High Conviction Investing and the Path to Outsized Returns

Financial independence is a dream that so many of us harbour aspirations for.

Inspirationally, some achieve it before the conventional retirement age.

One such story centres on a remarkable investor,?Simon, who retired at 43 ?by investing in a high conviction, deep value portfolio with explosive growth potential. His investment journey holds invaluable lessons for those willing to embark on a similar path.

At Bridge Private Wealth, we work toward creating comparable outcomes, carving out a small portion of your wealth, with the intention of delivering outsized returns. However, high growth investing is not a straightforward journey of simply watching share prices rise steadily. It is a path with inevitable bumps and hurdles, one that requires resilience and unwavering conviction.

Here are some of the key lessons to take from Simon’s journey (linked above):

Identifying Investment Objectives

The first step towards a successful investment journey is understanding your investment objectives.

“I want to double my portfolio every five years,?though I expect to hold sideways or down for years and then have sudden re-ratings of my positions when the market finally agrees with me.”

Simon's goal was ambitious yet clear: to double his portfolio every five years. He knew that he might have to endure periods of stagnation or even downturns for several years before his positions would experience sudden re-ratings when the market finally aligned with his perspective.

Holding conviction in your investments is vital here. Without that, your hand will falter, inevitably seeing you sell at the bottom of the market.

Embracing Emotional Intelligence in Investing

Investing is not just about numbers and financial acumen; it's also about understanding and managing your emotional responses to market fluctuations. As Simon shares, the emotional rollercoaster that accompanies the highs and lows of investing can warp your ability to think critically and stay true to your investment thesis.

He points out that feelings of nausea and depression during a massive drawdown, or the sense of invincibility when he was up multi-bags, can disrupt the rational investment decision-making process.

“By far the toughest, though, is when you need to do nothing and not much is happening, as you will feel like over-trading instead of waiting for your thesis to play out.”

It's easy to fall into the trap of over-trading when patience and steadfastness are what's truly required.

The Making of a Millionaire

The pinnacle of Simon's investment journey was his early backing of Afterpay, an Aussie BNPL pioneer.

“I did napkin math and thought it (Afterpay) would reach $42 billion, or more than $160 a share, if it grew at rates I had seen in other factoring/lending products. This seemed ridiculous at around $6 a share, but humans don’t process exponential growth well, so?I thought – even if I was half right – I would do very well.

During the COVID Crash of March 2020**, I loaded up when everyone else was selling, even down to just below $9, as it seemed like “blood on the streets**.” I sold out enough in the 70s to have all my capital back and then held the rest until the Block takeover.”

Clearly, Simon leaned heavily into his expertise and research, to take a position contrary to conventional market wisdom. It was the conviction he developed for his investment that allowed him to ultimately parlay risk into retirement-sized wealth.

The Journey to Outsized Returns

Creating outsized returns is not about following the herd or chasing market trends - that's gambling, not investing.

The market, with its constant fluctuations and incessant noise, can lead to irrational behaviour. Our brains are wired to protect our position, pushing us to make quick-trigger decisions that may not align with our long-term investment thesis.

Regularly trading or making frequent changes to our portfolio of high-conviction ideas is a surefire way to achieve average or even sub-par returns. If we want outsized returns, we must remain steadfast, doubling down on our positions when others panic.

Together, we must remain focused and committed to continually educating ourselves about our positions and ensuring the convictions of our investment thesis or theme is sound. The challenge in investing remains, differentiating between market noise and systemic issues, to effectively rationalise our decisions.

This is not an easy journey - if it were, everyone would be doing it.

Neelan Sornalingam