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Conviction is Everything

The Biggest Mistake Retail Investors are Making


Last week, one of my close friends mentioned in passing that he had bought Virgin Galactic, the space tourism company owned by Sir Richard Branson. Since purchasing a few months back, the stock had continued to slip, and he sold his entire position. The following day the stock jumped 39% after the FAA approved its passenger spaceflight license.


Such is life.

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To be honest, the whole conversation blew my mind. While I have no affinity to Virgin Galactic itself, I think it is fair to say that any investment into a space exploration company is likely to be a volatile, ultra-long-term investment. In fact, I fail to think of a single investment that would require a more forward-looking investment thesis, yet he held for just three months.


As I dug a little deeper, his actions became a lot easier to understand. Having purchased the company off the back of a headline he saw online, he had no problem selling even faster at a loss. As the stock tanked, his defensive wiring kicked in, and, in an effort to protect from further losses, he sold. Seems rational, right? Many of us would have done the same, simply because it's difficult to maintain faith in a company you know nothing about.


All this got me thinking; potentially, the biggest reason retail investors struggle with stock selection and even passive investing is a lack of conviction around what they hold.


Narratives are Not Enough


Many of the most-discussed investments or stock picks are notorious for being surface-level in nature. DIY investors will blurt their two-line quip about a certain company they have invested in, but if you go in search for some more in-depth supportive analysis, you will be left empty handed. The truth about modern day retail investing:

Many of the positions are populated by investors whose investment thesis is supported by little more than a tagline they pulled following an ‘in-depth’ 3 minute google search.


Now, I'm not saying this whimsical investment approach applies to everyone, nor am I saying that searching online for stock tips is inherently a bad thing (I do it all the time). What I will say is, this quick stock tip search needs to be the beginning of your investment research, not the end.


You can borrow someone’s idea, but you cannot borrow their conviction.


By simply taking another person’s stock tip you leave a plethora of unanswered questions.

  • How much should I invest?

  • At what point should I sell?

  • What changes in company outlook will change the investment thesis?

These are all questions you need to answer on your own.


Do Your Homework


Over your investing lifetime, major corrections WILL happen. Any number of random short-term events can tank a stock. When that happens, you need something to fall back on to avoid doing something you later regret.


You will never expose yourself to the exponential returns of truly innovative companies if you don't understand why you own the stock in the first place.


Not one of the Mega-Cap companies that dominate the current investing landscape achieved this status without first experiencing multiple bouts of gut-wrenching volatility.


Those who thought Amazon was just an online bookstore lacked the conviction to hold as the stock plummeted over 90% after the dot com crash. However, for those who had the iron stomach and foresight to see the company's true potential, the rewards were life-changing.


This works in the opposite direction as well. Those who thought Netflix was simply a DVD vending machine company sold their shares as the company jumped in value, while those who held their conviction since IPO multiplied their investment by 500 times without even having to lift a finger.


In short, you need to do your own homework if you want to be a successful active investor. Investing in every tip you see online may work over the short run, but without an understanding of what you own and why you own it, you are in for a painstaking investment experience laced with perpetual uncertainty.