In light of those who foresee the current bear market bringing about the death of stocks, here are 10 Market Rules to Remember from long time strategist Bob Farrell:

(Photo:  azrainman)

1)  Markets tend to return to the mean over time.

2)  Excesses in one direction will lead to an opposite excess in the other direction.

3)  There are no new eras - excesses are never permanent.

4)  Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

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 chip names.

8)  Bear markets have three stages - sharp down - reflexive rebound - a drawn-out fundamental downtrend.

9)  When all the experts and forecasts agree - something else is going to happen.

10)  Bull markets are more fun than bear markets.

Hat Tip:  Carpe Diem blog

The election is done.  Time to focus on the upcoming recovery in the stock market and economy. 

Here is what I see happening. 

Let’s first look at monetary policy.  As seen in the below chart, the Fed is pumping massive amounts of liquidity into the financial system:

 
 
After a period of time banks will be saturated with lendable dollars and bankers will start looking for deals.  Instead of being incredibly defensive, they will be on the lookout for borrowers.  There are a lot of good ideas out there but the owners of these ideas need capital to bring them to market.  Growth has been held down by a sharp decline in velocity (the rate at which money changes hands) and fear. 

I expect this activity to slowly increase just from the fact that more money is being made available.  The problem during the credit meltdown was there were a lot of people with ample collateral but could not get approved for a loan. 

So are we close to the market bottom?

Hindsight is the only way to be certain but one indicator that tells me we are nearing a recovery is business inventories.  They’re way down because everyone has been holding back thanks partly to the media spreading recession/depression fears for the past year and a half. 

This tells me companies will eventually need to start producing more goods.  When they do start producing, activity rises as does GDP.  I could be wrong but my best guess is that by the spring of next year we will begin to see the visible traces of growth.   

Now on to fiscal policy - the taxation and spending that goes on in Washington. 

We have an idea of what our President-Elect wants to do but the real issue is what will he do.  Fortunately the high level advisors to Obama carry a lot brain power - especially former Fed Chairman Paul Volcker.  So I don’t expect anything disastrous to happen, just slower growth (than what a free market would produce) once policies are put in place.

As for the stock market recovery, I think it will be closer to a V shape.  Actually, there will be two recoveries - one in the stock market and the other in the economy but we will see the market recovery first. 

Here’s why:

Unemployment is a lagging indicator meaning the peak of joblessness is seen after a market bottom has passed.  A ramp up in business activity and production will not be seen in current jobless claim reports. 

Historically a stock market recovery takes off at least 6 months prior to a recovery in the economy.  Expect the economic recovery to be more U shaped as the economy continues to muddle along over the next few months.       

I will close this post with the following:  My advice to investors over the past several months remains unchanged.  The rate at which the Fed is creating money will eventually have some incredibly powerful effects on asset prices.  When will this be?  Impossible to say but what I am most certain of is that you will either be a net receiver or a net payer.  Buyers of tangible assets at today’s prices will find themselves on the receiving end once the market recovery arrives. 

With the Dow swinging up and down hundreds of points nearly every session, despondency is the feeling of the day.  Here is some great insight I think will help investors stay the course. 

It’s a question the vast majority of Americans face:  Do you ‘go it alone’ when it comes to planning your financial future, investments, and savings plans; or do you get the help of an ‘expert’ to guide you through the process and ensure you get the most bang for your buck?  If one doesn’t have the time, discipline, and knowledge to manage their finances on their own, they often choose to seek financial help.  

But to whom do you turn to and trust?

Hiring a financial professional is a personal decision (and a very important investment) but here are a few tips to guide you in the right direction:

• I may be biased in my view but I’m confident you will greatly increase your probability of success by partnering with an independent firm and working with an advisor whose interests are aligned with yours.   
• Consider a professional who invests their own money in a similar way they would invest your money, and can show you how they performed through a variety of market cycles.  Too many financial professionals make their money from selling you high-commission products and not from being successful investors themselves.   
• Someone who is willing to constantly educate you about the financial markets, economics, diversification, retirement income, and risk management.  I do this for free through my radio show, seminar series, and this blog. 
• And last, the person you hire should exhibit an understanding of the Big Picture and the long term, and who is committed to enhancing your bottom line rather than their sales agenda.

KEY POINT:  In any market panic or economic uncertainty, people tend to ask themselves, “Is my money safe?” then take the necessary precautions so that all is well.  The realm of investments and finance is not an exact science but by keeping the above points in mind you will likely maintain the necessary discipline for financial success, better understand the investment process, and give yourself more free time and greater peace of mind.     

There’s nothing like a deep bear market to get folks talking about a lot of financial nonsense.  The rhetoric I’m hearing these days takes me back to October of 1998 and the Long Term Capital fiasco - a hedge fund collapse that came darn close to bringing down the house of cards. 

More recently (and more importantly), a group of researchers from Dimensional Fund Advisors reviewed the performance of the S&P 500 from January 1970 to December 2006.  The annualized return for that period was 11.1%.  

But here is where things get interesting. 

When the researchers removed the 25 best performing days of the market over that 36 year period (less than one day per year), that 11.1% return dropped to 7.6%.  A HUGE difference!

So what does one learn from all this?

First, tell your friends and family to quit making short-term changes to their investment strategy based on their emotions.  They are foolish if they do.  Woe onto anyone that thinks otherwise.   

And second, ignore the headlines in the financial media and all predictions telling you about the best stocks to own.  Here is a great example why:

AIG and Merrill Lynch?  Seriously, what were these editors thinking?

It sort of reminds me of that lyric from the Beatles’ “Nowhere Man”:

He’s as blind as he can be/Just sees what he wants to see.

In any case, what you’ve witnessed in the market over the past couple of days is another classic stampede that occurs every so often.  Bottom line:  Don’t do anything with your finances you will one day regret.  Although easier said than done, I know.  

But the fact remains that throughout human history, there have been numerous financial disasters far worse than anything we are experiencing today.  Millions of people prospered shortly after those times simply by remaining diversified in the market and not following the crowd.  I cannot find a reason why you and I should not do the same.    

Stay tuned, I will do my best to help you come out on the profit end of this unique and opportunistic environment. 

Video courtesy of KETV News.

After sketching this crude drawing on the back of a napkin, my hunch is that you are annoyed the stock market isn’t moving past the C dot.  Everyone experiences this at some point or another. 

We all like that ride from the dot in the lower left corner to dot A. 

The A dot is where you feel good; money is being made.  The A dot is when you see your brokerage account statement each month and smile. 

Being the free market capitalist that you are, you want that ride to continue.  Time goes on and eventually you find yourself at dot B.  Yes!

But then something happens.  Something you haven’t experienced in some time.  You start to go backwards.  Surely this is just an anomaly that you will soon return you to the B dot.  It isn’t.  Instead you find yourself at C.  Major bummer.   

The C dot hurts.  It’s uncomfortable.  And it’s where undisciplined investors bail out.  They change their investment strategy to something that instantly makes them feel better or to something they hope returns immediately to B – most often both lead to poorer results. 

So here you stand today at dot C.  It’s a difficult job to hang tight.  On one hand you see your peers bolting for the sidelines where their money is now earning less than inflation.  But on the other your patience is wearing thin.

You wonder:  When the heck will we see that breakout rally?

In doing so, you realize that you are only looking at a partial version of the chart.  The Big Picture version looks more like this:

Here you discover the C dot is the worst possible place to quit - especially when you take into account what often follows. 

REALITY CHECK:  To get to the D dot you must first endure the C dot, which right now is feeling awfully crummy and is never a fun place to be.

The path to D is not linear and rarely pain-free.  If it were, people with more brain power than you and I would have figured it out by now.  Sorry.  The best way I know of to get there is time, discipline, and knowledge even though the high-voltage Wall Street egos would have you think otherwise. 

The market is still a yo-yo climbing a flight of stairs.  Sooner or later, you must come to terms with this fact. 

One day later down the road when you look over your shoulder at history, my bet is that you will see this as a short-term blip.  Chances are good that you will be kicking yourself for having not taken advantage.     

Though it’s easier said than done when the panicky chorus of doom-and-gloom is surrounding you. 

One last thing to point out - see what happens after the D dot?  Will you be ready?  As the saying goes, “Forewarned is forearmed.” 

Know what it is?  I learned it over 30 years ago the hard way. 

The secret is patience.

Back then I discovered that if I stuck with my ownership-based investment strategy over the long haul and outlasted the quitters and ignored the critics, I would someday be in a better position than the majority of my peers. 

This is why I continue recommending the investment model I’ve used since then:

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When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist.  Last Friday, the S&P 500 closed at 1239.  Contrast that to where the index was trading at 10 years ago - 1164 - and you end up with a gain of about 6.4%. 

So why am I still so enthusiastic about my “stocks for the long run” philosophy? 

Take a look at history. 

The last time we went through a similar market environment was from about 1969 to 1982.  Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory. 

But people who maintained their discipline and continued acquiring equity positions were rewarded for it. 

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it.  Or there were others who prospered simply from dumb luck for being in the right place at the right time. 

You see, tangible assets - real wealth - does not vanish in a market decline.  Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.   

And that’s the way it has been throughout history. 

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Sir John Templeton has died at the age of 95.  He was one of the great minds in the financial community as well as one of my early mentors.  Below are some key excerpts from his 1993 article ”16 Rules For Investment Success.”  They are as true today as they have ever been.

I can sum up my message by reminding you of Will Rogers’ famous advice:

Don’t gamble.  Buy some good stock.  Hold it till it goes up . . .and then sell it.  If it doesn’t go up, don’t buy it!

There is as much wisdom as humor in this remark.  Success in the stock market is based on the principle of buying low and selling high.  Granted, one can make money by reversing the order - selling high and then buying low.  And there is money to be made in those strange animals, options and futures.  But, by and large, these are techniques for traders and speculators, not for investors.  And I am writing as a professional investor, one who has enjoyed a certain degree of success as an investment counselor over the past half-century — and who wishes to share with others the lessons during this time.

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