Capital With Conviction

Every 10-year hold has a first bad quarter, and what you do the week the numbers come in is decided by whether you had confidence in the deal or conviction about it. A stubborn investor also holds through a bad year, so the word needs a definition.

Confidence is a feeling about the evidence. The model clears and the management team can execute. It has a short shelf life. One bad quarter, one surprise on a customer list, and confidence turns into doubt, because it was never anything but a reading of the numbers. The investor who sells at the bottom of year two is usually the one whose confidence was the whole position.

Conviction is a direction you committed to before the pressure arrived, and wrote down, with your reasons. You hold through a bad year because you wrote down early what being wrong would look like, so that when a quarter comes in under the model you argue from the specifics you wrote down instead of from the last report.

Being vague doesn't inspire confidence. Being specific helps to inspire confidence. The specifics of conviction are the ugly ones, written down before the first quarter's numbers come in: the assumption most likely to be wrong, the condition under which you'd sell, the number that would mean the thesis is dead.