These 10 timeless investing rules provide guidance for today's markets.  In addition, why is falling betting stocks not a bargain

These 10 timeless investing rules provide guidance for today’s markets. In addition, why is falling betting stocks not a bargain

Legendary Merrill Lynch market expert Bob Farrell developed a list of 10 investing rules that are still highly quoted more than 20 years after his retirement. Stephen Soetmeyer, technical research strategist at Merrill Lynch’s successor BofA Securities, released a report in late May reviewing Farrell’s investment rules for guidance in the current market.

The ten rules are:

  1. Markets tend to return to the mean over time.
  2. Increases in one direction will lead to an opposite excess in the other.
  3. There are no new ages.
  4. Usually bullish or bearish markets quickly go further than you think but they do not correct by going sideways.
  5. The public buys more at the top and less at the bottom.
  6. Fear and greed are stronger than long-term resolve.
  7. Markets are stronger when they are broad and weaker when they are limited to a few excellent names.
  8. Bear markets are characterized by three phases: a sharp decline, a reversal recovery, and a long-term primary downtrend.
  9. When all experts and predictions agree – something else will happen.
  10. Bull markets are more fun than bear markets.

In terms of average retracement, Mr. Suttmeier explained that the S&P 500 tends to return to the 200-week moving average during bear markets, implying a 14 percent drop from current levels. He also believes that bond yields will return to somewhere near the long-term average, which would be 4.7 percent for the 10-year US Treasury.

I suspect many readers were thinking about the local housing market when they read Mr. Farrell’s investment rules. Home prices have risen at a rate that far exceeds long-term trends.

Mike Moffat, associate professor at the Ivy School of Business, estimates that home prices in southern Ontario, for example, are between 20 percent and 30 percent higher than population growth trends might suggest. Then the first rule indicates that these residential markets are set for a decrease in this percentage. The second investment rule will mean that home prices in southern Ontario will fall much more – the “adverse surplus” – before rising.

Mr. Suttmeier uses a number of past boom and bust cycles — the Japanese Nikkei in the 1980s, the tech bubble, the US housing bubble before the financial crisis, and bitcoin and FANG stocks more recently — to prop up Farrell’s rule number four.

In each case, the exponential rise was corrected by an almost identically large decrease. The third rule, then, advises against trying to buy dips in previously top-performing market segments such as technology.

Rule number eight, which covers the three phases of a bear market, provides an important frame of reference for stock investors in the coming weeks. The S&P 500 is down 19 percent – one percentage point lower than the official bear market – from its January peak to its May 22 low. It has risen about five percent since then.

I’m not yet convinced that a bear market has started. But, if the current rally fades into a slow decline in stocks, I’d be more inclined to heed Farrell’s Eighth Rule warning.

Mr. Farrell’s rules are timeless and worth reviewing regularly to maintain investment discipline.

— Scott Barlow, Market Strategist, Globe and Mail

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Can wine, art, and other collectibles act as a hedge against inflation?

When inflation explodes as it is now, people inevitably start talking about assets that can hold their value during economic turmoil. That’s when the conversation often turns to art, wine, sneakers, and other categories of collector’s items, writes Ian McGugan.

With sales stalled and cash dwindling, the mortgage sector is no bargaining chip for investors

Steep stock prices can attract contrarian investors, but the marijuana sector is saddled with an unfortunate problem that may deter bargain hunters: Sales don’t live up to expectations. No matter what stock of a pot you look at, prices drop a lot. Dismal financial results and pushed targets to achieve a certain level of profitability are eroding investor sentiment. It doesn’t help that this is happening at a time when interest rates are rising and investors seem to be more risk averse. David Berman looks forward to what the future may bring to a sector full of disappointment.

GICs with an escape hatch for the indecisive investor

Investors willing to hold funds for one to five years are being rewarded with GIC rates we haven’t seen in years. But what if you don’t want to commit for at least a year, or think you might need to access your money? Few players in the market for guaranteed investment certificates have an option for you – exchangeable GICs, according to Rob Carrick.

Spax was all the rage. Now, not so much

Wall Street’s love affair with SPACs is fading. After two hot and heavy years, during which investors poured $250 billion into SPACs, rising inflation, rising interest rates and the threat of recession have raised doubts. Increasingly, investors are withdrawing their money from SPACs. With stocks of high-growth companies taking a beating recently, they were less willing to bet on the success of SPAC mergers – which often involve risky companies -. Meanwhile, regulators are ramping up scrutiny of SPACs. Matthew Goldstein of The New York Times looks at the end of the bull market in SPACs.

The threat of stagflation presents a time-challenging challenge for investors

Stagflation – a period of high prices and slower economic growth – can be a major challenge for investors because it tends to damage the stock and bond markets. But there are a few things investors can do, The Canadian Press reports.

See also: The US Federal Reserve admitted it was wrong about inflation. Now eyes are on the possibility of a recession

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Ask Globe Investor

A question: Given that higher interest rates negatively affect bonds, what do you think about holding the Mawer Balanced Fund (MAW104.CF) with its bond exposure at 30 percent? – David D.

Answer: This fund has a good long-term track record. As of March 31, the 10-year compound annual rate of return was 8.7 percent, putting it near the top of its category. Morningstar gives it a four star rating.

However, it is going through a rough time right now and offering a 30 per cent bond isn’t helping. The fund lost 7.7 percent in the first quarter and almost certainly fell further in April/May (Mauer posts quarterly returns).

If I owned the fund, I would stick with it because the long-term record suggests it will recover. But I will not commit new money at this time.

Gordon Babb. (Send questions to Write the question about the globe in the subject line.)

What’s new in the coming days

This weekend, Rob Carrick is looking at how much money many investors will be saving with this week’s ban on selling money with ex post commission.

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Compiled by staff at The Globe Investor

2022-06-03 10:47:07

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