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 a perennial 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. Then on Dec 1, 2022, the PCE index came in at 6%, also below expectations. Then on Dec 13, 2022, November CPI came in at 7.1%, below expectations of 7.3%. Bullish!

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. The one-year bond yield is at 4.7% while the 10-year bond yield is at 3.5%. The inversion is the largest since 1981!

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 (shaded grey bars).

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 been able 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? We don’t.

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% – 4.75% 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 3.45%.

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 700 votes, the results are decidedly split.

A lower Series I Bond rate is a bullish indicator. Stocks will be higher by May 1, 2023, six months from now.

View Results

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31 thoughts on “Post-Mortem Analysis Of A Bullish Investment Thesis”

  1. For US citizens, never underestimate the privilege of being able to freely hold wealth in US dollars. The rest of the world would like to be able to do the same. And never underestimate the advantage of being able to invest freely within the US. The rest of the world would like to be able to do the same.

    Don’t let greed lure you to do stupid things, like investing in places where some tin pot president for life will have zero concern for you or your legal rights, and can destroy all of your investments whenever they so desire. Or in businesses that are too good to be true. And don’t forget to diversify (which does not mean to buy or hold crypto). And under no circumstances trust all of your wealth to one manager (even if that is you).

  2. Hi Sam,
    I appreciate your insights with this post. I’ve been a Fin Sam Fan since early 2018, and you’ve really helped me with your alternative views on building wealth.
    I’m an X factor investor as I’ve been self-employed since 1993 (Retail Specialty Coffee, Property Management & Technology Management). I’m 56 years old and just went through successful M&A event with a larger PE backed company. I sold 75% of my 15+ year IT business in October! The deal includes a 25% equity rollover into the new company, which expects to sell again in about 4 years.
    I recently bought BTNT for myself and gifted a couple of copies to colleagues that also received a windfall from the business sale. Hopefully they find your financial wisdom beneficial.
    My family’s current “dilemma”:
    Our cash position is now 34% of our net worth and I’m trying to figure out how to optimize a distribution of this significant windfall into various asset classes over a reasonable period of time of maybe 6-8 months (12 to 18 months)? My brokerage is calling me to invest these funds with them as soon as possible…lol.
    I have a somewhat more pessimistic outlook on equities and believe that we’ll be in a higher interest rate, and higher inflation rate environment for the foreseeable future. There just seems to be way too much free cash & debt to unwind that was generated during the Trump and Biden Administrations during COVID.
    Current rough breakdown of asset classes as a percentage of Net Worth:

    Cash 34%
    Tax-deferred Investments 8%
    Taxable Investments 12%
    Real Estate Investments 12%
    Principal Residence 13%
    Business Equity 20%
    Debt 1%

    I’d like to invest in various forms of real estate (physical and crowd funded) and get cash down to around 2%, but I’m not clear on a suitable timeline. We’re also seriously considering a move to a state with no income tax or capital gains tax (like Tennessee) to avoid a big tax hit in 4 years. What would Financial Samurai do?

  3. Couldn’t it be possible that part of your bullish investment theory was correct (“The lower Series I Bond interest rate means the government believes inflation has peaked and is heading down.”), but ALSO the Fed must continue to jawbone the rate lower to achieve it’s optimal 2% long-term inflation rate?

    By it’s very nature, the only way to bring inflation meaningfully down is to contract the economy and decrease the supply of available dollars that chases goods and services. Thus, a recession here isn’t just a bug in the Fed’s plan, it’s the desired outcome that they have no choice but to pursue.

    1. Yes, indeed. Moral suasion is powerful, and the Fed doesn’t want to admit, too quickly that inflation is coming down. Otherwise, we might end up spending like crazy again.

      We’re playing a game of belief.

  4. Hi Sam,

    I agree and disagree with you. I agree that sp500 will be higher in six month, but disagree with the reason. I think inflation will stay relatively high because of the structural supply and demand imbalance – it will take at least 2-3 years until other Asian countries like India/Bangladesh/Vietnam/Indonesia to replace China’s role to provide cheap consumer stuff, and the same amount of time for the global energy market to rebalance after the Ukraine war. Plus the energy transition is a medium term inflation inducer that can last for 10-20 years.

    But SP500 will nevertheless go higher because US is the relatively safest place to be in this unstable world. There are still lots of rich people and lots of money that need to go somewhere.

  5. I keep about 95% of my portfolio (aside from my house) in stocks with mostly Vanguard index funds stocks tilted towards value and small cap. This is because of the asset factor research like French-Fama. I am skeptical of the funds with high fees like AQR’s that involve extensive analysis around asset factors (especially since they haven’t really delivered vs some simple indices) but I feel there is a decent chance over a long enough time frame that value and small cap outperform. The main reason for this is prospect theory: I don’t think humans will ever really be economically rational due to cognitive errors which I view as responsible for effects like the French-Fama model. I also like in indexing how one can easily own shares in thousands of companies since I feel the more the better in terms of reducing wipeout risk. (What if there is some major disaster? Concentrated active investors can easily wipe out).

    I am interested in diversifying into crowdfunded real estate to further reduce volatility and sequence of returns risks. The main individual stock I own is my employer Adobe due to stock grants (RSUs). I would diversify it into indexes if I felt it were at fair value e.g. $400-500 per share in my view at present but I don’t view it as being at fair value. As a former active value investor it is hard to let go of that perspective and be price insensitive: I would rather just wait.

  6. Your analysis makes total sense and is sound; however, we no longer live in an environment where any of the data can be trusted (maybe we never did?). They can publish all of the inflation data they want, but real prices aren’t tough down anywhere you look. My grocery bill is still 1.5x what it was 2 years ago. Energy costs are continuing to rise. You can forget going out to eat. If we assume prices have stopped going up, are we to just accept this is where we are as a new baseline, without real wages increasing (and thus a decrease in overall purchasing power?) I think Powell is just getting started and would prefer his legacy be of a modern day Volcker, who is looked at more favorably as the years pass. The days of easy money and overinflated asset prices that have been promulgated by the economic policy of Greenspan and continued by Bernanke have come home to roost…destroying the middle class at the expense of people like you and me who have been able to get substantially invested in the stock markets, as well as corporations who have been able to access at such low rates to buy back stock and prop themselves up even with weak fundamentals. If we even have a chance to make this right and return to an era that makes sense (I don’t know if we can), the only way to do that may be to bring it back down to earth.

    1. What goes up too fast, generally comes down in a hurry.

      I expect inflation to be below 5% this time next year. I just bumped up my car with gas yesterday and I was pleasantly surprised by my 18% lower gas bill.

      The cure for higher prices are higher prices! At the very least, I think we can rule out return to 2008 Armageddon. I’m going to stick with 3,577 as the SP 500 bottom in this cycle.

      1. I’m keeping my eye on diesel fuel costs, since that’s what large trucks use to transport our goods. Thank goodness we hit November, which is when California switches to the cheaper, dirtier blend of winter gas (sold NOV thru MAR).

  7. I’m not the type to take big bets on anything in the stock market. But I do like to proactively put money to work roughly 3-4 times a year and usually over the course of 1-2 weeks in small increments. It was so nice when trading fees went away because it made legging in easier mentally and more economical.

    1. True on the elimination of trading fees, enabling us to leg in more easily.

      But I do wonder how many more investors turned into irresponsible day traders, because there were no more fees, and then blew themselves up.

      I’m pretty sure I would’ve traded way more aggressively. This happened in my 20s and early 30s.

  8. Jim Johnson

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

    I am looking at my leases with tenants. Several of my properties are nnn so the tenant is responsible for overall upkeep. In the last 6 months I have asked two tenants to resurface there parking lots and had one work on roof repairs. Those became 150k in improvements tax free. I paid off my highest interest loan at 5.25%, 300k paid off. I am watching loopnet and seeing if prices/cap rates are moving in directions that make deals attractive. So far not the case.
    I disagree with you Sam, in my opinion inflation is going to be an on going problem until at least 2027. So many younger people just expect immediate gratification/positive change….Political policies and a world that is buried in debt and obligated beyond its capacity will make it not possible to influence positive change in a meaningful way. The green deal handcuffs practical improvements regarding energy.
    What can derail a recovery…I don’t see that as the correct question. Instead “What will encourage and sustain a recovery in an increasingly aging/in debt/overly in titled nation”

    1. Mark Oliver

      Agree. Pessimism is a seductress, but I don’t see the inflation genie going back into the bottle that easily.

      1. Me neither. I think inflation is here for a while. We are in a bear market, economic downturn, raw material costs are rising, etc.

        It’s not bad per se, it’s just the economy is changing. Zombie companies with too much debt and unprofitable models got hype, Bitcoin took off, risk went away.

        This cycle rewards savers, those able to live below there means, Warren Buffet, profitable operations, shorting, value companies, conservative balance sheets and efficient organizations.

      2. I agree, especially since a ton of this reduced inflation was from Biden flooding the market with oil from the SPR, which will be ending very soon, combined with opec cuts. I think hard goods may drop but service items are just getting going. Hope I’m wrong

  9. Great points here Sam! Where did the US go off the rails and move from “a government of and for the people” to a group of politicians protecting one another to maintain power? It’s rather disappointing to say the least. I think 2023 will see a lot of layoffs, potentially more foreclosures, and it wouldn’t surprise me if they reintroduce ‘quantitative easing’ again in 2023, to mitigate the damage. We shall see!

  10. Interesting post, and I agree with the above comments. I think inflation will continue for a while, and the Fed will continue to increase rates for longer to be sure inflation is on the decline, especially since there is lag between changing rates and getting official reports of changes in inflation data (and they will want to demonstrate this publicly). As a result, the economy will hurt for longer unfortunately.

    Sam, can you elaborate on why you see mortgage rates dropping so much that fast? Perhaps I am unclear on your logic or mechanics involved.

    1. It’s because once inflation and interest rates, turn down, they turn down in a hurry.

      I think investors are improperly forecasting higher inflation rates when it is clear so many inflation data points are rolling over e.g shipping rates, WTI oil prices, home prices etc.

      With your bearish outlook, how are you Invest and your money? I am trying to encourage readers to take action based on their beliefs. Their actions need to be aligned, otherwise, they will be problems and disappointment down the road.

  11. I think inflation will come down a bit. The stock market should do a lot better next year as companies look ahead to 2024. I’d be a lot more bullish about a year from now.
    For 2022, I didn’t make much change. I moved some money to stocks, but it was a small percentage.

  12. Inflation will moderate as the base effect fades. However, the delayed effects of the rate hikes will continue to hammer the real economy. Stocks will try to rally, but they can’t defy gravity. I predict they will be down by May of next year. For stocks to go higher, the Fed would have to cut rates to under 1% again and re-start QE.

      1. Not the OP, but I’d be scared to straight short the market even though I agree with the thesis. It will likely be volatile as evidenced by the move on a slightly better than expected (and likely manipulated) cpi print. I think we raise rates to 5 and then hold them there for awhile. Not sure if that will be enough to rally the market by may. I don’t expect cuts until q3 or q4 at the earliest.

      2. I sold all my BTC for profit after the FTX debacle. I think in October I re-allocated my IRAs from 100% stocks to 100% fixed income. I shared your belief that rates are close to peaking and bought some 20 year and 30 year treasuries (prior to the recent dip in rates). I figure I can either hold on to these to maturity or take profits when rates inevitably go down. I also bought 5 year CDs ranging from 4.75% to 4.9%. To hedge my bet, I also got some 3 ~ 6 month treasuries. My average duration is about 11 years for my fixed income portfolio. In hindsight I wish I put more into longer treasuries. (Was also looking at a 100 year bond from MIT for fun but decided against it).

        Even though my IRAs are all fixed income now, I have a decent sized taxable account that is fully invested. I sold some covered calls; those positions moved against me with the recent bear market rally, so I have rolled them out to February (they are now turning green again).

        I moved my TSP to 60% stocks / 40% G-fund in January / February which was a decent call.

        I have about 8% in cash / T-bills, 60% stocks, 32% fixed income.

        1. Nice job making a profit on bitcoin AFTER FTX blew up. Not easy. Have you been a very long term holder?

          Buying long bond funds like TLT when the 10-year was at 4.2%+ is something I should have done. It could turn out to be a very strong double digit returner within the next six months.

  13. I think that inflation comes down but stays elevated at the 5% level based upon rents and wages. Therefore a 70s like stagflation with low growth, higher than average inflation and low labor participation rate which continues to drive inflation. And increased regulatory environment.
    Also a black swan event in 2023: Ukraine war escalation, risk of liquidity event, china/Taiwan. As such I think for the short run treasuries, for the long term low cost SnP index.

    1. If inflation gets down to 5%, I think investors will rejoice. Everything is relative, and there will be more hope for inflation, coming down further over the next 12 months after.

      I think because we are also all aware of potential wars and invasions in pandemics, etc., these called black swan event” won’t impact us as much as we think.

  14. Maybe a recession is just what the government wants so Ukraine and Europe can keep the lights on and their houses warm this winter

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