How_to_be_a_better_investment_forecaster
00:00:00.000 | Hello, everybody.
00:00:01.000 | It's Sam from Financial Samurai.
00:00:03.260 | And in this episode, I want to talk about inflation.
00:00:05.900 | Because great news, the October inflation numbers
00:00:10.180 | came out on November 10th.
00:00:12.180 | And they came in below expectations.
00:00:15.020 | October consumer prices plus 0.4%
00:00:19.060 | versus consensus of plus 0.6%.
00:00:22.540 | October CPI, x food and energy, came in at plus 0.3%
00:00:27.660 | versus consensus of plus 0.5%.
00:00:31.660 | And then October consumer prices overall
00:00:34.460 | increased 7.7% from a year earlier.
00:00:37.900 | And core CPI was up 6.3% year over year.
00:00:43.060 | And what's pretty cool is that you heard a podcast episode
00:00:46.820 | just a couple episodes ago talking
00:00:49.140 | about the most bullish economic indicator yet.
00:00:52.700 | And that bullish indicator, as you recall,
00:00:55.460 | was a lower series I bond rate, lower by 2.7%.
00:01:00.660 | And the general thesis was inflation has clearly peaked.
00:01:05.420 | The government has shown its cards.
00:01:07.820 | And the upcoming inflation numbers
00:01:10.420 | reported in November, December, January, February,
00:01:13.300 | March will likely be overall below expectations.
00:01:17.660 | Or individual months will be below expectations.
00:01:21.820 | So right now, we're spot on.
00:01:23.380 | We've got October numbers coming in below expectations.
00:01:26.860 | And what's happening with the stock market?
00:01:28.660 | The stock market is up 4%.
00:01:31.100 | The NASDAQ is up over 5.5%.
00:01:34.580 | So clearly, investors like this print
00:01:37.660 | because it shows that inflation really is rolling over.
00:01:41.220 | And there's hope now that the Fed
00:01:43.380 | won't hike as aggressively in December, January, and February.
00:01:47.620 | I think it's really important to know that once inflation turns,
00:01:51.820 | it can turn down very quickly, just like how inflation turned
00:01:55.140 | up very quickly.
00:01:56.460 | And as a result, interest rates can also turn up and then also
00:02:00.340 | turn down very quickly.
00:02:01.940 | So a 10-year bond yield at 3.8%, that's a 30 basis point
00:02:07.060 | move in just one day.
00:02:08.340 | That's huge.
00:02:09.220 | That's like a two standard deviation move.
00:02:11.780 | So you will see mortgage rates concurrently, on average,
00:02:15.900 | go down about 30 basis points.
00:02:17.620 | So let's say 6.5% mortgage, you can now
00:02:21.300 | get it at 6.2%.
00:02:23.300 | And again, with the series I bond collapsing by 2.7%,
00:02:27.580 | and given the rate is for six months,
00:02:30.380 | I can very easily imagine where the average mortgage rate will
00:02:34.820 | be down between 2% to 3%.
00:02:36.900 | So in other words, the average 30-year fixed rate mortgage
00:02:40.380 | could decline to 4.5% to 5.5%.
00:02:44.940 | And the reason why is because everything
00:02:47.740 | is correlated in finance.
00:02:49.060 | Everything is correlated to a risk-free rate and the series
00:02:52.100 | I bond rate.
00:02:53.140 | It's not a great example of a risk-free rate,
00:02:55.060 | given there's a $10,000 limit per person,
00:02:57.700 | but it is a risk-free rate nonetheless.
00:03:00.860 | And the government has to be consistent with its offerings.
00:03:04.580 | It can't say, OK, the next six months,
00:03:07.380 | we're going to offer 6.7% on the series I bond,
00:03:10.660 | but inflation is still at 8%, because then people
00:03:15.060 | will be like, well, why bother investing in such a lower rate
00:03:18.820 | when before you were offering 9.6% on the series I bond?
00:03:23.220 | Everything is relative to the risk-free rate return.
00:03:26.980 | You've got to think about that as an investor.
00:03:29.420 | Another thing to consider is how come more PhD economists
00:03:33.940 | and highly paid Wall Street strategists
00:03:36.620 | didn't recognize upcoming inflation figures will likely
00:03:40.580 | come in below expectations?
00:03:42.700 | Expectations are the expectations.
00:03:44.700 | So how did these numbers come in below expectations?
00:03:47.940 | They get paid a lot.
00:03:48.940 | They spend 40-plus hours a week crunching the numbers,
00:03:52.260 | looking at the research, and so forth.
00:03:54.340 | So how did they miss that?
00:03:55.860 | Conversely, how does a tired, stay-at-home dad
00:04:00.380 | who hasn't worked in finance in over 10 years
00:04:03.220 | get the call correctly?
00:04:04.860 | And to give you an idea of what I'm up to,
00:04:06.940 | it's right now 10:05 AM on November 10,
00:04:10.180 | and I'm sitting in my car a block away from the hospital
00:04:13.140 | because I just dropped off my wife and daughter
00:04:15.940 | for a nose and ear and throat checkup.
00:04:18.700 | So the first important thing to know
00:04:20.620 | is that skin in the game matters.
00:04:23.300 | If you're just pontificating with no money at stake,
00:04:26.820 | it's harder to connect the dots.
00:04:28.780 | There is no financial pain if you get your call wrong.
00:04:32.900 | And if you rely on investments to take care of your family,
00:04:35.780 | as I do, you will experience max pain if you mess things up.
00:04:40.540 | This situation is akin to being a PhD researcher
00:04:44.740 | about retirement who has gainful employment
00:04:48.500 | and a wonderful pension waiting for them.
00:04:51.060 | You know, they can research all they want
00:04:53.140 | about retirement lifestyle, withdraw rates,
00:04:55.980 | once you retire, and more, but unless you eject,
00:04:59.900 | press that eject button, and no longer have
00:05:02.860 | biweekly paycheck and a pension,
00:05:05.500 | what you think about retirement will be pretty different
00:05:08.700 | from what you model out.
00:05:10.420 | Personally, I can't afford to be too wrong
00:05:13.220 | with my investments because my investments
00:05:15.660 | are what generate enough passive income
00:05:18.220 | so both my wife and I don't have to work
00:05:20.620 | until our kids go to school full-time.
00:05:23.100 | You know, this time is precious,
00:05:24.180 | and we can't afford to lose this time.
00:05:26.500 | So having financial exposure is very important
00:05:29.820 | for making better forecasts.
00:05:33.100 | It's kind of like when you're arguing with a friend
00:05:35.940 | and she believes one thing, you believe another,
00:05:39.180 | and you just say, "Look, let's bet."
00:05:41.540 | And once you say, "Let's bet," that puts skin in the game,
00:05:44.580 | that crystallizes the odds, and if you really believe
00:05:48.420 | in what you're saying, then you'd be willing to bet.
00:05:51.820 | Otherwise, you'll just shy away.
00:05:53.660 | All right, two, you wanna invite dissension,
00:05:57.180 | people who disagree with you.
00:05:58.900 | Getting things wrong is a part of investing.
00:06:01.740 | Therefore, listen to people who have an opposing view.
00:06:06.020 | You can publish your thesis or talk about your thesis
00:06:09.500 | and invite others to tear it up
00:06:11.820 | because finding your blind spots is really key.
00:06:15.540 | You won't know what you don't know.
00:06:17.900 | So with Financial Samurai, I have this platform
00:06:20.460 | where I can publish a post, and then people can comment
00:06:23.740 | and say, "You're an idiot.
00:06:25.260 | "I agree with you.
00:06:26.480 | "Have you looked into this and this and that?"
00:06:29.020 | It is vital to see the other point of view,
00:06:32.860 | the other side of the story,
00:06:34.300 | because if you just have people saying,
00:06:35.760 | "Yes, sir, yes, ma'am, I agree with you.
00:06:37.720 | "I love your thesis."
00:06:39.080 | Whatever it is, you are gonna develop these blind spots,
00:06:42.820 | and you might suddenly think your poop doesn't stink
00:06:45.980 | and you're just God's gift to earth.
00:06:48.380 | But the reality is every experienced investor
00:06:50.940 | has lost a ton of money before.
00:06:53.060 | Hopefully, we can all get it right at least 51% of the time.
00:06:56.300 | If we do, we're gonna win long-term.
00:06:58.740 | But in the short term, it's really hard,
00:07:00.740 | and you need to at least call the direction.
00:07:03.140 | Once you get that direction correct,
00:07:05.020 | then you can look into the minutia.
00:07:06.980 | Please uncover your blind spots.
00:07:10.240 | All right, three, don't be delusional.
00:07:13.280 | All right, post-mortem analysis is very important.
00:07:16.920 | Ask yourself, did you get the call right
00:07:19.120 | because of your reasonings or because of something else?
00:07:22.880 | Because if you confuse your reasonings with something else,
00:07:25.980 | you're gonna be delusional.
00:07:27.580 | Let's use an example.
00:07:29.200 | Let's say you predict so-and-so
00:07:31.120 | is gonna win the tennis match,
00:07:32.920 | and you predict because the forehand,
00:07:35.840 | the person's forehand is better and they're fitter.
00:07:39.000 | And the person ends up winning.
00:07:40.660 | So you're suddenly thinking, ah, you're a genius.
00:07:44.160 | But the real reason why your person won
00:07:47.160 | was because the opponent had a stomach tear,
00:07:51.000 | and he twisted his ankle, and he was getting over a cold,
00:07:55.680 | so he couldn't perform to 110% of his ability.
00:07:59.760 | If you don't know that,
00:08:01.320 | then you are going to over-optimize
00:08:03.680 | on betting on the person you thought
00:08:05.680 | who would win, and over the long run,
00:08:08.280 | you might get very frustrated when that person doesn't win
00:08:12.480 | because of your reasoning.
00:08:14.000 | The same thing goes if you got your investment thesis wrong,
00:08:18.040 | but the results turned out correctly.
00:08:20.960 | Please don't forget that you got your investment thesis
00:08:23.400 | wrong, and basically luck bailed you out.
00:08:27.280 | Very important.
00:08:28.400 | Don't confuse being born on third base
00:08:31.560 | with hitting a home run.
00:08:32.880 | All right, final point here on how to be
00:08:35.320 | a better forecaster and hopefully a better investor,
00:08:38.520 | because it is hard.
00:08:39.840 | Man in the Arena, a great speech
00:08:42.400 | by President Teddy Roosevelt.
00:08:44.680 | Here is part of the speech.
00:08:47.160 | It is not the critic who counts,
00:08:49.000 | not the man who points out how the strong man stumbles,
00:08:52.140 | or where the doer of deeds could have done them better.
00:08:55.360 | The credit belongs to the man who is actually in the arena,
00:08:58.840 | whose face is marred by dust and sweat and blood,
00:09:02.200 | who strives valiantly, who errs, who comes short again
00:09:06.600 | and again because there is no effort without error
00:09:10.080 | and shortcoming, but who does actually strive
00:09:13.640 | to do the deeds, who knows great enthusiasms,
00:09:17.200 | the great devotions, who spends himself in a worthy cause,
00:09:21.800 | who at the best knows in the end the triumph
00:09:24.840 | of high achievement, and who at the worst, if he fails,
00:09:29.000 | at least fails while daring greatly,
00:09:32.600 | so that his place shall never be with those cold
00:09:36.120 | and timid souls who neither know victory nor defeat.
00:09:41.120 | I love this speech.
00:09:43.080 | I have the speech hung up in my bathroom,
00:09:45.320 | so every morning I see it to not give up.
00:09:49.120 | Except you will get plenty of calls wrong
00:09:51.800 | and lose money in the future.
00:09:53.040 | That's just the way investing is.
00:09:55.480 | But stay humble and recognize luck.
00:09:58.340 | To achieve financial independence,
00:10:00.080 | to make money on risk assets, you must continue to battle
00:10:04.440 | and suppress the fear of looking like an idiot
00:10:08.440 | by taking calculated risks.
00:10:10.640 | Think about it.
00:10:11.680 | When I was coming up with my investment thesis
00:10:13.640 | on the most bullish indicator I've seen this year,
00:10:17.220 | I was kind of concerned.
00:10:19.320 | I was afraid, like, is this investment thesis correct?
00:10:23.320 | Will readers and listeners think I'm a dumbass?
00:10:26.480 | But then I thought to myself,
00:10:27.840 | well, I look like a dumbass all the time
00:10:30.440 | based on my writing and my podcast.
00:10:33.280 | Hey, y'all tell me that all the time in the comments
00:10:36.080 | and I've come to embrace it, right?
00:10:38.180 | So I wanna look at those blind spots
00:10:40.160 | and I wanna do my due diligence and figure things out.
00:10:42.840 | And I said, you know what?
00:10:44.200 | People get things wrong all the time,
00:10:45.920 | but you know that if you don't try,
00:10:47.480 | if you're not in the arena,
00:10:49.160 | putting out your investment thesis,
00:10:50.840 | battling it out on the tennis court or on the pitch,
00:10:54.280 | you're never going to win.
00:10:55.820 | You're never gonna win at all.
00:10:57.400 | The reality for me is that money is too important
00:11:00.200 | to be left up to pontification and just winging it.
00:11:03.360 | It's one of the reasons why I started this podcast
00:11:05.680 | and why I started Financial Samurai in 2009,
00:11:08.640 | because writing and recording this voice
00:11:12.120 | helps me think things through.
00:11:14.720 | Because when I write, I've often discovered,
00:11:17.160 | ah, I missed something.
00:11:18.840 | And it just really helps crystallize
00:11:20.640 | and make you think more purposefully.
00:11:23.120 | So I highly suggest it for all of you
00:11:25.200 | before you make an investment thesis or investment decision.
00:11:29.200 | Moving forward, I'm pretty confident
00:11:31.680 | the worst is over for this bear market.
00:11:34.600 | 3577 on the S&P 500 reached in mid-October, 2022.
00:11:39.600 | Hopefully, likely is the bottom.
00:11:42.760 | As a result, psychologically, mentally,
00:11:44.880 | I feel more at peace that we're not gonna go down
00:11:47.520 | to the depths of despair like we did
00:11:50.480 | during the global financial crisis in 2008 and 2009.
00:11:54.000 | However, the X factor is whether the Fed
00:11:56.880 | will really recognize, verbally, publicly recognize
00:12:01.040 | that inflation has peaked and that they will slow down.
00:12:03.920 | They are the X factor.
00:12:06.720 | And I hope that my podcast and my articles,
00:12:11.040 | just speaking out will help pressure them
00:12:13.160 | to be more balanced and thoughtful
00:12:16.640 | for the middle class going forward.
00:12:18.560 | Because the last thing we want
00:12:20.000 | is to have millions of people unemployed
00:12:22.360 | for the sake of pushing down headline inflation
00:12:25.240 | by two or 3%.
00:12:26.840 | Yeah, inflation stings, but losing your job,
00:12:29.840 | losing your livelihood, stings even worse.
00:12:32.760 | All righty, if you enjoyed this podcast,
00:12:34.400 | I'd love a positive review and a share with your friends.
00:12:38.040 | If you wanna support my work,
00:12:39.360 | check out Buy This, Not That
00:12:40.720 | at financialsamurai.com/btnt.
00:12:44.840 | If you wanna subscribe to my newsletter,
00:12:46.600 | it's financialsamurai.com/news, N-E-W-S,
00:12:50.880 | so you don't miss a thing.
00:12:52.200 | And finally, don't forget to check out the show notes
00:12:54.400 | because I'll include the relevant links.
00:12:56.400 | Thanks so much, everyone.
00:12:57.240 | It's time to pick up my wife and daughter.