A few years ago, I participated in a panel discussion at the 50th Annual Contrary Opinion Forum in Vermont. One of my fellow panelists, Walter Deemer of Deemer Technical Research Inc., has been a cornerstone of institutional market strategy since the early 1960’s and is this year’s recipient of the MTA’s prestigious annual award.
Walt says he learned almost everything from the legendary Bob Farrell, his mentor at Merrill Lynch. And the essence of “everything” is summarized in Farrell’s Ten Market Rules to Remember. There are various versions of the ten rules out on the internet, but here is the official list conveyed by Walt in his recent book, Deemer on Technical Analysis:
1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras – excesses are never permanent.
4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5. The public buys the most at a top and the least at a bottom.
6. Fear and greed are stronger than long-term resolve.
7. Bull markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8. Bear markets have three stages – sharp down, reflexive rebound, and a drawn out fundamental downtrend.
9. When the experts and forecasts agree, something else is going to happen.
10. Bull markets are more fun than bear markets.
Why are these rules so important? In Walt’s own words:
“Technical analysis, you see, is much more than mechanically interpreting a chart or some data. It is much, much more than simply looking at the very best charts that are available and the very best indicators that you can find. And what Bob Farrell’s rules do is to elevate you past the basics; they make you think about the stock market and your investments. Bob Farrell’s rules, in other words, are designed to make you look at the market intellectually, not mechanically.”
So the ten rules are not a mechanical system. They are precepts, or observations, distilled from a long and successful career. There are times to follow the trend (rules 7 and 8), and times to bet against the crowd (rules 4 and 9). No single method will work in all market environments. If someone offers you a sure-fire system, run the other way.
Every investor must ultimately develop their own set of guidelines for interpreting market behavior and filtering investment decisions. Bob Farrell’s ten rules are a good place to start. And Walt’s book offers a new rule from Bob:
11. Though business conditions may change, corporations and securities may change and financial institutions and regulations may change, human nature remains essentially the same.
Words of wisdom…for investors of all persuasions.
