisdom, Markets, Recession, US Stocks
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Doug Kass’ 12 Sound Investment Principles

Sunday, January 20th, 2008

Jan. 20, 2008 – Doug Kass writes in RealMoney.com recent article for investors looking into the abyss, however, the advice is good anytime. 

1. Err on the side of conservatism.

2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.

3. Avoid advice from those who lack flexibility and are dogmatic.

4. Be more concerned with return of capital than return on capital.

5. Trade/invest with below-average positions in order to take advantage of the market’s volatility and opportunity.

6. Take a base on balls, hit a single, but don’t go for the fences.

7. Buy straw hats in the winter (meaning, but out of favor items).

8. Buy only the best of breed in periods of economic/market uncertainty.

9. Always leg into a position.

10. Be patient.

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

12. Always remember investing is about common sense.

Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST

Tags: Abyss, Base On Balls, Common Sense, Conservatism, Conversations, DOG, Doug Kass, Economic Market, Fences, Flexibility, Investing Books, Investment, Investment Strategy, Investment Wisdom, Market Uncertainty, Periods, Realmoney, Recent Article, Return Of Capital, Return On Capital, risk, Silver, Silver 1, Sound Investment Principles, Straw Hats, Volatility
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Watch out for “Black Swans”

Sunday, January 20th, 2008

Jan. 20, 2008 – Black Swan’ author Nassim Taleb warns traders to look out for the improbable:

Market meltdowns that scorch investors, 100-year floods that occur every 10 years and terrorist attacks such as 9/11. Nassim Taleb, an author, lecturer and big thinker, calls such unforeseen events “black swans,” borrowing from a tale about 17th Century European seafarers who landed on Australia and, much to their surprise, learned that not all swans were white.

Such shocks occur, Taleb says, because even experts fail to consider the likelihood of extreme scenarios. That’s why his theory, outlined in his book, “The Black Swan: The Impact of the Highly Improbable,” is so intriguing to Chicago’s trading community, which seeks to lessen risk by exchanging futures and options. His ideas have earned him cachet with investment bankers as well as rock ‘n’ rollers. (Copyright 2008 – Chicago Tribune)

Tags: Australia, Black Swan, Black Swans, Cachet, Chicago Tribune, Euro, Floods, Futures And Options, Investment, Investment Bankers, Investment Strategy, Investment Wisdom, Lecturer, Likelihood, Miscellaneous, Nassim Taleb, Rollers, S Trading, Scenarios, Scorch, Seafarers, Shocks, Swans, Terrorist Attacks, Thinker, Trading, Unforeseen Events
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Dennis Gartman’s ‘Not so Simple Rules of Trading’

Saturday, January 12th, 2008

January-12-08, 10:17:52 AM | GreenLight Advisor

Tags: Academics, Agriculture, Bear Market, Bear Markets, Blog, Bull Markets, Canadian Stocks, Carcinogen, Chart, Circumstance, Commodities, Complete List, Correlation, Currency, Dennis Gartman, Economics, Gartman, Greatest Weakness, Greenlight, Ground Experience, Illogic, Investment, Investment Strategy, Investment Wisdom, John Mauldin, Keynes, Markets, Mercenary Soldier, Miscellaneous, Paper Sacks, risk, Rocks, Strength And Weakness, Trading, Trumps, Weakness Weakness, Winning Side
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