The Conviction To Hold
IAN CASSEL AUGUST 19, 2014
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
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
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.
Even in this amazing chart you’ll find a 10-month period where the stock didn’t go anywhere.
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
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):
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
The Art of Holding
IAN CASSEL JANUARY 20, 2017
Stocks rarely perform in the time frames we predict, and it’s why the market only works
for investors that have a long-term portfolio focus. Performance is never linear, up and to
the right, year after year. You sometimes have to hold onto a position for a few years
before it goes up 100% in 3 months.
“I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the
money I make is in the third or fourth year that I’ve owned something.” – Peter Lynch
Here is a real-life example: I started buying a company I own today in early 2012 when it
was at $0.35-0.40 per share. As my conviction grew I bought more and by mid-2014 the
stock hit $2.00 per share. Today (January 2017), the stock is still at $2.00 per share.
Yes, I’m up considerably from my average cost basis but this company has been dead
money for 2.5 years. Years!
How do I know if I’m right in holding versus just being entrenched in endowment bias?
Let’s get back to some first principles. Sustainable multi-baggers have three
characteristics: Long-term revenue and earnings growth with little to no dilution. When
you are holding onto a position ask yourself – Is this business growing and making more
money per share than it did a year ago, two years ago? In my real-life example above
the company’s business is almost double the size it was 2.5 years ago. Yes, the stock
hasn’t gone anywhere but the business is doing really well. I have no problem holding
this stock. If the business wasn’t performing, I would sell. Successful investors can
differentiate business performance from stock performance and can take advantage of
those investors who can’t.
“I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m
ready to wait for.” – Phil Fisher
In the book, The Art of Execution, portfolio manager Lee Freeman-Shor invests $25-$150
million ($1+ billion total) in 45 of the world’s top investors. His instructions to them were
simple as there was just one rule. They could only invest in their ten best ideas. Over
several years he tracked their positions, trades, performance and was amazed at what
he saw. He identified both good and bad habits and divided the investors into groups –
Rabbits, Assassins, Hunters, Raiders, and the most successful group, the Connoisseurs.
“The most successful investors I worked with, those who made the most money, all had one thing in
common: the presence of a couple of big winners in their portfolios. Any approach that does not
embrace the possibility of winning big is doomed.” – Lee Freeman-Shor
In this excerpt, Lee Freeman-Shor talks about one of the attributes of Connoisseurs.
“One of the key requirements of staying invested in a big winner is to have (or cultivate) a high
Meeting some of my Connoisseurs could be very, very boring because nothing ever changed. They
would talk about the same stocks they had been invested in for the past five years or longer. On the
days I had a meeting scheduled with a Connoisseur, I sometimes struggled to get out of bed.
The fact is, most of us will find it difficult to emulate the Connoisseurs because we feel the need to do
something when we get to the office (or home trading desk) every day. We look at stock price charts,
listen to the latest market news on Bloomberg TV, and fool ourselves into believing we could add
value from making a few small trades here and there. It is very hard to do nothing but focus on the
same handful of companies every year; only researching new ideas on the side.
Many of us, seeing we have made a profit of 40% in one of our stocks, start actively looking for
another company to invest the money into – instead of leaving it invested. This is precisely why lots
of investors never become very successful.”
Every multi-bagger will have long periods (even years) of stagnation as fundamentals
backfill, old shareholders get bored, and new shareholders enter. Just like a fine wine,
sustainable multi-baggers often take their time to ascend and develop. If you’re invested
in great businesses that continue to grow and earn more money, don’t let lulls in stock
price and boredom scare you out of them.
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