Posts Tagged ‘Words Of Wisdom’
There’s No Place Like America
Sunday, May 27th, 2012
There’s No Place Like America
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
A conference with CEOs from around the globe this week brought me to Europe—the center of Western Civilization, the cradle of democracy, innovation and creativity, and the crux of today’s debt crisis. In Siena, I came across a medieval reminder of the effects of good and bad government inside the Palazzo Pubblico among the beautifully painted frescoes.
One mural, “The Allegory of Good Government,” personifies the virtues of justice, peace, virtue and wisdom, emphasizing the importance of a stable government. Two more frescos flank this painting, one depicting the effects of good government and another showing the effects of bad government.
Surrounded by historic beauty, it’s sad to see the disillusioned faces on the streets of Europe. If a picture is worth a thousand words, the one below might be more monumental than that. Business Insider featured this chart showing the rising unemployment rate among the youth throughout Europe. Since the 2009 global crisis through April 2012, youth unemployment has skyrocketed in Spain, Greece, Portugal, Italy and Ireland.
Ian McAvity recently shared some words of wisdom related to Europe’s colossal challenges: “When times get tough, economic nationalism and protectionism tends to rise because it is always easier to blame someone else for self-inflicted problems.”
The contrast of historic beauty against tragedy is one for Shakespeare. Back in the U.S., I am thankful for the entrepreneurial heart that beats throughout America. As the election grows closer, I’m confident it’ll beat louder to persuade the U.S. government to pursue thoughtful policies that embody essential American principles.
One should not underestimate what it means to be American; you don’t find a feeling quite like it outside the nation. In fact, emerging countries such as Singapore and China are now striving to replicate what my friend Alexander Green calls “American exceptionalism.”
He says the U.S. is the world’s economic superpower today not only because of geography, but, more importantly, the fact that entrepreneurs were free to innovate and create. Alex writes, “America cultivates, celebrates and rewards the habits that make men and women successful. It promises that anyone with ambition and grit can move up the economic ladder, that everyone has a chance to better his or her lot, regardless of circumstances.”
This feeling of empowerment has created a national group of well-informed and very engaged individuals. On the Organisation for Economic Cooperation and Development (OECD) “Your Better Life Index” based on 11 diverse measures of well-being, the U.S. is highly ranked. Each element measures a feeling of satisfaction with life, including health, education, environment, personal security, life satisfaction, and work-life balance. Here are a few of the highlights from OECD’s summary of the U.S.:
- The average income in the U.S. is nearly $38,000 a year, considerably more than the OECD average income of about $22,000.
- Almost 90 percent of adults in the U.S. have a high-school degree (or equivalent); the OECD average is 74 percent.
- Americans have a strong sense of community, as 92 percent know someone they could rely on in a time of need. The OECD average is 91 percent.
- Voter turnout was significantly higher than the world average: 90 percent of those registered participate in the U.S. political process, compared to 73 percent for the rest of the world.
- American households spend an average of only 20 percent of net disposable income on rent/home loans, gas, electricity, water, furnishings or repairs. The OECD average is 22 percent.
While a 2 percent difference in household spending isn’t striking, pennies add up. In a Deutsche Bank survey of how much a variety of goods cost around the world, the research firm found that New York “was found to be significantly cheaper than other major financial hubs even after accounting for taxes and other additional charges.”
According to its study, if I wanted to buy Apple’s iPhone in Europe, it would’ve cost me $845; filling a car with a liter of petrol would cost over $1 more than it does in the U.S. A pair of Levis is nearly double the price than the same pair in New York City. On multiple measures, New York City offers more for your money compared to Paris, Sao Paolo or Tokyo.
Nonetheless, consumers on the other side of the world willingly line up to purchase American-made goods, even at a premium price.
Affordability is partially why 60 million international tourists choose to immerse themselves in American culture each year. While Canada and Mexico make up the majority of these visitors, tourists from Brazil and China have been visiting in record numbers, according to data from the U.S. International Trade Administration. In 2011, visitors from Brazil increased 26 percent to 1.5 million people. About 1 million Chinese visited the U.S. in 2011, which was an increase of 36 percent over the previous year.
As the rising middle class in emerging markets gain more disposable income, they desire the same financial and social mobility that Americans take for granted. For that mobility, each visitor spends about $4,000 on travel, clothes, food and attractions.
Invest in America
In his article, Alex Green describes the traits that a typical American embodies: “an optimistic attitude, a can-do spirit, and an enthusiastic endorsement of the pursuit of happiness through individual initiative and self-reliance.”
Investors aren’t endorsing U.S. equities today. With all the positive aspects mentioned above, today’s low participation in the U.S. stock market is perplexing. Here are two more reasons to invest today: 1) About 620 companies in the S&P 1500 Index are growing their revenues at more than 10 percent; and 2) 428 stocks in the index have an annualized dividend yield higher than the 10-year Treasury.
Happy Memorial Day!
Whatever you happen to be doing this weekend—shopping the sales, sightseeing in the city or barbequing in your backyard—take time to honor the men and women who died serving our country. We owe the freedom of our “Better Life” we lead today to the men and women who selflessly gave their lives fighting for America.
Tags: Allegory Of Good Government, American Principles, Brazil, Business Insider, Chief Investment Officer, Debt Crisis, Economic Nationalism, Frank Holmes, Frien, Global Crisis, Ian Mcavity, Justice Peace, Palazzo Pubblico, Stable Government, Streets Of Europe, U S Global Investors, Unemployment Rate, Western Civilization, What It Means To Be American, Words Of Wisdom, Youth Unemployment
Posted in Markets | Comments Off
Bob Farrell’s 10 Rules for Investing
Friday, May 4th, 2012
Wall Street “gurus” come and go, but in the case of Bob Farrell legend status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate at the start of a new year as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.
8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.
Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.
Tags: Bear Market, Bob Farrell, Eras, Euphoria, Exact Words, Excesses, Heat Of The Moment, Juncture, Legend Status, Merrill Lynch, Mid 1980s, Minded Investors, Overshoot, Pessimism, Row Seat, Rubber String, Stock Market Analyst, Stock Markets, Wall Street Gurus, Words Of Wisdom
Posted in Markets | Comments Off
Bob Farrell’s Ten Rules for Investing
Tuesday, January 3rd, 2012
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate at the start of a new year as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.
8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.
Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.
Tags: Bear Market, Bob Farrell, Eras, Euphoria, Exact Words, Excesses, Heat Of The Moment, Juncture, Legendary Status, Merrill Lynch, Mid 1980s, Minded Investors, Overshoot, Pessimism, Row Seat, Rubber String, Stock Market Analyst, Stock Markets, Wall Street Gurus, Words Of Wisdom
Posted in Markets | Comments Off
Bob Farrell’s 10 Rules for Investing in Rough Markets
Friday, August 19th, 2011
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of Jonathan Burton of MarketWatch. The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
By “return to the mean,” Farrell reminds investors that when stocks go too far in one direction, they tend to come back to their long-term trend. Overly euphoric or pessimistic markets cloud people’s estimation and judgment of what they can reasonably expect.
2. Excesses in one direction will lead to an opposite excess in the other direction
Markets in a bubble can seem ready to pop, yet they manage to stretch into unrecognizable shapes — and still find buyers. Think of Internet shares a decade ago or real estate before the housing crash. When the bubble bursts, watch out.
Conversely, markets in free-fall typically spring back as if tied to a bungee cord. Think about the sharp bounce U.S. stocks have had since March 2009, when the Standard & Poor’s 500-stock index was about 80% cheaper.
The market’s recent volatility and investors’ uncertainty suggests that stocks are moving into another downswing. “Because we went so much higher [in the rally from March 2009 through April 2011], don’t be surprised if the correction is a little bigger,” said Barry Ritholtz, an investment manager and chief executive of FusionIQ, a quantitative research firm.
3. There are no new eras — excesses are never permanent
This relates to rules No. 1 and No. 2. Many investors latch on to the latest hot sector, and soon a fever builds that “this time it’s different.” It never is, of course. When the sector cools, individual shareholders are usually the last to know and sell at lower prices.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
This is Farrell’s way of saying that a popular sector can stay hot for a long while, but will fall hard when a correction inevitably occurs.
5. The public buys the most at the top and the least at the bottom
The time to buy stocks is when others are fearful and sell when others are complacent. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors do the opposite.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold.
To counter fear and greed, practice self-control. In down markets, keep enough cash on hand so you’re not tempted to sell at fire-sale prices and instead can buy on the cheap. In headier times, prune winners to the range you set for your portfolio’s asset allocation and use the proceeds to buy laggards. This strategy will help you to be proactive instead of reactive.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
There’s strength in numbers, and broad, powerful market momentum is hard to stop, Farrell observes. Conversely, when money channels into a shallow stream, many attractive companies are overlooked as investors crowd one side of the boat.
That’s what happened with the “Nifty 50” stocks of the early 1970s, when much of the market’s gains came from the 50 biggest U.S. companies. As their price-to-earnings ratios climbed to unsustainable levels, these “one-decision” stocks eventually capsized.
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
During the week of August 8, U.S. market volatility reached a level not seen since November 1929. Over four consecutive days of trading the S&P 500 moved at least 4% each day — down 6.7%, up 4.7%, down 4.4% and up 4.6% — finishing the week off 1.7%.
Is this the awakening of a bear market? With Tuesday’s close, the S&P 500 is down 12.5% since its April 29 peak. Not the 20%-plus decline that typically marks a bear, but still a confidence-slashing encounter.
9. When all the experts and forecasts agree — something else is going to happen
Going against the herd as Farrell repeatedly suggests can be quite profitable, especially for patient buyers who can raise cash in frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
No kidding.
Source: Jonathan Burton, MarketWatch, August 17, 2011.
Tags: Barry Ritholtz, Bear Market, Bob Farrell, Bungee Cord, Downswing, Eras, Internet Shares, Investment Manager, Jonathan Burton, Legendary Status, Merrill Lynch, Mid 1980s, Quantitative Research, Row Seat, Stock Index, Stock Market Analyst, Stock Markets, Term Trend, Wall Street Gurus, Words Of Wisdom
Posted in Markets | Comments Off
Bob Farrell’s Ten Investing Rules
Monday, May 2nd, 2011
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.
8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.
Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.
Tags: Bear Market, Bob Farrell, Eras, Exact Words, Excesses, Heat Of The Moment, Juncture, Legendary Status, Merrill Lynch, Mid 1980s, Minded Investors, Overshoot, Pessimism, Row Seat, Rubber String, Sentiment Indicators, Stock Market Analyst, Stock Markets, Wall Street Gurus, Words Of Wisdom
Posted in Markets | Comments Off
More on stock guru Bob Farrell’s rule #8
Monday, April 26th, 2010
I posted “Bob Farrell’s 10 rules for investing” a few days ago, and these words of wisdom turned out to be popular reading material.
Given the debate as to as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a so-called cyclical bull market, Farrell’s rule #8 has caused a fair amount of food for thought:
“Bear markets have three stages – (1) sharp down, (2) reflexive rebound and (3) a drawn-out fundamental downtrend.”
In an attempt to put these stages in perspective, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided a graphic illustration of Farrell’s three stages, as shown below. (As Rosie’s comments date back to August last year, the graph has just been updated by my colleagues at Plexus Asset Management.)
Click on the image for a larger graph.
Source: Gluskin Sheff & Associates – Lunch with Dave, August 7, 2009 (updated by Plexus Asset Management on April 26, 2010).
Whether stock markets will enter a drawn-out downtrend any time soon remains to be seen, but given the magnitude of the rebound a pullback certainly looks likely. Caution seems to be in order.
Tags: Asset Management, August 7, Bear Market, Bear Markets, Bob Farrell, Chief Economist, David Rosenberg, Food For Thought, Gluskin Sheff, Graphic Illustration, Magnitude, Pullback, Reading Material, Rebound, Reflexive, Rosie, Secular Bull Market, Strategist, Us Stock Markets, Words Of Wisdom
Posted in Markets | Comments Off
Lessons from Bernstein, Rosenberg and Farrell
Monday, January 11th, 2010
I have over the past year referred to parting comments from Richard Bernstein and David Rosenberg as they left Merrill Lynch for less restrictive surroundings. We were again reminded of these lessons, together with those by legendary Merrill analyst Bob Farrell (who retired in 1992), in a recent report by Jeff Saut as extracted below.
Treasure these words of wisdom and stick them onto your wall so that you are always reminded of them.
Richard Bernstein’s lessons
1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.
2. Most stock market indicators have never actually been tested. Most don’t work.
3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
6. Balance sheets are generally more important than income or cash-flow statements.
7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.
8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
9. Investors should research financial history as much as possible.
10. Leverage gives the illusion of wealth. Saving is wealth.
David Rosenberg’s lessons
1. In order for an economic forecast to be relevant, it must be combined with a market call.
2. Never be a slave to the data – they are no substitutes for astute observation of the big picture.
3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
4. Fall in love with your partner, not your forecast.
5. No two cycles are ever the same.
6. Never hide behind your model.
7. Always seek out corroborating evidence.
8. Have respect for what the markets are telling you.
Bob Farrell’s lessons
1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an excess in the other direction.
3. There are no new eras – excesses are never permanent.
4. Exponential rising and falling markets usually go further than you think.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
8. Bear markets have three stages.
9. When all the experts and forecasts agree, something else is going to happen.
10. Bull markets are more fun than bear markets.
Source: Jeffrey Saut, Raymond James – Investment Strategy, January 4, 2010 (hat tip: The Big Picture).
Tags: Asset Classes, Astute Observation, Bob Farrell, Bull Markets, Cash Flow Statements, David Rosenberg, Economic Forecast, Financial History, Income Opportunities, Merrill Lynch, Parting Comments, Portfolio 6, Return On Capital, Richard Bernstein, Risk Aversion, Scarce Capital, Stock Market Indicators, Time Horizons, Unaudited Financial Statements, Words Of Wisdom
Posted in Markets | Comments Off
More on Bob Farrell’s Rule #8
Monday, August 10th, 2009
I posted “Bob Farrell’s Rules for Investing” a few days ago, and these words of wisdom turned out to be popular reading material.
Given the debate as to as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a so-called cyclical bull market, Farrell’s rule #8 has caused a fair amount of food for thought:
“Bear markets have three stages – (1) sharp down, (2) reflexive rebound and (3) a drawn-out fundamental downtrend.”
In an attempt to put these stages in perspective, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided a graphic illustration of Farrell’s three stages, as shown below.
Click on the image for a larger graph.
Source: Gluskin Sheff & Associates – Lunch with Dave, August 7, 2009.
Whether stock markets will enter a drawn-out downtrend remains to be seen, but given the magnitude of the rebound a pullback certainly looks likely. Caution seems to be in order.
Tags: August 7, Bear Market, Bear Markets, Bob Farrell, Caution, Chief Economist, David Rosenberg, Food For Thought, Gluskin Sheff, Graph, Graphic Illustration, Magnitude, Pullback, Reading Material, Rebound, Reflexive, Secular Bull Market, Strategist, Us Stock Markets, Words Of Wisdom
Posted in Markets | Comments Off
Bob Farrell’s 10 Rules For Investing
Sunday, August 9th, 2009
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.
8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound – the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
We have yet to see the long-drawn-out fundamental portion of the bear market.
9. When all the experts and forecasts agree – something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.
Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.
Tags: Bear Market, Bob Farrell, BRIC, BRICs, Emerging Markets, Eras, Euphoria, Exact Words, Excesses, Heat Of The Moment, Juncture, Legendary Status, Merrill Lynch, Mid 1980s, Overshoot, Pessimism, Row Seat, Rubber String, Stock Market Analyst, Stock Markets, Wall Street Gurus, Words Of Wisdom
Posted in Emerging Markets, Markets | Comments Off
Seth Klarman (Baupost Group) Interview (Q2/2009)
Wednesday, May 27th, 2009
Here is an interview Seth Klarman (of Baupost Group) did with TIFF for their Endowment Management Seminar. This transcript provides even more words of wisdom from Klarman after we covered some of his latest movements. Additionally, be on the lookout next week when we cover him in our first quarter 2009 portfolio tracking series.
Here is the interview (RSS & Email readers will have to come to the blog to view it):
Tags: Baupost Group, Blog, Endowment Management, ETF, First Quarter, Group Interview, Lookout, Management Seminar, Portfolio Tracking, Seth Klarman, Tiff, Words Of Wisdom
Posted in ETFs, Markets | Comments Off
