The Difference Between Conviction and Stubborness

Today I saw this posting in a forum titled: The Difference Between Conviction and Stubborness

• When is holding on to your beliefs considered foolish stubborness, and when does it constitute "conviction" ? Look at it this way, when Warren Buffett refused to buy tech stocks during the dot.com bubble, he was criticized as being out of fashion and out of touch. But books have always mentioned (on hindsight) that he stuck to his guns and had "conviction" to stick to his beliefs, and thus avoided the inevitable crash that followed.
  
  To take another example, another investor stubbornly holds on to his beliefs that a company/industry is good and growing, yet he is actually wrong and the investment goes on to perform badly in the next 5-8 years.
  
  So how do we separate "conviction" from "foolish stubborness" ? Objective data may guide us, but as the future is always murky, there is no such thing as a sure thing.
  
  Note that mistakes of omission (i.e. not buying something which you SHOULD have, on hindsight) are always easier to bear than mistakes of commission (i.e. buying something which you SHOULD NOT have). In the former, it's just opportunity cost. In the latter, you lose real hard cash.

I like the following reply by d.o.g.

• Speaking for myself, I think "conviction" is when you follow the course of action suggested by the facts, against the actions of the herd. But I think Benjamin Graham said it better in chapter 20 of The Intelligent Investor:
  
  You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
  
  "Foolish stubborness" is when the facts subsequently show that the initial decision was wrong, and yet one continues with the old conclusion.
  
  In other words, conviction can easily turn into stubborness if we are not insistent about staying rational i.e. focused on the facts.
  
  Personally, when the facts change, I change my mind. What about you?

Yes, what about me? For me, this reminded me so much of the post I wrote back in June 2008. I wrote the following posting: Do Not Be Stubborn In Investing!

That post would be my view on this issue. Let me reproduce what I wrote back then again.......

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Blast from past. From Sun Tzu On Investing

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Sun Tzu often warned his generals that it is adaptive strategy that win wars, not persistence.

Persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful.

Your persistence must be rational.

Stubbornly holding onto losing stocks as their business fundamental decay, hoping they magically return to your purchase price is no way to ensure victory, in fact, it all but guarantees defeat.

When the evidence says sell, then sell. Be persistent in the application of your strategy, not in banging your head against the wall or burying it in the sand. Be open to accept new information, face facts and take action as necessary. Ignoring important business developments in your portfolio won't make them go away.

Selling a stock that no longer measures up, or one that was purchased without accurate or complete evaluation is not admitting a mistake or any cause for embarrassment, it's just one more necessary, even essential step toward victory.

If the stock price rises after you sell, don't be frustrated - you made a rational decision, the best you could based on the information you had at the time - and over your investing lifetime this rational approach will win out.

You invest your time and your energy into every business analysis, so after a sell decision you need not write off the company forever. If the business prospects and fundamentals improve later, you can and should reconsider repurchasing. Each decision must be viewed independently from previous decisions. Selling as fundamental decay is essential, as it frees capital to be redeployed into another productive investment.

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Ahh... the most common behaviour I have seen is one tends to be frustrated because after we had decided to sell the stock, that darn stock decides to move up!

Celaka betul!!!

Haven't we not witnessed this before?

It's like we are the sole reason why that rotten piece of stock is NOT moving, and the minute we sell, it flies! It's like they know. It's like they have them eyes on me!

And even for the investor, sometimes after the most intense thorough reasoning, sou searching and consultation from our Auntie May to Uncle Bennie, we finally come to the conclusion that the certain stock is not worth to be invested in anymore. And the very minute we finally gathered all our courage to execute our SELL decision(s), the stock miraculously rises!

Aisehman! #%$^(*@#

Err... so what gives?

Yes, being frustrated is understandable but what else can be done?

Nothing more! I repeat nothing more!

The point is, in the stock market sometimes this kind of stuff does happen, and it would most likely to happen again in the future! This is simply how the game is. All can we can do is say 'Que Sera Sera'!

For me, there is no way I could tell whether a stock is gonna go up or down. It is mere impossible for me to figure out which way the stock is really going to go. Haven't we seen them bad to the bone, them rotten stocks, them almost bankrupt stocks, go up faster than Iron Man on some rocket booster?

It does happen but for me, trying to catch which and when these rotten stocks will go up is the equivalent of buying a lottery ticket.

I simply cannot do it.

Again, let me say out loud again, I am not saying that it cannot be done, all I am saying is that I realise I do NOT have the abilities to play such a game.

And in my opinion, for the investor, the most important issue is making clear logical reasoning to invest in a stock or to stay invested or to cash out of a stock investment. That's the investors edge. Making commonsense investing decisions. That's all that matters. If we take this edge away from ourselves, what then will become of we? Does it make sense to try to play a game that we don't understand too well just so long as we can be a hero?

Remember..

• Without faith in his own judgement no man can go very far in this game! - - Lefevre

Or this one.

• "A man must think for himself, must follow his own convictions...Self-trust is the foundation of successful effort." - Dickson G. Watts

So what's our investment edge?

The very basic of our edge is we buy a 'good' stock at a cheap price and we sell the investment when either we get a really 'good' price (ie some paying an insane price for our investment stake... but how could i call it insane since this will be a good thingy for me? :P) for our investment or if the investment makes no sense anymore - ie the stock used to be good, but due to for some reasons or another, there are clear signs that the stock won't be good no more! And obviously we also sell if and when we made an investment mistake, ie a wrong stock selection.

Remember the issue of making mistakes? Here's some words of advice yet again...

There is no shame in making a mistake. Despite a great deal of research and analysis, I make plenty of them -- and so does every other investor -- because the future is inherently unpredictable. But there is shame in refusing to acknowledge a mistake and rectifying it. - - Warren Buffett

So if a stock goes up after we decided to sell (ie the stock investment makes no sense no more), what's there to be frustrated?

Should we continue to stick to our game plan and not get bothered? (see this blog posting: Developing A Good Investing Mindset )

Or should we try to get the best possible price out of our mistakes?

(Isn't this like HOPING for the market to correct our mistakes?? Does it make sense? Are we even that lucky all the time that the market will rectify our mistakes? What if that one mistake wipes us out of the game? How then?)

Or some would rather stay delusional by insisting that their paper losses caused by their own flawed stock picking is not real. It's only paper!!?!! ( See Is Paper Loss Not A Loss? and Do Not Cheat Yourself! )

Lastly...

• "ppersistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful"...

How very true!

Remember ... there is a verv, very fine line between being correct and being stubbornly wrong... hence it is most important that one's persistence must be rational!

Last but not least, in Buffett Partnership letters (July, 1966) there was this really little set of comments which is simply much, much, much better! (Aiyah.. he's the man, Warren Buffet mah!)

• "The course of the stock market will largely determine... when we'll be right, but the accuracy of our analysis will determine whether we'll be right. In other words, we... concentrate on what should happen, not when it should happen... If we start deciding, based on our guesses or emotions, whether we will... participate in a business where we... have some long-run edge, we're in trouble. We will not sell our interests in businesses when they are attractively priced just because some astrologer thinks the quotations may go lower even though forecasts... will be right some of the time... The availability of a quotation for your business interests should always be an asset to be utilized if desired. If it gets silly enough in either direction, you will take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn form your judgements."