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Bob Farrell’s 10 Stock Market Rules Still Ring True Decades Later

  • Stock market rules laid out by a Wall Street legend are ringing true decades later amid the ongoing sell-off.
  • Bob Farrell of Merill Lynch wrote these investing rules in 1998 when tech stocks dominated the market.
  • These are his 10 stock market rules to remember as investors grapple with rising inflation and higher interest rates.

Bob Farrell is a Wall Street legend who spent his 45-year career working at Merill Lynch after being taught by Benjamin Graham and David Dodd at Columbia University. 

Considered a pioneer of technical analysis, Farrell outlined 10 stock market investing rules in a 1998 note towards the end of his career. It went unnoticed amid the dot-com bubble, but slowly built recognition as much of the rules he outlined rang true as the stock market declined from 2001 to 2003.

More than two decades later, Farrell’s 10 stock market rules are resonating again as investors navigate a period of high inflation, rising interest rates, and heightened economic uncertainty. 

“You can’t change human nature and Mr. Farrell’s rules seem as relevant today as when he retired from Merrill Lynch 20 years ago,” Bank of America’s Stephen Suttmeier said in a note earlier this week.

These are Farrell’s 10 stock market rules investors need to remember, with additional commentary from Suttmeier. 

1. Markets tend to return to the mean over time.

“When trends go too far in one direction, investors can prepare for some form of reversal in trend and reversion to the mean,” Suttmeier said, pointing to the potential for a continued rise in interest rates after a 40-year long downtrend.

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

“Sometimes reversion to the mean is not enough. A market can swing like a pendulum with an excessive move in one direction preceding an extreme move in the opposite direction,” the BofA analyst said, highlighting that a basket of crypto stocks were up 12x in less than a year before losing 77% in less than six months.

3. There are no new eras. Excesses are never permanent.

“When excesses get built up, we begin to hear the phrase ‘this time is different.’ When investors talk about a new era, the big move has likely already happened and sentiment is too extreme for the move to continue,” Suttmeier said.

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

“Parabolic rallies, asset bubbles, manias and crashes fit this rule,” he said, highlighting the more than 70% decline in Ark Invest’s flagship ETF as a recent example.

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

“Taking a contrarian view can pay off,” Suttmeier said, highlighting that recent surveys from AAII show individual investors are the most bearish on stocks since the Great


Recession

.

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

“Fear and greed can cloud our emotions and lead to poor investment decisions, such as selling at the bottom and buying at the top,” the analyst said.

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

“The breadth of the market is important. Broad-based rallies have the potential to continue, while narrowing rallies are prone to failure,” he said.

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

Applying this rule to markets today, Suttmeier sees a cyclical


bear market

in the S&P 500 that is in its fundamental downtrend phase, with downside potential to 3,800 and 3,500.

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

“This rule suggests that consensus among the experts is often fully discounted in asset prices, which is a risk that forecasts do not come to fruition,” he said.

10. Bull markets are more fun than bear markets.

“Bull markets are associated with economic expansions and a positive wealth effect, while bear markets are often linked to recessions and a negative wealth effect,” Suttmeier said. 

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