The phrase, “Invest with conviction” sounds like a cliché. But it’s important. It’s a phrase I’ve had to repeat more than once this week.
James and the Giant Investing Conundrum
My friend James recently got into investing. And last weekend James was breathlessly peppering me with questions about Tesla (TSLA)—mostly negative ones. Is Elon Musk a fraud? Can the company sustain this share growth? Is the company actually a Ponzi scheme?!!
I told James that I didn’t think any of those things were true, and tried to sell him on Tesla’s merits. Namely, that the company sells great cars that are good for the environment, had essentially revolutionized the way you buy cars (i.e. not from a dealer), and that while the firm is barely profitable, it’s still growing sales at a relentless pace. As for Tesla’s stock, despite the recent weakness, it has offered an amazing return over the last year.
The next day, I got a text from James, saying I’d sold him on Tesla, and that he was thinking of buying TSLA stock at a bargain now that it’s consolidating. An hour later, he texted again, saying that Elon’s Twitter had “spooked” him. Then he sent me a link to a recent Morgan Stanley analyst note suggesting that Ferrari is actually a better EV company.
Back and forth he went, one minute thinking that Tesla stock was a buy-low opportunity at a discount, the next minute declaring the company the biggest scam since Enron. So I gave James a bit of investment advice: just don’t buy the stock!
Invest with Conviction
If you don’t have full confidence in a public company, then you shouldn’t invest in it. Sure, all stocks have risk, and some investments are more speculative than others. But if you’re having serious doubts about a company’s prospects—especially if those doubts include the words “fraud,” “scam” and “possible Ponzi scheme”—then you shouldn’t even consider investing in it.
There are different types of investing, including growth investing, value investing, dividend investing, emerging markets investing and small-cap investing. (And we at Cabot have an advisory for every one of those investment types.) But perhaps the most important kind of investing is conviction investing. That is, invest with conviction—or don’t invest. There are plenty of good stocks out there. Why buy one that you’re just not sure about, even if other people like it?
Warren Buffett famously said, “Buy what you know.” An addendum to that could be, “Buy what you like.” Don’t invest in a stock you’re skeptical about just because someone else tells you they like it. That’s a recipe for some sleepless nights. When you invest with conviction, you can at least lay your head on the pillow knowing that your investment portfolio is comprised solely of companies you truly believe in.
Of course, you’ll be wrong about some of them. That’s what loss limits are for. (Note: We typically recommend loss limits of no more than 15%, a bit higher if you own small-cap stocks, which tend to be more volatile.) That way, you buy stocks that you like (and preferably know), and if it doesn’t work out, you cut bait and move on. No sweat.
How much consideration do you give to your own conviction in a company when investing?
*Note: this post has been updated from an original version, published in 2018.