Post-Mortem Analysis Of A Bullish Investment Thesis

In order to become a good-enough investor, it’s worth doing a post-mortem analysis of your investment calls. Constantly reviewing what we got wrong and what we got right is important for improvement.

We must not confuse any investment outcome with improper reasoning. If we do, we will suffer from Dunning-Kruger, which could lead to deleterious future investment decisions.

Determining whether you made a good investment decision is harder in the short run. There is so much noise in the short run investors can easily be tricked into thinking they are geniuses. It often takes time for an investment thesis to play out, which means patience and humility are required.

Instead of short-term thinking, I firmly believe it’s better to identify long-term investment trends. If you do, you’ll experience a much greater ROI on your time than if you try to pick individual investments.

Bullish Investment Case Study

There is a lot of Fear, Uncertainty, and Doubt (FUD) right now with FTX blowing up, geopolitical risk in Ukraine and Taiwan, and an extremely aggressive Federal Reserve. The general consensus is for more downside, which means making a bullish call is risky.

However, as an optimist (a potential crutch), on November 2, 2022, I decided to publish a post entitled, The Most Bullish Economic Indicator Yet: A Lower Series I Bond Rate.

My thesis was the 2.7% drop in the rate was massive and indicative of how quickly interest rates and inflation could drop in the future. I believed there was a good chance the upcoming inflation figures would come in below expectations, resulting in an increase in risk appetite.

I thought the investment community wasn’t connecting the dots. As a result, I thought we should be buying stocks ahead of the November 10, 2022 inflation report. At the very least, we shouldn’t be selling.

The October inflation figures that came out on November 10, 2022, indeed came in below expectations. The S&P 500 and NASDAQ then proceeded to rocket higher by 5%+ and 7%+ that day, the largest gains since 2020.

Then on November 15, 2022, the October Producer Price Index came in at +0.2%, below expectations of 0.4%. This was another positive data point for risk assets, including real estate.

The lower-than-expected inflation figure means the Fed should feel added pressure to admit publicly that inflation is rolling over. If the Fed was to do so, it would imply the Fed is unlikely to hike rates as much or as long.

An Optimistic Cynical Investor

Although I’m an optimist, I’m also a cynic when it comes to listening to people in power. Greed and pride are difficult sins to overcome.

Since I started investing in 1996, I’ve seen too many cases of corruption, insider trading, and data manipulation to believe everything I hear from politicians and government officials.

Senior officials at the Federal Reserve Board care more about their legacy than the health of the economy. They don’t want to be described in the history books as the governors who weren’t able to contain inflation after decades of price stability.

Since Fed Board Governors are all very rich and got out of the stock market around October 2021, they are OK with tanking the stock market and the economy.

As a result, I expect my bullish call to face stubborn headwinds. Fed Board Governors will likely continue to state publicly they want to raise rates while ignoring real-time inflation data. For people like St. Louis Fed President James Bullard, it is better if millions lose their jobs and the economy goes back into a recession in order to contain inflation.

Therefore, as an optimistic cynic, I’ve shared ideas on how we can enjoy life more while the Fed ruins the world. Below is a chart that shows the yield curve is the most inverted since 1981.

The U.S. bond market is screaming for the Fed to stop hiking rates. If the Fed doesn’t listen, it is practically a certainty we head back into a deeper recession in 2023. Millions of jobs will be lost thanks to the Fed. You can see from the chart how an inverted yield curve always portends to a recession.

Post-Mortem Analysis Of The Bullish Investment Thesis

The investment thesis turned out correct, but was my reasoning for the correct outcome accurate? Not quite. Here’s what I wrote in my post.

The lower Series I Bond interest rate means the government believes inflation has peaked and is heading down. The government has shown us its cards! Its action must be consistent with the data.

This passage infers I believe the government has the power to manipulate the data. If the government could have announced the Series I Bond rate after the November 10 inflation report, it would have to protect its cards. But shifting the Series I Bond rate offer announcement date would have raised too many red flags. Hence, the government and the Fed became more restricted in what they can do in the future.

Risk-free rates and investment returns are intertwined. A 6.89% I Bond rate through April 2023 means the Fed has a lower upper-bound limit to hike up to. A 6.89% I Bond rate also means mortgage rates are likely to come down by 2% – 3% by May 1, 2023, which would be bullish for the real estate industry.

How The Series I Bond Interest Rate Is Calculated

In reality, the Series I Bond interest rate is determined by the percent change in the CPI-U over a six-month period ending prior to May 1 and November 1 of each year.

In other words, the government has “no say” in the rate according to its literature and as pointed out by some commenters. When it comes to investing, I like to delineate clearly who is friend or foe. But doing so is an emotional response which can be dangerous.

Below is an example from TreasuryDirect that highlights how the latest Series I Bond interest rate was calculated.

How the Series I Bond rate is calculated using an example

Hard To Believe Fed Reserve Governors And Politicians

In order to be a senior government official or politician, you need to be an egomaniac who craves power and attention. Craving power and attention is the antithesis of a Financial Samurai.

See: The Joy Of Being A Nobody

I won’t let go of my belief the government has a say in the data. After all, there are ~3,000 Fed Board employees. One of their responsibilities is to gather and report the data. But how do we really know what is real?

When you hear the President publicly warn the inflation data “could be high,” that is a clear sign the government knows the data well in advance and has input into the creation of the data and the timing of the data’s release.

The government is incentivized to massage the data in order for politicians to keep their power. Yes, this is a cynical view. But have you ever gotten to know a politician or someone running for office? I have. Deep down, many are incredibly focused on themselves and their legacies!

historical trust in the government

Put Your Money Where Your Mouth Is

Part of being a good-enough investor is having the appropriate amount of skin in the game. If you truly have high conviction, you invest more aggressively. If you don’t have conviction, you might just aimlessly jibber jabber without ever putting money to work.

Have a read of this passage from my bullish investment thesis post.

From the latest Series I Bond interest rate , we can assume inflation figures coming out on November 10, December 13, January 12, Feb 14, March 14, April 12, and May 10 will either be below inflation expectations or have a blended overall inflation rate below expectations.

This paragraph is actually a hedge. I believed the November 10 inflation data would come in below expectations. However, I wasn’t sure enough to say it.

Instead, given the Series I Bond rate is for the next six months, I took the safer route and included the inflation dates for the next six months. Then I talked about having a blended overall inflation rate below expectations as another option.

So what ended up happening? I just bought $50,000 worth of the S&P 500 before the November 10 inflation report when I could have bought $250,000.

As I wrote in my post, How I’d Invest $250,000 In A Today’s Bear Market, I invested ~$150,000 of my cash in Treasury bonds instead. The 4.2% – 4.6% risk-free returns Treasury bonds provided were just too enticing to pass up.

If I had had a ton of conviction in my bullish thesis, I would have bought $250,000 worth of S&P 500 out-of-the-money call options! Alas, I couldn’t afford to take too much risk given my wife and I don’t have steady paychecks and we have two young kids.

At least buying bonds when the 10-year yield was at 4.2% was a good investment. The yield has since dropped to about 3.75%.

Investing Is Too Damn Hard To Consistently Get Right

Unless you are an investing enthusiast or a professional money manager, spending time coming up with a public investment thesis and then investing accordingly is probably not a good use of your time.

I mainly write about investing because I used to work in equities. We had to always come up with a point of view or else what use were we? Having significant money at risk is also why I like to write. Finally, having a platform to easily gain feedback can be valuable. I don’t mind criticism or looking like a fool.

It is much better for your health and your finances to follow a risk-appropriate asset allocation model. Following an asset allocation model helps minimize the emotion that comes from investing.

You should also follow a logical split between active and passive investing based on your interest and abilities. The less interest you have in investing, the greater percentage of your investments should be in passive index funds

Spending too much time on your investments drains your energy. The less energy you have, the less time you can spend enthusiastically doing something else. Ultimately, we want to push our investments into the background so they quietly work for us.

I believe the Fed will ultimately relent to public pressure and pivot sometime in 1Q2023. As a result, I believe the S&P 500 will be higher six months from when I made my bullish call on November 2, 2022. Further, I will be hunting again for real estate deals before mortgage rates drop.

The biggest risk to my bullish call is a larger-than-expected drop in earnings and a de-rating of the S&P 500. Let’s see what the future brings!

Reader Questions And Poll

What do you believe? And where are you putting money to work? What could go wrong that would derail a recovery?

Here’s the poll again from my bullish thesis post. After over 550 votes, the results are decidedly split.

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Post-Mortem Analysis Of A Bullish Investment Thesis is written by Financial Samurai for