WWBD? What Would Bob Farrell Do? Part II

Bob Farrell, WWBD?  What Would Bob Farrell Do? Part II

WWBD?  What Would Bob Farrell Do? Part II

In Part 1 of What Would Bob Farrell Do? we reviewed the first five of Bob Farrell’s legendary rules of investing. We now continue with rules six through ten.

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

This rule extends rule #5- the public buys the most at the top and the least at the bottom. Our investment rules and inherent conservatism often yield to the yearning to make more money at market tops. Similarly, fear at market bottoms frequently inhibits our ability to buy assets at cheap levels.

To counteract our emotions and maintain resolve, we should have a plan for different scenarios. If we can fight our feelings at market tops and adhere to risk management plans, we will have cash on hand to take advantage of relative bargains when markets bottom.

Warren Buffet once said, “buy when people are fearful and sell when they are greedy.”

Rule #7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Breadth matters! Markets are strongest when most sectors and indexes are hitting highs, and many stocks within the indexes are also hitting highs.

Bob warns to be wary when market indexes are hitting all-time highs despite many stocks not following. The graph below shows the market’s poor breadth leading into the 2008 Financial Crisis. Markets rose by about 10% through 2007, yet the increasing number of stocks trading above their 200 dma fell steadily. Many investors ignored this signal as they were enamored with record highs.

Bob Farrell, WWBD?  What Would Bob Farrell Do? Part II

The following graph shows the NASDAQ (QQQ) is currently at or near record highs, yet the number of stocks within the index trading above their respective 200 dma is steadily falling. As it is said, the troops are not following the leaders higher.

Bob Farrell, WWBD?  What Would Bob Farrell Do? Part II

 

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

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