The Conviction To Hold

Ian Cassel Blog, Educational 14 Comments

Extraordinary returns follow extraordinary discipline. Discipline in buying and selling, and maybe the most important one of all, holding. Developing the conviction to hold is something that I’ve learned over time. It didn’t come easy. The basis of this article is to give some insight on how to develop the conviction to hold your winners. It is very tempting to sell along the way, and it’s okay to take a little off the table, but the big money is made by holding.

“It never was my thinking that made the big money for me. It always was my sitting.” — Reminiscences of a Stock Operator

Many of us, myself included, look at stocks that have made big moves and think to ourselves, “If I would have only knew about that company and bought it back then.” But would you really have developed the conviction to hold during the run up? The problem is that to achieve a multi-bagger in the portfolio, you have to hold a multi-bagger. And if you want it to change your life, you need to hold a lot of it.

Don’t bother finding the next multi-bagger if you aren’t going to develop the conviction to hold it

 Over the last decade, I’ve been lucky enough to be invested in a few stocks that have gone up 5-10-20-30x over a multi-year time horizon.  From my experience, the only way to hold onto a big position after it makes a big move is to know the underlying company better than anyone else. Greed and fear will test your resolve, so you need to learn to keep these emotions in check. You need to believe in your due diligence and form an unwavering conviction.

 So how do you develop the conviction to hold?

 A lot of due diligence is on the front-end of a buying decision, but it certainly doesn’t stop there. The maintenance due diligence following the buy decision is even more important. For me, I talk to management regularly and keep close watch of all the ancillary forces and trends that are driving the company’s business. My “edge” is knowing my positions better than anyone else. This doesn’t mean I’m going to be right, but the more I know the better.

I think many misperceive high conviction for close-mindedness, ignorance, and arrogance. The conviction I’m talking about is quite the opposite. You need to constantly assess your positions and openly listen to counter arguments. Only then will you have the conviction to hold multi-baggers because you will understand all sides to the story. You also need to develop a thick skin. If you are not ready to be criticized for your convictions than you aren’t ready to make real money.

I believe most investors focus too much on selling strategies and not enough time on knowing what they own. Selling strategies such as, “Sell half after a stock doubles” or “When a position reaches 10% of the portfolio, sell it down to 8%” are meant for lazy investors. These selling metrics-formulas-strategies sound great in academia or when selling an investment strategy to a bunch of lemmings who can’t think for themselves. The truth is if you know what you own at all times, you’ll know when to sell.

In many cases the stocks I’ve owned were better buys after they doubled then when I initially bought them. In many cases when a position became 30% of my portfolio there was a reason for it.  The underlying business was doing really well, or institutions were just starting to nibble on shares, so why would I sell it. Just because a stock doubles, triples, etc, doesn’t mean it should be sold. Stocks should be sold when your maintenance due diligence shows something has changed. If you know the story better than anyone, you’ll likely get clues well before the rest of the market. When a company performs, and the story hasn’t changed, stop trying to change it. Enjoy the ride.

When a stock goes on a multi-year run there will be long periods of time when nothing happens. These are consolidation periods when old shareholders are selling and new investors are buying in. You will notice a 12-month period of time in this three-year chart where the stock does nothing. This is very normal.

wfcf 

Even in this amazing chart you’ll find a 10-month period where the stock didn’t go anywhere

rx

A big part of successful investing is becoming content doing nothing. If you are in great companies, a lot of times your biggest risk is boredom. Warren Buffett’s famous quote, “Our favorite holding period is forever”. If he likes where the business is headed, he’ll continue to hold it and probably buy more. Don’t be active for activity sake. Remember, there are no day traders on the Forbes 400 list. Learn to be content holding and doing nothing.

“Patience is power.

Patience is not an absence of action;

rather it is “timing”

it waits on the right time to act,

for the right principles

and in the right way.”

— Fulton J. Sheen

As a microcap investor who invests in companies with little to no institutional ownership, I want to hold for the institutional rally. When a management continues to execute on a great story, at some point it’s going to attract institutional inflows. You will see this when an illiquid stock all of sudden gets propelled by a sustained period of above average volume. Hello Institutions!

You can literally see the institutional rally in this chart of Vertex Energy (VTNR):

vtnr

A multi-year run is made up of a bunch of mini-cycles that can last weeks or months. During these times the stock can become undervalued or overvalued. Quite a few professional investors I know like to trade 10-20% of their full position during these swings. For my psyche I’ve found it to be counter productive. If I own a $5 stock and think it might go back to $4 before it goes to $10 in 12 months, I’m fine simply holding it through the mini-cycles.

I hope I’ve helped shed some light on a hard but lucrative topic. Many investors spend all their time trying to find great microcap companies only to sell them after quick paltry gains. If management is executing and the story hasn’t changed, hold on for the real money. Find great companies, develop the conviction to hold them, and it will change your life.

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Comments 14

  1. Thanks Ian,

    This is an acute and easy to understand text about your thought process going through the ”holding challenge” of a stock you own. I have to agree with you(and with Reminiscences of a Stock Operator)that even if in the past I I was tempted into trading in/out during market swings (with less than mixed results in my case), its definitely my SITTING that has paid the most. I quite liked your ”Don’t be active for activity sake” lol.

    Seb

    PS: I’m still looking forward a ”like button” feature on this blog. 😉

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    2. Nobody talks about how you remain in conviction! what is the process! There can be dilemmas all the time whether to be in a stock ! No one has ever written it!

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  2. Excellent read, thank you. I know why I made the picks that I made, I continue to practice patience until the plan comes to fruition.

    Cheers/

  3. Thank you Ian,

    I find this to be quite a profound insight. It is rare to read something that makes you see your own processes in a new light. Thanks.

  4. Your philosophy has one flaw. Your assumption is that people know what they have “all the time”. They don’t. People tend to rely on other peoples Due Diligence (DD) because to be honest they are two lazy to do their own. So suddenly someone elses DD becomes the groups as a whole’s DD. People have to learn how to do their own DD and actually know how to do it. The DD you did 1 month ago may be vaiid today, but it may not be. So checking and rechecking your own DD (not someone elses) and asking yourself the hard questions continually is the only true form of Longterm Hold.

    I had lunch with the President, does not have the same impact as “I have done my DD” in fact the latter is a far bigger catch in the investing world. If you say publicly you have done thorough research and extensive DD, its amazing how many people believe it. If someone questions you, the comeback is “Hey DO your DD and come back and talk to me. I have done mine.
    Creating groups creates comfort levels, false comfort levels. Just because Bloggins did excellent DD on one stock does not mean he does it on another. However the group will yield to his/her prowess. I am sure as you read this you are thinking. I can’t wait to say ” Responsible Investors know how to do DD”. Actually, they don’t and if they did, they would not get into as many troubles as they do. If they do know how to do DD, they want to convince themselves that the reason the stock is off is because the market does not like it, its not what they missed, ever!

    So knowing the flaw in humanity I still believe even after reading your good article, greed is stupid. Take some of the table on a double and get your money back. If you are that good, the remainder will put you in good stead for you next investment.

    Your article is “somewhat” dated because of the introduction of ALGO’s, Fast trading systems and other nefarious computer software programs that prey on small caps. Its far easier to kill a good microcap then it is any other stock.

    So unless you believe everyday your DD is perfect, then take your money off the table on a double and let the rest ride.

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      Thanks for the comment Dennis. I believe I addressed some of these points in the article. Doing DD and balancing the ego is always crucial. I can only speak from personal experience, but knowing a company very well is the only way I’ve been able to hold a positions after they’ve gone up 2-3-5-10x. And similarly, knowing a company very well has allowed me to spot things quickly and sell before the masses.

      I could probably write an article on DD, but it honestly changes with every company. I’m a big fan of people learning their own strategies, and the only way you learn is by losing money.

  5. It depends on the strategy involved, and whether the investor (or a manager’s investor base) has the skill and temperament to stomach the volatility inherent in a concentrated high conviction approach.

    Walter Schloss did fine over 4 decades with high turnover and high diversification in hundreds of names, just buying cheap and selling fair. It fitted him, and presumably his investors. 21% before fees per annum for over 4 decades!

    There is no one-size-fits-all panacea to investing success. Knowing oneself is the primary objective, and then select a strategy that fits. That would ensure commitment and discipline to stick with the strategy.

  6. Nice article. I’ve actually been struggling with this lately. I own 3000 shares of Vertex at average of 3.77. At least once a week it bounces between 3.40 and 3.85 during trading. I keep thinking, I can sell and get back in cheaper. So far, I’ve been able to keep the 3.77 and not try and play the timing game. Ultimately, my thinking is like yours. If I think they’ll hit 12+ a share, why try and time for a few cents a share. My luck they would make a move while I’m trying to time it 🙂

  7. Your article is excellent.understanding business,management,financials such as debtlevels,ROCE,cash flows with an eye of long term orientatlon,predictability,past performance can enable one to identify great and excellent stories

  8. One of the most helpful blogs I’ve read. I refer back to this often and it helps me to stay focussed. Thanks for posting these for everyone’s benefit.

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