Revisiting Bob Farrell’s “10 Rules” and why they still explain today’s market better than most forecasts. Plus, one surprise moose.
Retraction: About That “American Marmet”
Before we get to this month’s topic, a quick correction—and a laugh at my own
expense. In my last personal note, I wrote “American Marmet.” Spellcheck ran amuck, and what I meant to say was “American Martin.”
Only two readers caught the slip—both college professors. Which tells me either (a) most of you were kind enough to overlook it, or (b) you were picturing a very industrious marmot waving the flag and thought, “Well, that tracks.”
In any case, thanks for the good humor. I’ll try to keep the wildlife references in check going forward. Well, maybe.
On to this month’s topic.
Markets Change — Human Behavior Doesn’t: Farrell’s Rules
Last month’s newsletter sparked a lot of interest in Bob Farrell’s “10 Market Rules.” Several clients reached out asking for the full list and some additional context. It’s no surprise—Farrell’s rules often explain market behavior in a way that’s both simple and engaging. They don’t predict short-term moves, but they do highlight the recurring patterns of fear, greed, and overconfidence that drive markets to extremes.
To build on that discussion, I’ve drawn on Thematic Analysis: Revisiting Bob Farrell’s Market Rules to Remember from Rosenberg Research. It’s a helpful piece that connects each of Farrell’s rules to today’s market backdrop and reinforces why these insights remain so valuable.
With that in mind, here’s a look at each of Farrell’s rules, along with context that shows
how they’ve played out across different market cycles.
- Markets tend to return to the mean over time.
Asset prices, valuations, and interest rates may swing to extremes, but they eventually correct, often overshooting before finding balance. The U.S. housing market boom of the early 2000s was followed by a sharp correction, while the dot-com crash in the early 2000s reset technology valuations closer to historical norms - Excesses in one direction will lead to an opposite excess in the other direction.
Oil’s collapse to $12 in 1998 set up the surge to $146 in 2008, only for prices to collapse again — just as the “Nifty Fifty” soared in the 1970s before a decade of underperformance. - There are no new eras — excesses are never permanent.
Narratives like the “new economy,” “peak oil,” or today’s enthusiasm around AI never make excesses permanent. The Japanese equity bubble of the late 1980s was justified by claims of a permanently different economic model — but the Nikkei has still never regained its 1989 peak. - Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
The Nasdaq fell nearly 80% from 2000 to 2002 after soaring in the dot-com boom. Similarly, U.S. financial stocks in 2008 dropped rapidly rather than “cooling off” slowly. - The public buys the most at the top and the least at the bottom.
Investors tend to chase performance, buying at peaks and selling at troughs. The surge of retail buying during the late stages of the GameStop and meme-stock rally in 2021 is a recent example, followed by sharp losses as momentum faded. - Fear and greed are stronger than long-term resolve.
Emotions often overpower long-term discipline. The housing bubble demonstrated greed, with buyers stretching beyond fundamentals, while the 2008 panic showed how fear drove many to sell at the bottom, locking in losses. - Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
In 2023, a narrow group of mega-cap tech firms — the so-called “Magnificent Seven” — accounted for much of the S&P 500’s gains, echoing Cisco, Intel, and Microsoft in 2000. The same pattern appeared in 2021 when pandemic-era rallies centered almost entirely on a handful of speculative names, leaving the broader market weaker underneath. - Bear markets have three stages — sharp down — reflexive rebound — a drawn-out fundamental downtrend.
After 1929, markets experienced a severe crash, then a rebound in 1930, followed by years of grinding losses through the Great Depression. The 2008 financial crisis followed the same script. - When all the experts and forecasts agree — something else is going to happen.
The widespread belief in the mid-2000s that U.S. housing prices could “never fall nationwide” preceded the 2008 collapse. Conversely, the 1982 consensus that inflation and stagnation would persist gave way to a historic bull market. - Bull markets are more fun than bear markets
During the long bull run of the 2010s, consumer spending and risk-taking rose with asset values, while the bear markets of 2000–2002 and 2008 eroded not only portfolios but also household confidence and economic activity.
Putting It Together
What makes Farrell’s rules so useful is that they cut through the noise. They remind us that while earnings, interest rates, and policy all matter, it’s often investor psychology that pushes markets to extremes. Fear and greed, “new era” stories, and herd behavior have been with us in every cycle
Farrell was ahead of his time. He spotted these patterns back in the 1950s—long before academics coined the term “behavioral finance.” Decades later, thinkers like Daniel Kahneman and Robert Shiller confirmed what Farrell already knew: markets are shaped as much by emotion as by math.
But emotions only carry markets so far. Eventually, fundamentals reassert themselves—valuations, earnings, and balance sheets set the real foundation. Bubbles burst when confidence breaks. The dot-com crash proved that companies without profits couldn’t justify sky-high prices, just as the housing bust proved debt-fueled consumption has limits.
The bottom line: psychology shapes the ride, but fundamentals set the destination. Farrell’s rules remind us to keep our eyes open, ask tough questions, and remember that markets change—but human behavior rarely does.
On a Personal Note…
Last week in Colorado, it rained almost every day. The area needed it — it’s been quite dry, and while we were there several forest fires broke out within 30 to 60 miles of Steamboat Springs. The rain was a welcome relief.
In a lot of ways, Steamboat reminds us of Kansas. People are welcoming and friendly. When you pass them walking Bode in the morning, they say hello. There’s even a regular crowd along the dog trail each morning, and we’ve gotten to know some of them. Folks look out for each other, warning when a moose or bear has been spotted nearby. It felt like home.
We definitely enjoyed our time in the fresh mountain air — the vistas, hikes, and bike rides. Rachel found a rhythm with yoga in the botanical garden a few mornings each week, and I joined her once. We even did yoga at the top of the mountain one Sunday while Katelyn was visiting, which was an extra-special treat.
The weekend before we left, I took my mountain bike up Mount Werner on the gondola, then made my way back down the Tenderfoot Trail. I lost count of how many times I pulled over to let others fly past me. There didn’t seem to be much “tenderfoot” about it. I only skidded around one corner — and I’ve got the trail rash on my left leg to prove it.
And while the yoga, hikes, and mountain biking made for some great memories, Colorado has a way of reminding you that you’re a visitor in its backyard. One morning with Bode drove that point home.
Bode and I were out for a run after rain the night before. He was eager to go, and I followed on my mountain bike. Pretty soon, he stopped in the tall grass to take care of his morning business. About 30 feet ahead, I noticed what looked like a tree stump. I even snapped a quick picture. But when I zoomed in, that “stump” turned out to be a moose.
As soon as Bode was finished, we quietly turned around and headed back the other way.
No marmots spotted in this issue… only a moose. I’ll catch you next time.
Phill
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