If you are new to the investing world, it makes more sense to follow Bob Farrell’s investing tips. A Wall Street veteran who attributes his investing style to his 50 years of experience in the stock market shared 10 rules of investing. These rules, he says, stem from more than a decade of experience in trading in dull markets, bull markets, bear markets and surviving multiple instances that had sent the market crashing down. Other than the necessary fundamental rules and technical tools much needed for both trading and investing, Farrell studied both human sentiments and market psychology to understand why some people react sharply to market downfalls while many remain stoic irrespective of which way the market is heading.
The 10 rules that you or any investor must take note of before investing include:
Markets tend to return to the mean over time
There is no scope for exaggeration in the market. Markets that tend to get overextended in any direction either due to euphoria or fear will one day return to their long-term average.
Excesses in one direction will lead to an opposite excess in the other direction
Simply put, every action has an equal and opposite reaction. The market that may have overshot beyond any logical explanation will also fall back on the downside with equal speed.
There are no new eras – excesses are never permanent
Nothing is permanent. No sector will command stock investors’ attention for eternity. Investors and traders preferred buying stocks of autos, radio and electricity in the 20s. Then the Nifty bubble burst, thereby, forcing everyone to explore new options. Loyalty towards any stock will only cause you to lose your money. Speculating fads will not help.
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
A strong upgoing trend is bound to fall. The correction will be equally deep and sharp. Sometimes, the trend tends to extend, which means that you may have to wait for the market to come back to its position.
The public buys the most at the top and the least at the bottom
Ever heard of the bull trap? This is a classic example of how some investors bound and propelled by sentiments tend to get trapped in the bull race. They buy most at the top and least at the bottom. This means that they tend to sell or ignore when the market assumes a bearish form while rushing to buy when stock prices rise.
Fear and greed are stronger than long-term resolve
Everyone comes into the market hoping to stay invested for a prolonged period. And then emotions take over the strong resolve to stay put. Fear and greed may cloud your judgement. The fear factor during sharp declines will make you question your stock’s fundamentals. The greed to earn with the market will push you to pay more than what the stock is valued at.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
The breadth of the market is important. Relying on large caps alone can spell unwanted doom. Small and mid-caps must equally perform to lend credibility to the rally in the market. A rally based on the overall market movement is more likely to get you more gains than a limited run spelt by some stocks making a high.
Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend
The starting of a bear market is marked by a steep decline. Then there is an oversold zone that retraces a part of that decline. The decline continues for a few weeks at a declining pace with some intermittent bounces depending on the stock fundamentals and market news. Watch out for the three phases in the bear market with some reflexive bounds in between.
When all the experts and forecasts agree – something else is going to happen
Ever heard of the contrarian view of a stock. When too many analysts give a “Buy” call to stock, the stock price is bound to go downward. Too much stress on the bullish movement of a stock must be construed as a warning sign. Look at stocks that have escaped the notice of most analysts. The slow and steadily performing stocks get reviewed only after they have made a high. Sell stocks when they become too popular and you see people around you getting greedy for that stock. Have fun at the cost of those who speculate or rely on what analysts pronounce publicly.
Bull markets are more fun than bear markets
All stock markets love the bull run. Everyone fears the bear run. Realize the opportunity when they fear the most. Take advantage of their greed by selling stocks at the top.