Posts filed under “Rules”

Ed Easterling’s 12 Rules of Market Cycles

Ed Easterling of Crestmont Research boils down his views on long term markets to 12 rules of secular stock market cycles. In case you are unfamiliar with Ed’s work, several books, including Unexpected Returns: Understanding Secular Stock Market Cycles; he also wrote Probable Outcomes.

Here are Ed Easterling’s 12 Rules of Market Cycles:

1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)

2. Secular bulls occur when P/E starts low and ends high over an extended period

3. Secular bears occur when P/E starts high and ends low over an extended period

4. Cyclical bulls and bears are interim periods of directional swings within secular periods

5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)

6. Time is irrelevant to the length of secular stock market cycles

7. Secular bulls require a doubling or tripling of P/E

8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more

9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens

10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively

11. Inflation drives P/Es location within the range; economic growth drives the level of the range

12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E

Good stuff. That’s an interesting take on broad cycles.

Category: Cycles, Earnings, Investing, Markets, Psychology, Rules

UPDATED: Trading Rules, Aphorisms & Books

Last month, we put together a full run of Trading Rules & Aphorisms.  In the intervening weeks, I discovered I overlooked quite a few lists that are on the site.

Here is the updated version:

Livermores Seven Trading Lessons

Bob Farrell’s 10 Rules for Investing

James Montier’s Seven Immutable Laws of Investing

John Murphy’s Ten Laws of Technical Trading

Six Rules of Michael Steinhardt

Art Huprich’s Market Truisms and Axioms

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

Lessons from Merrill Lynch

Rosie’s Rules to Remember

In Defense of the “Old Always” (Montier)

Lessons Learned from 37 Years of Futures Trading

Richard Russell’s The Power of Compounding

My (Ritholtz) own rules

Rules for Shorting

15 Inviolable Rules for Dealing with Wall Street

10 Psychological, Valuation, Adapative Investing Rules

The Zen of Trading

After this run, I plan on updating this list every quarter . . .

Books after the jump

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Category: Investing, Rules, Trading

Art Huprich’s Market Truisms and Axioms

Raymond James’ P. Arthur Huprich published a terrific list of rules at year’s end. Other than commandment #1, they are in no particular order: • Commandment #1: “Thou Shall Not Trade Against the Trend.” • Portfolios heavy with underperforming stocks rarely outperform the stock market! • There is nothing new on Wall Street. There can’t…Read More

Category: Apprenticed Investor, Investing, Rules, Trading

10 Lessons of Madoff’s Ponzi Scheme

Its been two years since the Madoff crime erupted across headlines. The massive theft punctured what little faith investors  had in the markets, investment firms and regulators. Fraud rarely has a silver lining, but the least we can do is try to learn from other people’s mistakes. There were many many lessons to be learned…Read More

Category: Investing, Legal, Rules

15 Inviolable Rules for Dealing with Wall Street

The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Mexico to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets. For reasons we are…Read More

Category: Apprenticed Investor, Corporate Management, Investing, Really, really bad calls, Rules

Six Rules of Michael Steinhardt

Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995. The following six rules were pulled out from a speech he gave: 1. Make all your mistakes early in life: The more tough lessons…Read More

Category: Apprenticed Investor, Investing, Rules

10 Habits of Mind for Investors

This comes from a math blog by a teacher called WITHOUT GEOMETRY, LIFE IS POINTLESS (get it?).

There is a recent post I wanted to reference — Habits of Mind — that was originally written for math students. With a few small changes, it can be readily adapted to thinking about markets, risk, investing, etc.

Have a go at it:

Habits of mind

1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts

2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)

3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases

4. Describe
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise

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Category: Apprenticed Investor, Investing, Mathematics, Psychology, Rules

Lessons from Merrill Lynch

While I am not a fan of most big firm fundamental analysts, over the years, Merrill Lynch has had some sharp guys in their Chief Strategist/Economist positions. Here are some lessons and rules from 3 of them. Richard Bernstein was “notoriously cautious on stocks for much of this decade” — and was very bearish on…Read More

Category: Apprenticed Investor, Investing, Markets, Rules

Lessons to Be Learned From Dow 36,000

“This book will convince you of the single most important fact about stocks at the dawn of the twenty-first century: They are cheap….If you are worried about missing the market’s big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher…Read More

Category: Investing, Markets, Really, really bad calls, Rules

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

Category: Investing, Rules, Trading