“Borrowed conviction is much more dangerous than borrowed money.” - D. Muthukrishnan
Last week, I had given a talk on Chinese Equities (esp. Ali Baba & Tencent) and specifically commented upon the strength of the businesses and optionality therein. I did mention that the regulatory risks remain and their impact on these businesses is highly uncertain and hence one can take exposure to Chinese Stocks, but with a small proportion of one’s portfolio. Basically, all disclaimers were provided and all risks were stressed upon.
The next day, one of the attendees loaded up on Ali Baba for around $ 180, only to see it tank to $ 160 by the end of the week. The same person met me during the week and was regretting having bought the stock post my presentation and was going through buyer’s remorse on an epic scale. This incident made me wonder about the idea of “Borrowed Conviction” and the damage it causes to people’s portfolios and wealth accumulation.
Let me share another example from the depths of the 2020 Market Crash.
I was researching this company from India and was going through its Annual Reports and Quarterly Calls when the crisis hit us with lockdowns and travel bans in March 2020. If you see the Sales chart above, it has been growing consistently for years and Mindtree has gone onto creating a reputation for itself in the Digital Transformation and Technology Services Industry in India, the US, Canada, Europe, UK, and many others.
In spite of the strength of the business, Investors panicked and sold this stock along with others, bringing the price 25% below its Feb prices. There was chaos in the markets, the news channels were filled with doom and gloom, some even predicted absolute catastrophe in the face of the COVID pandemic BUT (a big one), I was excited to buy this company at that time as the markets had announced FIRE SALE on the stock. I loaded up on it with very high conviction on the business model, quality of management, and the size of the opportunity that Mindtree was tapping into.
To be honest, I didn’t know anything about vaccines then, or how long it will take to get out of the economic disruption brought upon us by COVID. What I did know was that the business won’t fail, nor will the size of opportunity shrink, and the management will operate wisely in any situation faced by the company, as had been demonstrated over the years. That was enough for me to go all in.
Today, this stock is the biggest position in my India Equity portfolio with 3X gains in less than 18 months. And this was possible only because of “my conviction” on the idea and not someone else’s. If I had bought this before March 2020 on someone else’s recommendation, I might have panicked exactly the way my friend is panicking about her purchases of Ali Baba.
The above image is a funny one but that’s exactly how “borrowed conviction” looks. You seek to know what Warren Buffet is buying or maybe what the richest investor in your country is buying or maybe what your colleague is buying? And you get into a buying spree on the basis of what others are buying BUT do you have the capacity to hold onto your stocks even if they go through a correction of 30% or more? Do you have the patience needed for the profits to be realized? Do you have the clarity of the business growth while the newsroom is filled with missed quarterly earnings targets or ESG issues being found?
If you don’t, then you will panic and SELL. And in the bargain, lose out on creating wealth which many a time requires “sitting on your ass and doing nothing.”
The above chart is of Microsoft Stock from 2001 to 2011. The stock lost 19% in spite of one holding onto it for 10 years. The news publishers were having a lot of content at the expense of Microsoft during these years. Few news clips are provided here, here, and here.
But the next 10 years, Microsoft stock went up 10X i.e. 1000% +. This period did compensate its investors handsomely for the painful decade before. But the question is how many stayed put? How many understood the Moat that Microsoft had with its MS Office? How many understood the size of the opportunity of the Cloud? Those who did understand these about the company profited handsomely. Those who did not, were chasing some other hot tip or a peek into someone else’s portfolio hoping to benefit this time around.
"You can borrow someone else's stock ideas but you can't borrow their conviction. True conviction can only be obtained by trusting your own research over that of others. Do the work so you know when to sell. Do the work so you can hold. Do the work so you can stand alone." - Ian Cassel
If you read about the lives of most successful investors, you would realize that many of them made the largest gains of their career from 5-10 decisions mainly, and most of them were taken in the depths of crisis and chaos.
Warren Buffett's Berkshire Hathaway bought $5 billion of preferred stock in Goldman Sachs during the 2008 financial crisis. In 2011, Goldman Sachs redeemed the shares, earning Berkshire Hathaway a profit of $3.7 billion. The remaining shares of Goldman Sachs were sold out in 2020 netting him billions of dollars in gains on this trade. He did the same with American Express, Washington Post, and even GEICO.
J.P. Morgan, led by Jamie Dimon, acquired Bear Sterns and Washing Mutual Bank in the 2008 crisis at a fraction of the price in early 2008. These turned out very profitable bets leading to 3X returns in J.P. Morgan stock.
Hedge fund manager John Paulson reached fame during the 2008 credit crisis for a spectacular bet against the U.S. housing market. This timely bet made his firm, Paulson & Co., an estimated $15 billion during the crisis. He quickly switched gears in 2009 to bet on a subsequent recovery and established a multi-billion dollar position in Bank of America as well as a multi-million dollar position in Goldman Sachs.
The data points above have been taken from Google and can be verified. In fact, The movie (BIG SHORT) was based on Michael Bury and John Paulson’s characters and the gains they pulled off while the financial system was falling apart during GFC (Great Financial Crisis). This movie is a MUST WATCH for anyone that wants to understand what conviction looks like, how it feels, and how it could be put to work.
The most appropriate explanation of “Conviction” in Investing context has been provided by Sleepwell Capital - “A differentiated opinion on a company’s long term prospects, with a high level of confidence, achieved after gaining the required knowledge while becoming comfortable with the risks and aware of the consensus view”
The statement above is a loaded one, but a very thoughtful one at the same time. Let’s break this down a bit -
Gaining the Required Knowledge #
You could use many sources for this e.g. books, blogs, discussions forums, interviews, annual reports, quarterly calls, discussions with your connections in the industry, research reports and so many more.
If you are an investor in Passive Index Funds, then gaining the required knowledge need not be as exhaustive as above. But you still will need basic knowledge about the economic growth rate, historical returns, portfolio of the Index Fund, likely volatility, liquidity of the scheme, fees, and taxes. If you ain’t aware of this, your ignorance could come to hurt you in time to come.
None of the subjects shared above may give you a dopamine hit that you get from watching a movie or eating popcorn. But if you have a clear view of your goals, you will breeze through the ‘gaining the required knowledge’ stage.
Many a time, you fool yourself by creating an illusion that you did put in the work e.g. you read a book on a subject and you boldly claim to others that you have read the book or you may even share the picture on Instagram or put a review on Goodreads. But did you just stop at reading the book or did you absorb the message/wisdom in the book? Did you stop at being happy that you read the book or did it bring about a change in you or made you better than before reading the book?
The former is easy, the latter is what is immensely profitable. The former is unconscious in nature. The latter allows your subconscious to absorb the matter. It needs effort and attention, which is possible with journalling, discussing, or brainstorming with others.
High Level of Confidence #
This stage has got a lot to do with scenario analysis i.e. bear case, base case, and bull case. Bull Case projects return with all variables falling in place and you compounding your investment handsomely. This is what most use their Excel Projections for. Some even use Napkin Maths to estimate returns on companies they buy.
But one also needs to evaluate base case and bear case scenarios too. The base case refers to business growth continuing as it is, with similar tailwinds/headwinds i.e. no surprises but business as usual. Whereas the bear case refers to a scenario where business or the industry could be impaired due to developments in the future. E.g. In the case of China, the biggest risks are regulatory in nature and the future course of action by CCP is unknowable and hence that uncertainty has to be factored into one’s bet on China.
I own Alibaba, Tencent & CQQQ (Chinese Index) but my confidence level isn’t at an absolute high, as was during the case of Mindtree investment in 2020. Hence I have limited my positions in China to less than 5% of my whole portfolio and I am comfortable with it knowing how CCP thinks. And my reading on China has provided me a peripheral understanding of the objectives that Xi Jinping aspires to achieve, and hence I am not fearful while many are.
Level of Confidence is a function of playing out various scenarios in your head given the information you know and the context within which you interpret these. One of my favorite tweets regarding China’s Regulatory risks is -
Level of Confidence allows you to keep ‘Fear’ at bay. As for Crypto, my level of confidence in the technology is high and you can even read my post on the subject. But which coin will succeed as the poster boy of this new industry is an unknown. Hence I have spread my bets between Bitcoin, Ethereum, and Chainlink, and all 3 put together, make up for less than 2% of my portfolio.
In time, if and when I get knowledgeable enough about Crypto Assets, I might just increase my exposure to this asset class. But till that happens, my level of confidence decides the game I get to play. Not my emotions, not my friends, not my hero on Twitter; but my level of confidence on the bet itself.
The day your level of confidence goes to 100%, that’s when Ego and Over Confidence are setting in. That’s when you take on unnecessary leverage, unnecessary risks, get complacent and leave very little room for error. This is when you become vulnerable and risk the possibility of ruin. Hence, knowing that nothing is certain except for Death helps in framing your decision-making process.
Comfortable with the Risks #
I have spoken a lot on this subject in my previous post and hence will limit my expression here. All I would like to say is that ‘Everything includes some element of Risk’. You can’t run away from it. You can only -
Avoid it (By staying away from Complicated Strategies)
Mitigate it (Stay within your Circle of Competence)
Transfer it (Insurance)
Accept it
Even making a so-called risk-free deposit with a bank carries an invisible risk i.e. your savings may not be sufficient to meet your future goals. The inflation in education, healthcare, and general living standards will need your Savings to grow at a healthy clip. I assume you would like to keep pace with inflation and not let that economic reality eat into your hard-earned money. But if you only care to preserve the notional amount of your savings, then you can ignore everything I have written in this post and all others. I can only pray for you in that case 🙏🏻
“Risk is what’s left over when you think you’ve thought of everything.” - Carl Richards
Aware of the Consensus View #
The most nonsensical statement I come across “Everyone is ____________”. It could be ‘Everyone is buying that one’ or ‘Everyone is selling this one’. How is it even mathematically possible? If everyone is selling it, then there cannot be a buyer buying from them. If everyone is buying it, then there ain’t any seller selling it since he also is buying. I hope you get the irony of using ‘Everyone’ so loosely.
If someone you know is selling something, then figuring out why becomes very important. Is he doing the same because many other people are doing the same? The Investor I bought Mindtree shares from would be selling because many around him would be doing the same. Irrespective of his reasons to sell, ‘Selling all Equity Holdings’ was a consensus view in March 2020. But that was a consensus view, not mine. I am not the Consensus and hence it didn’t bother me at all.
The consensus view could be taken advantage of instead of being sucked into it. Let me give you a few consensus views that you see playing out around you day in day out -
Being Average is alright - My view is ‘It’s not alright. Progress feels good and hence I set goals for myself and strive to achieve them time and again. In the bargain, I may land up making the right impression on the right people that opens up exciting opportunities for the future.’
Staying Fit is tough - My view is ‘It’s not tough, it just takes a little discipline to fit in a workout routine for the week. When I choose a healthy lifestyle and work out regularly, I create a kind of reputation that attracts only a certain kind of friends I want. It also creates a kind of credibility of being dependable and disciplined. This reputation could also open up many doors in time to come.’
Reading is Boring - My view is ‘It’s not. It just takes practice. Even I don’t feel like reading on many days but I am committed to getting better than yesterday and hence will take on reading ‘One Page’ if not more. And when I started doing it daily, it slowly turned into 2 and 20 and today I finish at least 2 books a month along with many newsletters and publications. This also builds a reputation of you being wise and hence people could counsel with you before making decisions, which brings you friendships and relationships that could be even developed further and deeper.’
In 2016, I was diagnosed with Hyperthyroid and I was experiencing palpitations, persistent tiredness, weakness, and anxiety. When I visited Prime Medical Center in Dubai, the doctor informed me that Surgery was the best option available and treating it naturally won’t work. His level of confidence was bordering on Overconfidence and we almost had an argument over alternative solutions.
I did not agree to his recommended procedure and went on a 3-month reading spree on Thyroid, while I was on medication with 15 tablets on daily basis. I read ‘Thyroid for Dummies’, then came ‘Keto Clarity’, and sometime later I bumped into ‘Bulletproof Diet.’ I was a vegetarian then but the book recommended Organic Animal Protein and something in me urged me to try it out and give it a shot.
And I did. I went all in. I increased my intake of organic meat and dairy products, avocado, butter, ghee, and dark chocolate. I reduced my intake of sugar, grains, fried stuff, frozen foods, and packaged foods. I was on a mission to save myself and was not willing to bite the ‘consensus view’ that taking iodine tablets for life was ok. It wasn’t ok to me. And that decision has been one of the best decisions of my life. Today, I am in the best shape physically and also energetically.
Consensus is one more data point. You ain’t the consensus. You ought to think for yourself. You may seek advice from others you respect. But you still got to take your own call and make your own bets and embrace what gets thrown at you. That’s conviction.
The pic above is from the movie ‘Sully’. A Must Watch if you haven’t yet.
On January 15, 2009, Sully Sullenberger was the captain of US Airways Flight 1549, an Airbus A320 taking off from LaGuardia Airport in New York City. Shortly after takeoff, the plane struck a flock of Canada geese and lost power in both engines. Quickly determining he would be unable to reach either LaGuardia or Teterboro Airport, Sullenberger piloted the plane to an emergency water landing on the Hudson River. All 155 people on board survived and were rescued by nearby boats.
His statement post the ‘Miracle on the Hudson River’ is the most eloquent explanation of what conviction can translate into - “One way of looking at this might be that for 42 years, I've been making small, regular deposits in this bank of experience, education, and training. And on January 15, the balance was sufficient so that I could make a very large withdrawal."
Many things you do, need conviction at the core of it. If it’s being done today because people around you do it or it’s been done that way since you were a child, that complacency will come back to bite you. Or maybe haunt you and it’ll be too late to turn the ship around.
So before your ship comes to a screeching halt, I urge you to look at your life and ask yourself ‘Am I doing ________ because it’s my conviction or is it someone else’s?”
You could use this question to assess your habits around Money, Self Development, Relationships, Health, and/or Career. And I urge you to start today. I once started with just a page a day so that I could get wise enough to tap into profitable opportunities around me. What’s your baby step going to be and for building conviction towards which goal?
I look forward to hearing from you…
Recommendations for the Week #
If you’d like to hear the G.O.A.T. Mr. Buffet talk about Conviction, then this is the video to plug into.
Being a Creator requires huge amounts of energy, resources, and attention towards creating content and supplying it to the gatekeepers of platforms like Twitter, FB, and others. Own the demand talks about the much more durable side of the content business i.e. Capturing the Demand. This one is a fascinating read if you are keen to build an enterprise in the digital realm.
Kevin Kelly is one of my favorite writers and his ‘68 Pieces of Unsolicited Advice’ remains one of my most special posts ever. But the one sharing here is his new post where he makes a case for being ‘Optimistic’. It’s an interesting take on this mindset and shows the reader how to benefit from the emerging trends of the future.
This post on Covid informs you about the reality of COVID and its possible transition towards being declared as an ‘endemic’. One must be informed about this, so that fear doesn’t get a stronghold on you or your loved ones.