“I am a dynamic figure, often seen scaling walls and crushing ice. I have been known to remodel train stations on my lunch breaks, making them more efficient in the area of heat retention. I translate ethnic slurs for Cuban refugees, I write award-winning operas, I manage time efficiently. Occasionally, I tread water for three days in a row.”
That’s the opening to an award-winning college application essay. The punch line at the end of the piece is, “But I have not yet gone to college.”
One could write a similar essay about investing.
“I build 35-tab dynamic Excel models with detail 10 years in the future. I write investment memos that rival War and Peace. Occasionally, I pull all-nighters to read every SEC filing on a company. But I have not yet found conviction.”
An investor’s entire career is a search for a few moments of conviction.
Consider the context of investment conviction. We’re looking for an unyielding belief that we’ve found a mispriced asset that somehow thousands of other smart investors — the market — missed. That makes conviction the most powerful and important force in investing.
Most investments are made of sufficiency, not conviction. The investment is good enough. Close enough. Consensus enough. Small enough. It won’t hurt that bad if you’re wrong, but it won’t outperform the market by much if you’re right. To generate great returns, which most investors fail to do, you must find conviction and bet big.
The journey to conviction happens through a three-step process: strategy, idea, and sizing.
The Foundation of Conviction
Failure to find conviction often originates from a lack of conviction in how one wants to invest.
An investor must find conviction in a strategy that matches his style before he can find reliable conviction in individual ideas. If you don’t know what you’re looking for to generate conviction in your heart and mind, then any conviction you find will be built on a base of sand.
It doesn’t really matter what your strategy is. The only thing that matters is that you have conviction in the strategy.
Your strategy might be buying high-quality businesses at fair prices and owning them forever (Warren Buffett). It might be owning the best companies and shorting the worst (Julian Robertson’s Tiger). It might be buying entire software businesses that have incredible unit economics hidden by accounting conventions and inefficient operations (Orlando Bravo’s Thoma Bravo). It might be rapidly deploying capital into a broad representation of late-stage venture-backed companies (Chase Coleman’s Tiger private fund strategy, at least at one point).
Finding strategy conviction is a process most investors never complete. It often requires painful experience in the market to learn lessons about what doesn’t work. When something doesn’t work, it directs one to what might. When something works, it builds conviction in the strategy behind the idea. Time, experimentation, and adjustment are the only paths to finding strategy conviction. There are no shortcuts.
Only with conviction in your strategy can you find conviction in investment ideas and bet appropriately when you find them.
The Magic of Conviction
Finding conviction is more akin to magic than science. There’s no common formula to get to conviction regardless of your strategy, but there are four key things to remember in your search.
Conviction is rare.
Lack of conviction is a sign you’re doing it right. If you find conviction all the time, you have no conviction. You’re lucky to hit conviction once a year. One must consider a lot of investment ideas before finding a good one. The journey to conviction is a patient exploration of mediocrity in search of one great idea.
Mediocrity must be avoided.
Mediocrity is where most investors get lost in their hunt for conviction because it distracts them from finding great ideas. A mediocre idea is almost good enough to think it’s worthy of conviction, but it’s not bad enough to obviously ignore. Depending on your strategy, you should deal with mediocrity in one of two ways: Kill it fast and move on or put it in your portfolio in a small size as good enough and move on.
Conviction lives on intangibles.
Reasonable ideas don’t create conviction because reasonable ideas are apparently decent. Conviction requires one to overcome the unreasonable to bloom. Only the embrace of the unbelievable can create conviction. The unbelievable can only be understood on intangible qualities — human nature, products, emotion, instinct. Unbelievable ideas are not found in tangible numbers and performance until they are already believable. Fundamentals will prove your convictions right later.
Conviction is dangerous once it consumes you.
The power of conviction can blind the convicted to apparent truths. Denial of truth always results in suboptimal long-term investment outcomes, so conviction must be tested. The convicted must detach the emotional component necessary to believe the unbelievable to rationally test and challenge conviction. When conviction survives tests, then you bet big.
“Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.”
— Warren Buffett in his 2022 Annual Letter
Stan Druckenmiller tells a famous story of shorting the British Pound at the Quantum fund. He told Soros he wanted to go short 100% of the fund against the Pound. Soros looked at him with disgust. Then Soros told Druckenmiller he should do 200% because the idea was so good.
That’s conviction with appropriate sizing. If you have ideas of high conviction but only swing small, your results will never show your convictions.
A few high conviction ideas that turn out to be right, and aggressively sized, make every investment career. Venture capital, private equity, public, fixed income. It doesn’t matter. Embracing this reality demands you to bet big when conviction is with you.
The Universal Power of Conviction
When you find conviction, you reach a confidence rarely found in any pursuit, not just investing. Finding conviction and betting big on it is a required act in any pursuit of greatness. All ideas that turn into great realities start with a spark of conviction that compels major action.
The rarity of conviction grants the convicted the power of convincing. When others hear a convicted person speak, it’s intoxicating and infectious. People follow conviction because it’s authentic. Fake conviction is no conviction at all. You can’t fool yourself into conviction. It only happens through a journey of open-minded exploration and discovery whereby you are sold on the idea. After you are convicted, your conviction does the selling for you.
Hopefully, my conviction about conviction has convinced you to keep looking for it and bet big when you find it.