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If you have never heard of Bob Farrell’s investing rules, then we highly recommend you take ten minutes to listen to this week’s Mullooly Asset Management podcast. In this week’s podcast Tom and Brendan discuss five of Bob Farrell’s investing rules. These rules (which you can find here) are likely things investors may have heard before, but sadly have chose to ignore.
The podcast begins with a little bit of background information on Bob Farrell. He was the chief stock market analyst at Merrill Lynch from 1957-1992. He began his career using fundamental analysis learned at Columbia University under Benjamin Graham and David Dodd. He eventually started to use technical analysis more and more though. For those of you who don’t know, technical analysis is something we strongly rely upon here at Mullooly Asset Management. Farrell found that a stock can have outstanding fundamentals, but if it is not also technically sound then it may not necessarily perform well.
After going through the background information, Tom and Brendan dive right into Bob Farrell’s investing rules 1-5.
The first rule pertains to markets and their propensity to return to the mean over time. So often investors lack the patience that is necessary when it comes to waiting for a market to return to the mean. The second rule states that excesses in one direction lead to an opposite excess in the other. Tom and Brendan give several examples of this happening with stocks we all know like Yahoo and EMC. The next of Bob Farrell’s investing rules says that there are no “new eras”. History has taught us this time and time again, but investors never seem to learn. Tom and Brendan give some examples of this rule as well.
The podcast wraps up with rule numbers four and five. The fourth rule handles markets that are rapidly rising or falling. It says that in most instances they will go further to the extremes than you probably expect. The fifth rule is probably the most well known one. The public buys the most at the top and the least at the bottom. This is sad, but true. So many investors have heard this, but they continue to act just the way the rule predicts. This is why we utilize the bullish percent charts provided to us by Dorsey Wright and Associates.
Tom and Brendan are set to cover Bob Farrell’s investing rules numbers 6-10 in next week’s podcast so make sure to check back for their analysis and discussion of those!