The Conviction in Investing | A 5Y View
Find what you truly believe in, and go all in.
Recommended by
Kai Liu, Partner at 5Y Capital
This article is republished from The Deload
Author: Doug Clinton
Original: https://www.thedeload.com/p/how-to-find-conviction
How to Find Conviction
"I am a dynamic figure, often seen scaling walls and crushing ice. I have been known to remodel train stations during 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."
This is the opening of a prize-winning college application essay. The kicker at the end: "But I have not yet gone to college."
One could write a similar essay about investing — "I built a dynamic Excel model with 35 tabs and detailed a vision of the future ten years out. My investment memos rival War and Peace in length. Sometimes I stay up all night reading every SEC filing on a company. But I have not yet found conviction."
For investors, finding genuine conviction is the most important thing in a career.
Why? Because we might discover an undervalued asset that thousands of other smart investors and the market itself have overlooked. This requires an unshakable belief. And so conviction is the most powerful and important force in investing.
Most investing is done with caution rather than conviction. That's probably good enough — close enough, consensus enough, sized modestly enough. If you're wrong, you won't lose too much. If you're right, you won't outperform by much either.
To achieve outsized returns, you must find conviction and size it accordingly. For most people, this is a difficult task.
The journey to finding conviction can be broken into three steps: strategy, thinking, and sizing.
The Foundation of Conviction
Conviction is hard to find, often because of a lack of confidence in one's approach.
You must explore and believe in a strategy that fits your style before you can find reliable conviction in individual ideas. If you don't know how to cultivate conviction within yourself, any conviction you do acquire is built on sand.
It doesn't matter what your strategy is. The only thing that matters is that you have confidence in it.
Your strategy might be buying high-quality businesses at fair prices and holding them for the long term (Warren Buffett). Or it might be going long the best companies and shorting the worst (Julian Robertson's Tiger). Or acquiring software businesses with hidden, incredible unit economics (Orlando Bravo's Thoma Bravo). Or rapidly deploying capital into a broad representation of venture-backed late-stage companies (Chase Coleman's Tiger private equity strategy, at least at one point).
Finding strategic conviction is a task most investors never complete. It often requires accumulating painful experience in the market and learning valuable lessons from it. When an approach doesn't work, it points you toward what might. When an approach does work, it builds conviction in the strategy behind it. Time, experimentation, and adjustment are the only paths to strategic conviction — there are no shortcuts.
Only with confidence in your strategy can you find conviction in investments, and only then can you size them appropriately.
The Magic of Conviction
The process of finding conviction is more magic than science. There's no universal formula, but four key points are worth remembering.
Conviction is scarce
A lack of conviction may be the norm, and that's a sign you're on the right track. If you always feel full of conviction, you've probably lost sight of what real conviction actually is. Having genuine conviction even once in a year is fortunate. The journey to find it is an exercise in patience. Your goal is to discover one great idea through continuous exploration.
Avoid the trap of mediocrity
In the search for conviction, many investors get lost in the trap of mediocrity, which distracts from the pursuit of great ideas. Plenty of mediocre ideas seem attractive enough. Depending on your strategy, you should treat them in one of two ways: either dismiss them quickly and move on, or incorporate them into your portfolio at small size and move on.
Conviction lives in the intangible
Many ideas seem reasonable on the surface but fail to inspire conviction. Conviction only emerges when you break from convention and embrace the unreasonable — even if much seems unbelievable at first. This process involves intangible qualities: human nature, emotion, instinct. Before many unbelievable, crazy ideas become consensus, we may struggle to find convincing evidence through data and performance. But what sustains people is conviction, which ultimately proves itself in time.
Conviction must withstand challenge and testing
Sometimes the power of conviction can blind us to obvious truths, leading to failed investments. Therefore, conviction must be tested. We must strip away necessary emotional factors, believe in unbelievable facts, and rationally examine and question our convictions. Only when conviction withstands this testing can you invest boldly.
Find What You Truly Believe
"We have had satisfactory results because we made about a dozen truly intelligent decisions — roughly one every five years." — Warren Buffett, 2022 Annual Letter
Stan Druckenmiller tells a story about shorting the British pound at his Quantum Fund. He told Soros he wanted to put 100% of the fund into the trade. But Soros suggested he should do 200%, because the idea was that good. If you have a great idea but only put in small size, you're not really expressing your belief.
A strongly convicted idea that proves correct, sized appropriately, can change any investor's career. To succeed in investing, you must size your true beliefs more aggressively.
When you find conviction, you gain a rare confidence that extends beyond investing. In the pursuit of greatness, finding conviction and committing boldly is essential. All ideas that become great realities begin with a spark of conviction that compels you to take significant action.
The scarcity of conviction can be a source of tremendous power. Those who possess genuine conviction carry an intoxicating force and infectiousness in their words. People are moved by this belief and follow it because it is real. Conviction must be authentic. You cannot trick yourself into having it. You can only arrive at true belief through repeated exploration. Once you are infected by conviction, your belief will empower you in turn.
May you continue searching for what you truly believe. And when you find it, commit boldly.
5Y Capital seeks out, supports, and inspires solitary entrepreneurs, providing support from the spiritual to the operational. We believe that if the "crazy" you in others' eyes begins to be believed in, the world will become a different place.
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