Why is there a “courage” in front of “conviction”?
Just because you have conviction (aka as your strong belief) doesn’t mean your conviction may come true. Hence, you need to have courage to carry your conviction through the uncertainty period until the event(s) you are convinced will happen actually happens.
In my case, I’ve strong belief in the following:
1) AMRN will prosper with its fish-oil drug. I believe millions of people will benefit due to our over-eating population around the globe. RISK: Amarin bungles on its execution and the patent is sold for a song.
2) USU will prosper because the United States must have its own uranium enrichment facility to be considered truly energy self-sufficient. RISK: GE comes out with a much better uranium enrichment technology even though it will take many years to establish.
3) LRAD will stock the military and police department around the globe with its long-range acoustic devices. RISK: competitors (or copycat) come out to steal market share.
4) EMAN will change the face of our entertainment industry by providing a unique way to watch movie & TV shows and play video games in the form of a display goggle that provides a panoramic view that no movie theater or TV can give you. RISK: delay or change in company priority in designing the display goggle for the consumer electronic industry (in other words, the focus is more on military use)
In the case of The Fly:
1) VHC will prevail in court cases against AAPL, CSCO, and others with generous punitive damages and future licensing revenues stream. RISK: reward is not as generous as expected by the market.
As you can see, the RISK emphasizes the uncertainty and creates the necessity to have courage to stand behind your beliefs.
IMPORTANT REMINDER: Courage means you have the audacity to face the LOSS you WILL incur when your conviction is blown to pieces (aka being wrong).
And this is the very reason why I don’t like to average down on my position trade when I’m going through drawdown. You MUST determine a specific amount of money you are willing to lose in any position trade in case your conviction turns out to be wrong. Once you set your target loss amount, you have a much steady hand in maintaining your courage until judgement day.
However, the moment you start to average down while you are going through drawdown, you are INCREASING your loss amount to a level that you may not have the courage to withstand. In other words, averaging down while price action is going against you can weaken your courage and resolve. And if you have blind courage, averaging down can destroy you.
On the other hand, when price action starts to bounce back from the downdraft and exhibiting sign of a bull trend, I do not have an issue of taking a swing trade on top of my position trade. Remember, I’m taking a swing trade and therefore I must also adhere to the swing trade rule- taking my loss quickly if the swing trade doesn’t work out as planned. Thus, if the swing trade is successful, I may be riding the swing trade position along with the position trade together.
The way I see it, successful swing trade help pays your bill and earns a decent living; but it is the successful position trades that buy you your yacht so to speak.
The courage of conviction, if you look at all the millionaires and billionaires out there, is the backbone of any successful venture out there. Just don’t forget that courage is needed because you can literally be injured if you are wrong.
Categories: Trading philosophies and thoughts