This was what someone told me after I joked that I had taken profit from a position way too early and that the stock price doubled after I sold.
Aside from the fact that I was quite taken aback when this was supposed to be a light hearted conversation and he went all “serious mode” on me, his point hit the nail on the head.
There are times when I entered a position at a great price but left too much on the table. These are led by poor judgement, impatience and… yes, a lack of conviction on my investment thesis.
Conviction is about the level of sureness you feel. For myself, high conviction usually happens when I did my research and the numbers makes sense to me that it is a great stock to own, be it due to cheapness or great business fundamentals.
This is also part of the reason why I started writing down my case studies. It helps me organise my thoughts about a company and if my piece could not even convince myself to own the company stock, it means that I have not done my homework well enough. I’ll admit that there are times when I went head first without writing or that I know I won’t be able to convince myself fully that it is a well thought-out investment case. It’s a bad habit of mine (greed) and I working on correcting it.
On the other hand, the level of certainty you have does not necessarily correlate to your returns. A great example would be that my bullishness on Scorpio Tankers (NYSE:STNG) only gave me headaches and heartaches whereas my punt on ExpressSpa (NASDAQ:XSPA) had a 300% return in a week (due to some news that it is converting its airport spa centres to Covid-19 testing centres).
Stock picking remains an element of speculation and is more art than science. Conviction in a stock is very much a matter of perspective. I’ve seen people with so much confidence (overconfidence perhaps) in a stock but his case is mostly built on 1 or 2 pointers and he did not see the whole picture, or that it didn’t matter. Especially much so for all the recent covid-related plays.
Seriously, the market’s going crazy lately. Just because a company announced that they have this covid-related tech (be it contact tracing, testing, thermal cameras, vaccine etc) people start piling on it and IT IS actually making these speculators huge money. Now they are getting yaya-papaya and starting to do stupid things like calling themselves superinvestors. How I wished Dave Portnoy did not just called Warren Buffet an idiot, it’s clear that by doing so he has jinxed it and angered the market gods. Andddd now we are on our way to a stock market correction.
Okay, before anyone starts to realise that I’m going off topic, let’s talk about borrowed conviction, which means relying on other people’s research and stock picks. I feel that doing so, well for me, will definitely not make it easy to maintain a position for long and you will more liable to make mistakes such as taking profits or losses too early.
I believe that in order to stay in your stock positions and not be swayed by the comments or articles, it is important to have a relatively deep understanding of the business and the risks it entails. I would like to highlight that knowing and having the appetite to stomach the risks is crucial because this is what keeps you awake at night if you don’t do this well enough. The fear that results from knowing the unknowns.
Finding the edge that works for you is not an easy task and it can take a great effort to do so. But once conviction is build, its easier to deal with stuff like draw-downs and volatility. Until that time, you will, like me, keep jumping from one queue to another since one’s queue always seems to be not moving (or the grass always seem greener on the other side, take your pick).