What Conviction Means When You Are Down 40 Percent
Conviction is usually described as a feeling. The useful version is a document written when you had nothing to defend.
Conviction is the most overused word in this sector and the least examined. People describe it as though it were a personal quality, like courage, which you either have or lack.
That framing is useless during a drawdown, because the feeling is exactly what disappears.
What conviction is not
It is not certainty. Anyone certain about a volatile asset has stopped thinking.
It is not refusing to sell. Holding a position through a decline can be conviction or it can be paralysis, and from the outside these are identical. Frequently they are identical from the inside too.
It is not the absence of doubt. I have doubted every position I have ever held, continuously, including the ones that worked.
What it actually is
Conviction is having written down, in a calm month, the specific reasons you hold something and the specific conditions under which you would stop. Then, in a bad month, reading that document and finding that none of the conditions have been met.
That is it. It is not a feeling that persists through the drawdown. It is a record that survives it.
Why it has to be written
Memory is not neutral. During a decline, my recollection of why I bought becomes suspiciously vague and suspiciously weak. The arguments I had found compelling are unavailable to me, and what remains is a sense that I once had reasons.
That sense does not survive a third month. A document does.
My 2021 entry, written at a point when the position was performing well, lists four reasons and three conditions that would invalidate them. When I read it in 2022, at a substantial loss, I found that none of the three conditions had occurred. The price had fallen, which was not on the list, because the price falling was never a reason to think the thesis was wrong.
The conditions are the important half
Most people can articulate why they bought something. Very few have written down what would make them stop.
If you cannot answer that question, you do not have a thesis. You have a position and a hope, and there is no version of a drawdown in which you will be able to tell the difference.
Mine, for the largest position, are specific: a successful attack on consensus, a change to the issuance schedule, or a legal change making the asset unholdable where I live. All three are checkable in an afternoon. None of them is “the price fell.”
What this looks like in practice
Every quarter I open the document and answer three questions in writing.
- Has any invalidation condition occurred? Yes or no, with evidence.
- Is the position still within my size limit? Number, not impression.
- Has anything changed that I should add to the list?
It takes fifteen minutes. In four years it has produced one genuine change to my holdings and prevented perhaps six decisions I would have regretted.
The version that fails
The failure mode is writing the document and then not consulting it, which is the same as not having written it.
The second failure mode is amending it during a bad month. Any change made while a position is under pressure is a rationalisation with a timestamp. Changes go in during flat periods or not at all.
The uncomfortable part
Sometimes the conditions are met and you have to act on a document written by a more optimistic version of yourself. That has happened to me once, and following my own instruction to exit was harder than any decision to hold has ever been.
That is the test of whether the system is real. A rule you only follow when it agrees with you is not a rule.
I keep the liquid portion on the exchange I have used since 2021 precisely so that acting on the document, in either direction, is a matter of minutes rather than a project.
This is a personal account of holding through market cycles. It describes what one person did and why. It is not a recommendation, and past cycles do not predict future ones.