How to ‘Call’ the Markets Correctly

Doc’s note: Today, I’m sharing an essay from my good friend and colleague Steve Sjuggerud, in which he shares his secret to investment success. Steve also explains the best times to use certain types of investment strategies.

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“Steve’s been one of the very few who’s been really right this cycle,” my friend Meb Faber said about me on a recent episode of his podcast, The Meb Faber Show.

“There’s a speech he gave at the New York Stock Exchange in like 2012, where he outlined [his “Melt Up”] thesis, and he’s been right.”

Meb is the chief investment officer of Cambria Investment Management. He does fantastic homework about what works in investing. And he and I separately came to the same conclusions. (I strongly recommend listening to his podcast and reading his books if you are REALLY into investing.)

What I’d like to share with you today is my big secret…

It’s how I’ve correctly called the U.S. stock market since 2009.

And it’s how I make ALL my market calls… whether it’s stocks, real estate, commodities… you name it.

The secret is simple. I follow two basic ideas

  • My simple setup for buying for all assets, and
  • “The one thing.

Let me briefly explain both of these, starting with the simple setup I look for…

As Meb said on his podcast, “[Steve] always says his favorite investments are cheap, hated, [and] entering an uptrend. That’s where we originally intersected years ago, and why we kind of see eye to eye on a lot of things.”

Contrary to most everyone on Wall Street, Meb and I came to the same conclusion years ago about what works in investing:

  • Value investing works, AND
  • Momentum investing works.

Value investing is buying what’s cheap – what’s “on sale.” Momentum investing seems like the opposite. You are buying what’s in an uptrend – what’s “going up.”

Because these strategies feel so opposed, most folks on Wall Street are firmly in one camp or the other (value or momentum).

Since Meb and I believe that BOTH strategies work, we discovered that we were basically Wall Street outsiders. Somehow, there’s an unwritten law that you can’t believe in both… It’s like saying you’re a Christian and a Muslim at the same time.

The thing is, the math is clear. Both strategies work. It’s plain as day. And these are not competing ideas. Here’s what you need to know:

  • Momentum works in the short run (about 12 months or less).
  • Value works in the long run (about three to five years).

Astoundingly, the basic idea of finding what’s cheap, hated, and in an uptrend works across most asset classes. (The challenge sometimes is figuring out how to define “cheap” and “hated” in some assets.)

In 2009, in the U.S. stock market, this simple setup was in place. Stocks were cheap and in an uptrend. And they were hated, too… No one else was interested.

So back then, I needed to decide on “one thing that matters” to the markets.

When I invest, I want to find the one thing that matters to the markets at that moment… If you can isolate the one thing that matters, you can more easily block out the daily “noise” in the markets and stay invested.

I decided “the one thing” that mattered back then was interest rates…

My working script was this: The Federal Reserve would keep interest rates lower than anyone could imagine, for longer than anyone could imagine. And that would drive asset prices (like stocks and real estate) higher than anyone could imagine.

That was my “one thing.” And that one thing kept me in the markets all these years. Heck, rates are still relatively low today.

So where are we today? Look to the lessons of this message…

  • In the short run, the trend matters. And even with some recent volatility, the trend is up today.
  • In the long run, value matters. And there isn’t a lot of value in stocks today.

So if you are in stocks today, you are in because of No. 1 – the trend.

Stay in stocks. And if the trend goes away, then see No. 2…

Good investing,

Steve