Below is a famous chart often doing the rounds on twitter.

Returns in green & Drawdowns in red.

This is an incredible chart shared by Michael Batnick which in his words, shows Amazon’s path to 38,000% return – filled with heartache, despair, and nausea.

In the Indian context too there are several examples. My friend and fellow blogger, Amit Aggarwal wrote about how he faced multiple 50% drawdowns in Muthoot Capital.

This stock has fallen ~50% more than twice in just five years. In fact, after kissing 261 on the 23rd of October 2014, it not only collapsed by 50%, but took another two years until October 2016 to regain lost ground and made a new high at ~330. Only when the investors sighed a relief, it collapsed once again to 202, post demonetization.

Today just after an year the stock is trading closer to 700.

When i saw the Amazon chart and read about the examples Amit and many others put up, something hit me.

There is a huge difference between identifying a successful stock and making serious money from it. Just internalising this fact is the first step in making the big returns .

All of us today have access to a lot of information — probably more than we would like. We spend most of our time looking for the new winners. We read about industry trends, technology disruptions, decipher management commentary and are fairly good at identifying promising businesses. What’s more, we’re probably right too. But our analysis and judgement apparently does not guarantee us the returns we deserve. Why?

The market is built to shakes us out, scares us out or bores us out. How does one ensure that once a good business has been identified and bought, we are able to participate in most of the return that the stock generates?

In true Howard Marks style, i think the most important thing is: Building Conviction.

Without conviction we’ll sell on the first 25% drawdown.

Without conviction we’ll sell on the first 100% profit.

Without conviction we’ll sell on every second news item.

Without conviction we’ll not allocate meaningfully.

Without conviction the market will never allow us to make the big returns.

What then, are sources of conviction?

Conviction about the business: you truly know what events matter to the business and what do not.

Conviction about the management : the standard Buffett test: demonstrated record of integrity, energy and intelligence.

Conviction about yourself: the temparament to withstand drawdowns, not get shaken, scared or bored.

Conviction about the capital: you ensure that the capital you have employed is patient in nature.

Conviction about the market: that the market long term is a weighing machine, not a voting machine.

All of these have to built painstakingly and over years of ownership. If you want to make the big returns, just reading the annual reports or conference calls won’t cut it. It’s just the first step. You have to go through several ups and downs where your conviction in each of the above categories will be tested by the market before it allows you to go home with that ten or fifty bagger.

Conviction > Ideas.

In this information age of whatsapp and twitter, ideas and research have become a commodity. I am not saying that in negative sense. We have to be grateful to be living in an age where we get information about so many businesses on a platter. The other day i was browsing through an aggregated list of small-caps identified by some smart investors, then i read about how Mohnish Pabrai bought into KRBL or Vijay Kedia bought into Everest Industries. Whatsapp groups are full of extremely smart investors telling us about their ideas and thought process.

They are several investing ideas out there for the taking. Today, we all know what needs to be bought, we just don’t know how to carry them – and there lies all the return.

Conviction doesn’t guarantee returns, especially if you’re convinced about the wrong ideas. It only allows you to do full justice to your correct judgements — and hopefully more than make up for all the bad ones.

The next time you like a company/mutual fund/advisor/strategy ask yourself if you have or are willing to do the work to build enough conviction to hold on to them through several market and business drawdowns — which are a given — if not, you may as well not bother.

Source : LINK

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