The Conviction To Hold IAN CASSEL AUGUST 19, 2014 BLOG, EDUCATIONAL 9 COMMENTS 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 Ive learned over time. It didnt 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 its 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. Dont bother finding the next multi-bagger if you arent going to develop the conviction to hold it Over the last decade, Ive 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 unwavering conviction. 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 doesnt 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 companys business. My edge is knowing my positions better than anyone else. This doesnt mean Im going to be right, but the more I know the better. I think many misperceive high conviction for close-mindedness, ignorance, and arrogance. The conviction Im 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 arent 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 cant think for themselves. The truth is if you know what you own at all times, youll know when to sell. In many cases the stocks Ive 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, doesnt 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, youll likely get clues well before the rest of the market. When a company performs, and the story hasnt 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. wfcf Even in this amazing chart youll find a 10-month period where the stock didnt go anywhere rx 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 Buffetts famous quote, Our favorite holding period is forever. If he likes where the business is headed, hell continue to hold it and probably buy more. Dont be active for activity sake. Remember, there are no day traders on the Forbes 400 list. Learn to be content holding and doing nothing. Patience is power. Patience is not an absence of action; rather it is timing it waits on the right time to act, for the right principles and in the right way. Fulton J. Sheen 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 its 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): 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 Ive 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, Im fine simply holding it through the mini-cycles. I hope Ive 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 hasnt changed, hold on for the real money. Find great companies, develop the conviction to hold them, and it will change your life.