Son como los 10 Mandamientos, siempre hay que volver a ellos para entender de qué va esto…
Who is Bob Farrell?
The Illustrated 10-Rules Of Investing
1.- Markets tend to return to the mean (average price) over time.
2.- Excesses in one direction will lead to an opposite excess in the other direction.
Markets that overshoot on the upside will also overshoot on the downside, kind of like a pendulum. The further it swings to one side, the further it rebounds to the other side. This is the extension of Rule #1 as it applies to longer term market cycles (cyclical markets).
3.- There are no new eras – excesses are never permanent.
There will always be some “new thing” that elicits speculative interest. These “new things” throughout history, like the “Siren’s Song,” has led many investors to their demise. In fact, over the last 500 years, we have seen speculative bubbles involving everything from Tulip Bulbs to Railways, Real Estate to Technology, Emerging Markets (5 times) to Automobiles and Commodities. It always starts the same and ends with the utterings of “This time it is different”
4.- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
The reality is that excesses, such as we are seeing in the market now, can indeed go much further than logic would dictate. However, these excesses, as stated above, are never worked off simply by trading sideways. Corrections are always just as brutal as the advances were exhilarating. As the chart below shows when the markets broke out of their directional trends – the corrections came soon thereafter.
5.- The public buys the most at the top and the least at the bottom.
The average individual investor is most bullish at market tops and most bearish at market bottoms. This is due to investor’s emotional biases of “greed” when markets are rising and “fear” when markets are falling. Logic would dictate that the best time to invest is after a massive sell-off; unfortunately, this is exactly the opposite of what investors do.
6.- Fear and greed are stronger than long-term resolve.
As stated in Rule $5 it is emotions that cloud your decisions and affect your long-term plan.
7.- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Breadth is important. A rally on narrow breadth indicates limited participation and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give the rally credibility. A rally that “lifts all boats” indicates far-reaching strength and increases the chances of further gains.
8.- Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
Bear markets often start with a sharp and swift decline. After this decline, there is an oversold bounce that retraces a portion of that decline. The longer term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate. Dow Theory suggests that bear markets consist of three down legs with reflexive rebounds in between.
9.- When all the experts and forecasts agree – something else is going to happen.
This rule fits within Bob Farrell’s contrarian nature. As Sam Stovall, the investment strategist for Standard & Poor’s once stated:
10.- Bull markets are more fun than bear markets
As stated above in Rule #5 – investors are primarily driven by emotions. As the overall markets rise; up to 90% of any individual stock’s price movement is dictated by the overall direction of the market hence the saying “a rising tide lifts all boats.”
Like all rules on Wall Street, Bob Farrell’s rules are not meant has hard and fast rules. There are always exceptions to every rule and while history never repeats exactly it does often “rhyme” very closely.
Espero te haya servido tanto como a mi… Un fuerte abrazo,
PD1: ''Hacer el bien sin cálculos, incluso cuando nadie nos lo pide, incluso cuando no ganamos nada con ello, incluso cuando no nos gusta. Dios quiere esto", Papa Francisco.