Subnostr

**Conviction (Or How To Lose A Lot Of Money In Investing)**

Conviction (Or How To Lose A Lot Of Money In Investing)

_Authored by Lance Roberts via RealInvestmentAdvice.com,_ (https://realinvestmentadvice.com/conviction-or-how-to-lose-a-lot-of-money-in-investing/)

**Conviction** _(kan-vik-shan):_ noun, a strong persuasion or belief; the state of being convinced.

In life, there are things that we should be convicted and committed to. For example, the love for our families, spouses, and religious beliefs. We can also be convicted about other things, such as political ideologies, social issues, and environmental causes. With the rise of social media, individuals’ conviction is easy to see and the source of the _“great divide”_ in today’s society _(and I would argue not for the better.)_

However, when investing, having an absolute conviction in any ideology or thesis can lead to lost opportunity or lost capital over time._Friederik Gieschen_ (https://neckar.substack.com/p/was-tepper-wrong-liquidity-timing) wrote an interesting post about great investors and the risk of conviction to capital.

> _“This presents an obvious challenge. Not only do you have to be right, but you also have to survive until reality and the market catch up with your view. Otherwise, you won’t get paid. Just ask van Gogh. Or Michael Burry, almost. And in the interim, the market can throw all kinds of antics. Short seller John Hempton: ‘We found the Wirecard fraud in 2009. It went from 9 to 191 euros and then to zero. It was our biggest ever loser.'”_

So, what are your convictions regarding investing and your portfolio? Here is a short list of some of the most current:

1. _The dollar is “fiat” and is going to zero._

2. _The dollar will lose its reserve currency status._

3. _There is too much debt, and the U.S. will eventually default._

4. _A recession or depression is coming because (fill-in-the-blank) said so._

5. _There is going to be a worldwide shortage of food and oil._

6. _Interest rates can only go higher._

7. _The Government is going to confiscate everything._

8. _Society is on the edge of collapse._

9. _**Add your personal conviction here.**_

There are obviously many more.

Importantly, all of these things could indeed happen. I am surely not prescient enough to see that far into the future.

**The Beauty Contest**

However, when it comes to investing, these _“convictions”_ can take longer to come to fruition than you have years to live. Furthermore, given that both the markets and the economy evolve over time, it is likely that many of these convictions will never come to pass or will take some far less dire form.

As Gieschen noted, **not only is the market always shifting and reconfiguring itself, but it’s also a complex adaptive system. This means its participants are aware of their own history.** Indicators are a great example of the Keynesian beauty contest (https://en.wikipedia.org/wiki/Keynesian_beauty_contest) in which observers move from observing the object to observing each other.

> _“It is not a case of choosing those \[faces\] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment, Interest and Money, 1936)._

In other words, if the market, which is a living, breathing organism of the collective minds of investors, begins to sense your conviction, it will take advantage of your positioning to take money away from you. As the old saying goes, the market is adept at shifting capital from _“weak hands to strong hands.”_

**An Example Of Conviction Gone Wrong**

Over my many years of managing money, I have received countless emails from individuals convinced that certain things would happen. One good example was during the _“financial crisis”_ in 2008. In February 2009, I wrote an article discussing 8-reasons why investors should start buying stocks. I was inundated by emails berating me for such a call as it was obvious the _“world had just ended, and the stock market was going to zero.”_

Of course, that didn’t happen as the Federal Reserve and the Government intervened with various bailouts, liquidity supports, and forcing interest rates to zero.

But, the _“gold bugs”_ doubled down on their conviction as it was apparent the Government was printing money which would lead to the dollar’s demise, surging inflation, and interest rates.

Such certainly seemed logical.

**But it didn’t happen.**

Then in 2020, the pandemic struck the U.S., and the Government shut down the economy. Again, it was believed the market was going to zero, the world would end, and gold was the only investment worth owning.

Reply to this note

Discussion