In most endeavors — sports, business, romance — sustained aggression produces positive results. Don’t give up, double your efforts, keep pushing until you reach your goal, and never be satisfied.
Aggressiveness is a personality trait of many superachievers. It works well in most situations in life, but aggressiveness has to be directed at the right target. In most endeavors, the ultimate goal is very clear, and if a mistake is made, it is shrugged off, and you keep pushing forward. In sports, the goal is to win, and there is no question about how to do so.
The stock market is a different animal. Many traders and investors embrace an aggressive mindset, but they quickly find out that the stock market is not kind to raw aggressiveness. Undisciplined aggression in the stock market is a recipe for disaster. Continued aggression when a bad stock selection is made or a trade goes wrong will cause great harm to achieving the ultimate goal of making money. Aggression in the stock market must be quickly tempered when you are heading in the wrong direction. Admitting failures and mistakes at any early stage is essential to produce superior returns. Humility must be embraced.
Silicon Valley futurist and forecaster Paul Saffo used the phrase “strong convictions, weakly held” as a characterization for the mindset needed to navigate uncertainty like that which exists in the stock market. The best approach is to form bold, fact-based opinions, but remain flexible enough to abandon them when new facts emerge. Act decisively after doing deep research and bet big on a thesis, but avoid the ego trap of clinging to a losing position. Be aggressive with your best ideas, but pivot and modify your stance very fast as new information becomes available or conditions shift.
The key to this approach is to first build a high level of conviction through rigorous research and study. But be aware that high conviction doesn’t mean you are guaranteed a positive outcome. The most dangerous situations occur when you believe that you have found a “sure thing” and are not open to changing your mind despite new evidence.
Conviction must be balanced with holding loosely. Conviction helps you hold through volatility and the randomness of market action, but it requires constant vigilance. When there is a substantive change, you have to loosen that hold on your conviction. You can’t be stubborn and overlook fundamental shifts, but you don’t want to be shaken out on inconsequential matters.
You make big money by being highly aggressive when conviction is high, but you also will lose big in those conditions if you are not willing to admit a mistake and change your position when there is good reason to do so. Be big, bold, and confident, but be fast to embrace changing circumstances.
The best investments in the stock market are typical themes. Investors who had high conviction at an early point in themes like the internet, bitcoin, and AI have seen tremendous returns, but holding those investments in the early stages required significant conviction. It would be very easy to take gains quickly as the critics piled on and explained why you were a fool to embrace these new ideas.
How does an investor implement the “strong conviction, loosely held” philosophy?
* Rank your ideas based on your level of conviction. Which themes, stocks, or trading strategies do you have the most confidence in? Why do you believe they will work, and how do you build your position to achieve an outstanding return?
* Stress test your ideas. Play devil’s advocate and don’t just look for evidence to support what you already believe. What is the thinking of the folks on the other side of your trade? If something substantially has changed, then get out.
* Use short-term trading tactics to expand and contract your level of risk. The key is to have your greatest exposure when you have the most confidence and to reduce risk if you have some doubts. Trade around a core position and diversify by time frame.
“Strong convictions, weakly held” is not a passive approach to the stock market. It is very disciplined aggression. It rewards the investor who dances with the market volatility rather than fights it.
Humility-with-guts is a superpower for investors.
At the time of publication, DePorre had no position any security mentioned.
