The Perils of Thesis Drift

When you’re confronted with mounting evidence that you’re wrong, what do you do?

Investing is incredibly humbling. Those of us who decide to pursue actively managing an investment portfolio are often driven by the fun pursuits of this job. We tie ourselves to the intellectual pursuit of information, the stimulating rewards of finding new ideas, the making money, maybe even appearing smart to our non-investor friends. But much of the time in this business, you are confronted with the irrationality of people, the difficulty of managing a losing or winning position, the ego hit of being wrong, and the constant discovery that you don’t know as much as you think you do. 

I love learning about businesses and industries and putting the pieces of the puzzle together that this job requires. But there is a reason many people will claim that ‘investing is hard’. Spending significant amounts of time studying a business, building a model of the world, making a prediction about the future and putting real money at risk, only to find that reality is nowhere near what you thought – aka your thesis is invalidated – is a difficult and emotionally taxing part of being an investor. 

But there are ways to manage the difficulty, by letting go of mistakes and bad investments as quickly as possible, by avoiding what’s known as ‘thesis drift’. 

Thesis drift is a term we all know and love, and happens when an investor refuses to admit they made a mistake, instead justifying the reasons for poor business performance and a declining stock price. When your model of the world predicts one thing, and something entirely different happens, refusing to acknowledge you were wrong and investing newreasons for continuing to own a stock can be portfolio management death.

I’ve been there many times. The problem with thesis drift is that it’s incredibly easy to fall prey. Your company just lost their largest customer? That’s ok, they were low margin anyway. Pricing power never materialized? That’s ok, they’ll make up for it on volume. Margin expansion isn’t happening? That’s ok, we’re just a few quarters away from that. 

Not falling prey to thesis drift is a cognitive battle against yourself, which mirrors much of what investing really is. The hardest part is catching yourself in the act of bad behavior and correcting it before it damages the portfolio. We all know we carry biases, but the real game is preventing them from steering our decisions. When you confront what looks like thesis drift, resist the temptation to “re-underwrite the business,” call management again, or tinker endlessly with your model. Instead, cut your losses and move on. This is a gift you can give yourself: the willingness to admit a mistake. Far from a weakness, it’s a mark of emotional maturity and one of the most valuable qualities an investor can cultivate.

Despite the typical negative public reaction, I always enjoy seeing a well known investor or 13F filer blow out of a position, especially a newly purchased one, without any consideration for what might happen. An unexpectedly bad earnings report or structural shift in the industry could trigger a decision like that, which again, is a sign of strength. 

I posed the question at the beginning of this article because it applies to much more than investing. Many of us have stayed in relationships that weren’t working and jobs we didn’t like. We see politicians cling to policies that aren’t effective and watch TV shows that are clearly in decline but won’t be cancelled. It is an investing – and general – superpower to avoid rationalizing, and act when evidence is mounting that you are wrong. 

With investing, the goal is to make money, full stop. That is a straightforward goal. But in life, it’s not that cut and dry. Although much harder said than done, my solution to avoiding thesis drift has been to try and remove my ego. No decision should be framed as being ‘right or wrong’ but rather avoiding any potential failure that begets more failure. Paul Tudor Jones is famous for having the phrase ‘Losers Average Losers’ framed above his desk. Exiting bad positions is the way to avoid this death spiral. Again, this is a source of strength and maturity, not something that should destroy your identity. 

Investing is hard. Life can be hard. But both are made easier when we allow ourselves to change course when necessary. From here on out, try to recognize thesis drift when it appears, and cut it off early. The discipline to admit you’re wrong is what keeps you in the game long enough to eventually be right.

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