• Wall Street “gurus” come and go, but in the case of Bob Farrell legend status was achieved. 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 October 1987 crash.
• Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism 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. 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. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

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.

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

9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there

I particularly like the point about emotions taking control – it’s very true.

Every day you read the paper or listen to/watch the news and there are stories about businesses closing and the stress that family budgets are under.  There is very little good news out there (that gets reported anyway!) for us to reset our focus onto when things look this grim.

I must admit, the ecconomy is not looking that great at the moment and the new imposts that will be introduced later this year will only serve to increase the financial burden on a lot of businesses and households.  The carbon tax in particular is going to have a significant impact on a wide range of businesses and the level of this impact is yet to be fully understood.

However, I must admit that, being the eternal optimist, it is times like these that create massive opportunities for those businesses and people that look to take advantage of the situation.  Many businesses will be looking at ways to cut costs and reduce their expenses – they won’t replace staff that leave, they’ll reduce their advertising, they’ll look to find cheaper suppliers for the things they do need and they will generally contract to try and protect themselves.

Whilst this may initially seem an attractive option, let’s think it through a bit further (not an exhaustive list):

• where everyone else is contracting, a business that maintains its service levels will actually improve in comparison to their competition;
• by being positive about the opportunities, you will attract other people and businesses that are like you and will help you achieve your goals/plans;
• supporting your existing suppliers through times like this will build incredible loyalty (especially when you let them know that you’re doing it – don’t assume they know) that will be of great value to both of you down the track; and
• the possibility for opening up new market opportunities created by the contraction/exit of other suppliers can be very profitable to leverage in to areas that were previously a bit difficult to get in to.

Having been through a few economic cycles now, it is really amazing to reflect on those businesses that took the opportunity created by adverse economic conditions to grow their operations.  I’ve seen it so often and the approach (with proper planning and implementation) can yield substantially improved business performance along with increased wealth and satisfaction for the owners of the business.

It all depends on your viewpoint – is the glass half full or half empty?  Is it a time of adversity or is it a time of great opportunity (in camouflage?)….

This is a process which focussses on when an organisation is at its best and it’s people most engaged and enthusiastic – it doesn’t focus on the “law of diminishing returns” that is lean manufacturing or Six Sigma.  I encourage you to have a look at Jeremy’s presentation – it should get you thinking.

You can link to the video here.

Ron discussed at his presentations in Hobart, Melbourne, Brisbane and Sydney the perceptions that customers have as to value they get from the experience they have with their advisors.  As he mentioned, the examples of the value that can be added (by accountants in this example) include: budgets, business plans, tax advisory work and the like. 

Ron argues (and I think he’s right here), that at least two-thirds of the value that we provide to customers is “intangible” or, as he puts it, “spritual”.  The argument goes that the care provided, the thinking, the concern and the other “stuff” that comes from a very positive, open and frank relationship is held in much higher regard than a tax return or set of financial statements (which are often a grudge purchase).

Thinking about this over the past week or so has shown that he is right.  The things that I value in the relationships I have with my advisors are not really connected with their professional competence (that’s a “table stake” according to Ron) – it has to do with their apparent concern and care for what’s going on in my life.

This approach and the underlying decency inherent in it will gain a lot of traction in the coming years.  Things will move from “we’re the expert” to a more collaborative approach where advisors and their customers will work together on mutual goals and achievement of the things that are really important to and for the customer - this can only be a good thing on so many fronts. 

So when you next have the opportunity to assess the quality of your advisor, have a think about how much “intangible” support they provide you.  It might well be a pause for reflection – by both parties!

As it was said somewhere before – people don’t care how much you know until they know how much you care.

In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed – Charles Darwin.

Not much more you can say to that is there?

The people concerned were “socially excited” and proceeded to belittle and laugh at my friend who was trying to be gracious and friendly to them.  They hung it on them about where they went to school, about where their kids went to school, about the house they lived in and even had a go at their “hotshot” father – who was dying of cancer!

I find this type of behaviour obnoxious and offensive and it serves as a very unflattering measure of the people “dishing it out”.  The people concerned are well known in the Ballarat community – given the fact that people tend to behave as they really are when they’ve had a few drinks, the insight obtained into their conceit and arrogance was illuminating! 

The fact that some people think they’re better than others and then proceed to belittle them is just objectionable.

By their rudeness, they show their ignorance.

In many respects, it has some resonance with Patrick Lenceoni’s “Five Dysfunctions of a Team”:

• Absence of Trust (dealing with vulnerablity);
• Fear of Conflict (dealing with artificial versus real harmony):
• Lack of Commitment (dealing with ambiguity);
• Avoidance of Accountability (focus on standards); and
• Inattention to results (around status and ego).

For a diagrammatic representation of this model, look here.

The level of freedom that can be provided by senior managers to staff is critical in enabling them to not only get engaged but stay passionate about what they are doing – this then evolves in to a healthy “inner work life” that ensures that the business is working at its optimum level.  Part of this is “Leader as Servant” and part is a focus on the issues  from the Five Dysfunctions of a Team.

I recommend you have a read of the McKinsey Article which can be found here.

It is fascinating reading and, whilst seven pages long, provides some observations which are just as relevant today.  I enccourage you to read the paper which can be found here.

The coming year promises to be an “interesting” one on many fronts. 

The global economy is in a state of flux at the moment and the position of the European economy in particular is concerning.  I suppose it will depend on what happens with the various sovereign debt issues and the bank and financial market approach to things, but, in some ways, it could well create fantastic opportunities for many businesses.  If Europe does melt down this year, there will be great prospects for businesses to exploit openings that were serviced from there.  The only draw-back will be that our exports to Europe will become relatively more expensive (just look at the change in forex rates between AUD and EUR at the moment).

The other issue relates to the health of the US economy.  In many ways, it reflects the situation in Europe.  There is still the issue however of the underlying strength of the US economy – if they can get their domestic issues better controlled.  The debt position of the country is a concern, however, if internal demand can be driven by increased confidence by US consumers, the impacts on the global economy can be profound.  One issue that needs to be considered is the upcoming Presidential election over there – not sure as to what will happen and whether Obama will be re-elected.  There seems to be a significant drift to more conservative politics globally which may mean a major change in policy direction from the US government.

Then there’s China.  The development of their economy has been spectacular, but there is a school of thought that they might be a little “over cooked”.  Stories are starting to emerge as to whether the reality is in line with the published facts (all government vetted) for their economy.  There was a report the other week on the debt position of a number of internal governments in China that was not healthy.   Yes, they have significant foreign reserves, however, these may not be able to be called in if Europe and the US contract markedly.  As stated above, it is “interesting”.

On numerous occasions over the past 16 years, I have mentioned to our customers that times of great uncertainty are also times of great opportunity.  This is one of those times. 

By getting your vision, goals and strategy right, you will be able to exploit the opportunities that exist and significantly develop your business and lifestyle.  It is simply a matter of devoting the time and thinking space to develop the vision, goals and strategy for you and your business.  Once they are detailed, it then comes down to implementation.  Many, many great ideas and opportunities fail because of a lack of commitment to implementation and falling in to the bad habit of micro-managing.  By keeping your head up in 2012, you maintain your focus on the important things.  This will put you far ahead of your competitors.

Make 2012 a great year – it is your choice!