Bob Farrell’s Investing Rules Part II

by | Dec 23, 2013 | Asset Management, Podcasts

Last week on the Mullooly Asset Management podcast, Tom and Brendan discussed Bob Farrell’s Investing Rules. Since Mr. Farrell had 10 total rules to share with us, the podcast was divided into two parts. This is the conclusion of our mini-series on Farrell’s investing rules where Tom and Brendan discuss rules number 6-10.

If you didn’t catch last week’s podcast/post, we highly recommend checking it out before continuing through this one. You can find that post here. To bring you up to speed, Bob Farrell was a stock market analyst for Merrill Lynch for over thirty years (1957-1992). David Dodd and Benjamin Graham (the same ones who taught Warren Buffet) educated Farrell in fundamental analysis at Columbia University. Farrell found that good fundamentals don’t always mean higher stock prices though, so he began to focus more on technical analysis over the years. Bob Farrell’s investing rules can benefit any investor, and they are often quoted. They are hardly followed though, and that is a mistake.

Tom and Brendan take each rule, one by one, and discuss what the rule means in this podcast.

The sixth of Bob Farrell’s rules deals with investors and their unwarranted fear and/or greed when it comes to the stock market. Investors let these emotions get in the way with their investments all the time. Instead of being patient many investors became fearful that they’ll get hurt and lose money in the market. Conversely, other investors hang on too long in an investment they’ve already seen nice gains in. This is why we use point and figure charts here at Mullooly Asset Management. We utilize charts provided by Dorsey Wright and Associates. They give us clear entry and exit points for investing. These points may change depending on how the market performs, but we always have a plan. That is paramount.

Rule number 7 tells investors when markets are strongest. Tom and Brendan give an example of a scenario that occurred in 1994. The stock market saw rolling corrections throughout nearly every sector at some point during the year. Overall it didn’t look like the market gained or lost much in 1994, but depending on what sectors investors were in (and when), they got hurt badly. This is another reason we use the charts here at Mullooly Asset. The majority of risk in the stock market comes from knowing whether to be on offense or defense, and knowing what sector to invest in. The charts tell us both of these things clearly.

Farrell’s eighth rule covers bear markets. Most bear markets tend to have three stages. Tom and Brendan talk about these stages, and go over the mistake that most investors make concerning them.

Tom is a little concerned about Farrell’s ninth rule right now. This rule talks about experts and market forecasts. When they all agree, Farrell says that something else will most likely happen. While all of our charts look good right now, we are always prepared for that to change here at Mullooly Asset Management. Somebody who doesn’t use technical analysis, and listens to all the stock market “experts” in the media probably won’t fare as well.

The last of Bob Farrell’s investing rules talks about bull and bear markets. Bull markets elicit a euphoric feeling. Tom shares an old saying, “Don’t confuse brilliance with a bull market”.

Tune into this week’s podcast to hear Tom and Brendan analyze Bob Farrell’s investing rules numbers 6-10.

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