Wall Street 'gurus' come and go; however, Bob Farrell has achieved legendary status. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and the October 1987 crash.

According to Dr Prieur du Plessis, Plexus group chairman, Farrell?s words of wisdom are timeless and especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

Farrell retired in 1992, but his famous '10 Market Rules to Remember' lives on. These are summarised below, courtesy of The Big Picture and MarketWatch (June 2008).

10 market rules to remember

  1. Markets tend to return to the mean over time. When stocks go too far in one direction, they come back. Euphoria and pessimism (click here to learn more about how fear and greed destroys wealth) can cloud people?s heads. It?s easy to get caught up in the heat of the moment and lose perspective.

  2. Excesses in one direction will lead to an excess in the opposite direction. Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

  3. There are no new eras ? excesses are never permanent. Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over several years up to late 2007, only to have their gains halved in less than a year. As the fever builds, a chorus of 'this time it?s different' will be heard, even if those exact words are never used. And of course, it ? human nature ? is never different.

  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Regardless of how hot a sector is, don?t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

  5. The public buys the most at the top and the least at the bottom. That?s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

  6. Fear and greed are stronger than long-term resolve. Investors can be their own worst enemy (click here to learn how having a cold heart may lead to having a huge wallet), particularly when emotions take hold. Gains make investors exuberant and promote optimism, which encourages us to invest more money even when markets are overbought and don?t offer good value. Losses bring sadness, disgust, fear and regret, which encourage us to sell at rock-bottom prices or not to buy when bargains are staring us in the face.

  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

Go to page two for rules eight to ten...