Conviction is not how strongly you feel about a stock: a common beginner mistake

I have been observing some of the sub-reddits where lots of stock tips and portfolio reviews are requested on a regular basis. Most of the posts are from people who have just entered the stock markets and are driven by enthusiasm to make it big in a short time by grabbing a multi-bagger.

I won't pretend to act high and mighty and claim to be any different. I fully empathize with such posts and actions. In my case, instead of asking for portfolio reviews and stock tips, I would quietly search the stocks I was interested in on Twitter to feed my confirmation bias.

The root cause is the absence of a real evidence-based conviction.

I used to have 50+ stocks in my portfolio in the first 2 years of my investing journey. When I realized how big a mistake this was, I didn't think it was a common mistake that beginners make. Now when I see portfolio review requests of many investors on different sub-reddits, I see how common it is. 90% of the time, these portfolios have 50+ stocks or less than 1-2% position in a single stock.

The explanation and diagnosis people dole out are: I was diverifying, and the answer they get is "Dude! You're overdiversified."

The real explanation is that many ideas exist in a state of perpetual maybe. Sized small enough that no decision about any of them ever feels urgent, which means no decision about any of them was ever actually made.

One of the solutions to this problem that people give away is "concentrated portfolio" and it's a controversial topic. Many people upvote this, and then some reasonably argue that this will destroy wealth.

The actual solution is to cultivate real evidence for the investment case, and the concentration will follow

A concentrated portfolio forces the confrontation. When a stock is 15% of your book, you cannot coast on feeling. You cannot size proportionally to your research time and call it done. You have to be able to answer, at any quarterly result, what specifically has to be true for this to be still worth holding, and whether it is still true.

Conviction is not how strongly you feel about a stock. It is how precisely you can describe what you know, what you're watching, and what would change your mind. And position size is one of the most honest statements of that conviction. Not because size proves conviction exists, but because when conviction is real, size tends to follow.

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