What Conviction Actually Costs
Welcome to issue #26 of The Davem Dish. Every two weeks I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
A friend of mine emailed me last week asking about a stock he’d been holding for two years. It was down 60%. I asked what he thought the best move would be. His response: “I still have conviction in the thesis…I think it will rebound.”
I hear some version of this often. And every time I read it, I think about how successfully the financial industry has trained people to use the word “conviction” as a shield against one of the most expensive mistakes in investing — holding a loser long after the price has told you to leave.
Conviction is one of those words that sounds like wisdom.
Have conviction in your ideas. Size up your highest-conviction positions. Don’t sell what you have conviction in.
The word echoes through every podcast, every CNBC segment, every fund manager interview. It’s become the unquestioned virtue of serious investing.
Let’s explore what it really means and what it costs.
One Word, Two Meanings
The first problem with how conviction gets used is that it actually means two different things in industry usage, and the two meanings get blurred together.
The first meaning is about portfolio construction. A “high conviction” fund holds a concentrated portfolio with the biggest positions being the manager’s strongest ideas. That’s a sizing decision. It has a real benefit in the form of more upside when the analysis is right. It’s a coherent strategy.
The second meaning is about pain tolerance. A high-conviction investment is one that an investor believes will ultimately be highly profitable and is worth holding even at the cost of enduring losses along the way. That’s not a portfolio construction principle. That’s an emotional posture.
When you hear “have conviction,” nine times out of ten the speaker means the second thing while leaning on the respectability of the first. The implication is that good investors hold through pain because that’s what conviction means. The structure of the language quietly substitutes a behavior — refusing to sell losers — for a virtue.
And that substitution is where the damage starts.
The Heroes
The reason conviction-as-pain-tolerance feels so unquestionable is that we’ve all heard the same story. Michael Burry shorting the housing market in 2007 while his own investors threatened to pull their money out. He held a contrarian position through ridicule, doubt, and pain. He made history.
It’s a great story and a misleading one — and not just because of survivorship bias. Look at what Burry did after the Big Short.
He pivoted his fund toward water and farmland investments. He’s spent the years since making bearish public calls on the market with predictions of crashes in 2015, 2017, 2019, 2020, 2022, and 2023. A few were correct but most weren’t. In January 2023 he posted a one-word tweet to his followers: “Sell.” Two months later, after the market rallied, he posted again: “I was wrong to say sell.” Later in 2023 he shorted semiconductors, which then went on to hit all-time highs. One analysis of his major public calls between 2017 and 2023 found that roughly 71% were wrong.
The conviction that made Burry famous didn’t reliably help him again. The legend gets told as if the holding itself was the source of the return, when in fact the analysis was right and the holding gave the analysis time to play out. Strip away the analysis and the holding is just stubbornness.
Two more recent cases.
Bill Ackman and Valeant Pharmaceuticals. Ackman’s Pershing Square bought Valeant at an average price of around $166 per share. The position was reportedly more than 20% of the fund’s assets. A textbook high-conviction position. As the price fell, Ackman publicly defended the stock, took a board seat, and added to the position. He told his investors and the media that the market was wrong about Valeant. He had conviction in the thesis.
He liquidated the entire position at about $11 per share. Total loss: approximately $4 billion or 93%. In his 2017 annual letter, Ackman wrote: “Clearly, our investment in Valeant was a huge mistake.”
Cathie Wood and ARK Invest. Her ARK Innovation ETF (ARKK) returned about 153% in 2020 and Wood became the public face of high-conviction investing for an entire generation of retail investors. Then ARKK fell 24% in 2021, 67% in 2022, and roughly 78% peak-to-trough from its February 2021 high. Through all of it, Wood defended her positions, called the drawdowns buying opportunities, and reminded investors of her five-year horizon. ARK’s total assets under management fell from a peak of around $59 billion to about $11 billion. Morningstar estimated ARK’s funds destroyed roughly $14 billion in shareholder wealth over the decade, with ARKK alone accounting for about $7.1 billion.
Three of the most public, most respected, most credentialed conviction investors of the modern era. Each had a thesis, defended it through the pain, and was wrong long enough to inflict damage on the people who were trusting them.
The takeaway isn’t that they’re bad investors. They’re not. Every good investor is wrong some of the time. The takeaway is that conviction, by itself, doesn’t protect you from anything. It only feels like it does until it doesn’t.
What the Research Actually Shows
The behavioral finance researchers Brad Barber and Terrance Odean published a paper in 1999 called The Courage of Misguided Convictions. The closing line: “Overconfidence provides the will to act on these biases. It gives us the courage of our misguided convictions.”
Odean’s related research on the disposition effect — the tendency to sell winners too early and hold losers too long — estimates this single behavioral pattern costs retail investors roughly 4.4% annually. Investors are about 60% more likely to sell a winning position than a losing one. The reason they hold the losers, when you ask them, is almost always some version of “I still believe in the thesis.”
That phrase is doing damage to portfolios. Most of the people saying it aren’t holding for any analytical reason. They’re holding because selling means admitting they were wrong, and the human mind will do almost anything to avoid that admission. Conviction is the word we use to make that easier.
Psychologists call this the sunk cost fallacy. Once you’ve put money, time, or public statements into a decision, you become resistant to evidence that the decision was wrong. The more you’ve committed, the more resistant you become.
Investing is a perfect environment for this bias to operate. You take a position. The position moves against you. Now you have two pieces of information that point in opposite directions — your original analysis, and the new price action. A rational actor would weigh both. A human actor weighs the original analysis more heavily because they’ve already paid for it.
What makes investing uniquely difficult is that the financial industry has given you a culturally approved word — conviction — that lets you frame the bias as a virtue. You’re not being stubborn. You’re not refusing to admit you were wrong. You’re a conviction investor. The vocabulary itself is doing the work of the bias.
Most investing virtues have a corresponding vice everyone can name. Confidence becomes arrogance. Patience becomes paralysis. Skepticism becomes cynicism. Conviction has no opposite that anyone uses. The word itself gives you no signal about which version you’re holding. That’s the trap underneath the trap.
I’ve learned this the painful way more than once. Companies I rode down because I had a thesis and conviction that they’d rebound. The lesson was that no analysis is good enough to justify holding through that kind of price action without an exit plan. You can’t reason your way out of a 60% drawdown. You can only get out of it long before it gets there.
What’s Actually Worth Having Conviction In
So is conviction useless? No.
The trick is using it for what it should be used for.
Conviction in a single position is dangerous because it conflates two things — your belief about the company and your belief about the price. Those move independently. A great company is not a great investment at the wrong price. A great company that drops 40% might be a buying opportunity, or it might be telling you something you don’t yet know. The price is information. Conviction in the company makes you ignore information.
Conviction in a process is different. That’s worth having.
For me, that means trusting the Davem Method analysis when it identifies a quality company at a fair price. It means cutting losses at 12% without negotiating with myself for another week to see if the stock recovers. It means letting trailing stops do their job even when a position is up 50% in a month and every instinct in my body wants to lock in the gain. And it means not second-guessing a sell when the stock keeps climbing afterward, or a buy when the stop triggers right before a bounce.
The process accounts for the times I’m going to be wrong. It accounts for the times I’m going to be right but not as right as I could have been with a longer hold period. It removes those decisions from the moment of the investment and pre-decides them based on rules I made when I wasn’t emotionally invested in any particular outcome.
That’s the only kind of conviction worth carrying around. Not faith in any one company, or “marrying the stock”, but faith in the system that lets you keep playing the game without one wrong bet sending you back to square one.
Many investors have it backwards. They have weak processes and strong opinions about individual stocks. The result is that they ride conviction in single names down the drain. Strong processes and held-loosely opinions about individual names is what actually compounds wealth over decades.
The Test
Every time you hear “have conviction in your thesis,” try translating it into what’s actually being recommended. Most of the time, it’s “ignore the price action and stay in the trade.” That’s the cognitive bias the research has been measuring for thirty years, made to sound more flattering.
The investors who got famous for conviction did so because they were right once. The far larger group of investors who had identical conviction and were wrong don’t have books written about them. They have smaller portfolios and a mantra they keep repeating to themselves.
I still have conviction in the thesis.
The next time you catch yourself about to say that, try saying the literal version instead: I’m holding because I don’t want to admit I was wrong.
If both sentences feel true at the same time, the conviction isn’t doing what you think it’s doing. And the longer you wait to act on that, the more it’s going to cost you.
The market doesn’t care what you or I believe. It doesn’t read our investor letters. It rewards companies that are growing and exceeding expectations and it punishes companies that don’t. Your conviction has no vote.
Cheers,
Andrew
The hardest part of investing is recognizing which of your own behaviors are quitely costing you returns. I built a free 3-minute assessment to help you figure out which patterns might be holding you back — including the conviction trap.
Take the “Can I Really Beat the Market?” assessment here.
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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.