WWBD? What Would Bob Farrell Do?

The ten commandments are biblical rules and ethical standards forming the foundation of Judaism and Christianity.

Bob Farrell, Wall Street legend, created his own set of commandments. His guidelines provide a foundation to help investors reap and retain market rewards by better understanding the risks.

Disobeying his rules carries no legal or moral punishment but can be harmful to your wealth.

Bob has over 50 years of experience and excellent mastery of psychological factors which drive markets. He is supposedly the first to use the now-common word “sentiment” to help describe market psychology.

For those of you who believe in Bob’s rule #3, “there are no new eras,” we present Bob Farrell’s ten timeless rules on investing. We wish the best of luck for the rest of you who believe this time is different.

This article explains his rules and notably contemplates them in today’s environment. You will not be surprised to learn the market is breaking many of Bob’s golden rules.

Rule #1: Markets tend to mean revert over time

“Reversion to the mean is the iron rule of the financial markets” – John Bogle

Asset prices typically follow trends. Those trends can be up, down, or sideways. They can also be straight or diagonal lines or even oscillating lines. Trends are often linked to fundamental or technical factors.

At times investors are greedy, pushing prices well above trends. Similarly, investors can be overly cautious, and prices fall below trend.

Bob’s first rule reminds us of a rubber band stretched too far. When prices are highly deviated from their trends, like a stretched rubber band, they tend to snap back and are usually in a hurry.

A well-followed example is how stocks and indexes trade around their 200-day moving averages (dma). The graph below shows the range in which the S&P 500 (SPY) consistently trades above and below its 200-dma. It is quite uncommon for most stocks and indexes to travel more than two standard deviations from the 200-dma. When it does, the odds of a snapback increase.

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