Lessons from Bernstein, Rosenberg and Farrell

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I have over the past year referred to parting comments from Richard Bernstein and David Rosenberg as they left Merrill Lynch for less restrictive surroundings. We were again reminded of these lessons, together with those by legendary Merrill analyst Bob Farrell (who retired in 1992), in a recent report by Jeff Saut as extracted below.

Treasure these words of wisdom and stick them onto your wall so that you are always reminded of them.

Richard Bernstein’s lessons

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

David Rosenberg’s lessons

1. In order for an economic forecast to be relevant, it must be combined with a market call.

2. Never be a slave to the data – they are no substitutes for astute observation of the big picture.

3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.

4. Fall in love with your partner, not your forecast.

5. No two cycles are ever the same.

6. Never hide behind your model.

7. Always seek out corroborating evidence.

8. Have respect for what the markets are telling you.

Bob Farrell’s lessons

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

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

3. There are no new eras – excesses are never permanent.

4. Exponential rising and falling markets usually go further than you think.

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-chips.

8. Bear markets have three stages.

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

10. Bull markets are more fun than bear markets.

Source: Jeffrey Saut, Raymond James – Investment Strategy, January 4, 2010 (hat tip: The Big Picture).

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2 comments to Lessons from Bernstein, Rosenberg and Farrell

  • Frank W

    As I read these lessons from these three advisors, I can’t help but be impressed by what Bernstein says, although I don’t necessarily agree with all of it, e.g. ignore “operating earnings” and focus on “GAAP earnings” (#7). The trouble here is that, altho GAAP earnings provide the true picture, those of limited intelligence, who make up the large majority of the market, ignore them, because the bad numbers contained in them are not what they want to hear. They would rather focus on the bullshit and outright lies contained in operating earnings. Farrell’s advice borders on the vulgar commonplace. Some of what Rosensberg says — no matter how much respect he receives from investors — is dead wrong, e.g. “2. Never be a slave to the data…”. I wouldn’t say that the data is everything, but ignoring it is what usually leads to grief. Never, never, never ignore the data!

  • Superstar

    Frank W.

    Rosenberg did not say ignore the data. He said not to be a slave to it. Big difference IMHO

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