Have a call on the direction

It sounds obvious, but having a call on the direction of the market is a key step towards being a successful money manager. 

• As an example, when I left my job at the end of 2016 and had a whole world of investment possibilities open to me...I though the market was going down. I viewed interest rates as headed up, which would hurt cost of capital without any offsetting growth. I shorted the market on every rally. It was a rough stretch. And it was the absolute WRONG view. It seems obvious now, but the Trump election gave confidence to the economy and he was willing to do anything he could to juice up the stock market. In any event, I was wrong - but executed on my process.
• Once I figured out that the Trump stock market wanted to go UP, I began to be aggressively invested. Even and especially in interest-rate sensitive sectors like REITs and Utilities. I was aggressively and fully invested up until the summer of 2019. That's when I took a step back and saw stretched valuations, rising debt levels, and a lack of mobility in the job market. Job mobility never came around in this cycle and that's one of the things I believe should manifest in a booming economy. We needed the next reason to buy (or stay invested) in the summer of 2019 and it never came. The rate cuts and expanded repo operations in the fall iced the cake to me and I changed my market call to DOWN.

Calling the direction the market wants to go is a 3-6 month view. The market is almost always higher over time, but over periods of months, quarters, and a handful of years, that may not be true. You need to have a view on interest rates, risk appetites, earnings outlooks, and general economic backdrop. I don't believe it requires technical understanding of all of those things - just a finger on the pulse of each of them.  If you watch a bunch of data long enough, eventually you won't need to obsess over it to know the trends. My dad is surprisingly good at calling the direction of the market. To my knowledge, he doesn't really look at any of the economic data - he reads and watches a lot of news, but doesn't dig into data. Some people have a gift. (My dad also doesn't act on his views as aggressively as I'd like.)

After we call the market's direction, we can begin to formulate an investment plan. With the direction as the backbone, we can trust that a bad trade should work in our favor as economic gravity or the rising tide kicks in as a safety. That means being less invested than normal during "down" markets and more invested during "up" markets. A bad buy in an "up" market will likely still go up with the market.

As of 4/8/2020, I see the market's direction as DOWN.

As such, I'm selling long positions and shorting the rallies. Each up day is a chance to increase short exposure. I'm currently 33% net short - a personal record.

You don't have to be short if your view is the market is headed down. I've never been net short in my investing life. I used to view being 50% invested as the lowest I'd drop exposure. It's all about whether you'd be more mad about missing the rally or actually losing money. 

If you call the direction of the market as UP, add riskier stocks (small cap, tech, growth, and "story" stocks) along with high yield debt.
If you call the direction of the market as DOWN, do the opposite. Shift into less risky stocks (utilities, staples, REITS) and into Treasuries and cash.

Next up, well talk about the importance of having and executing on a plan.