The Anthropic stake staying intact while the public book got cut in half is the real tell — private marks don’t get margin calls, and that gap between “the position I believe in” and “the position the market can force me out of” is where conviction actually gets tested.
Thanks for sharing, it was a lovely read. Conviction is one of those elements (just like patience is one) that can set apart good from great investors, in my opinion. Of course, only if that conviction doesn’t slip into a glorified gambling outfit because of leverage.
A couple of thoughts pop into my head in response to all of this. First is the old saying that the market can remain irrational longer than you can remain solvent. Also, there's a wonderful book called "Being Wrong" which talks about how we delude ourselves. It isn't about investing but should be required reading for everyone who thinks conviction has anything to do with being right. Like confidence, it's probably one of the most essential underlying qualities in the success of any difficult human undertaking, but it's twin is hubris, and we know where that leads. Lastly, the real culprit is leverage, no? But for that, the returns even after being cut by 2/3rds weren't bad, and they would not have had to liquidate. .... but then, I'm happy with a reasonable return over a long time, so what do I know.
Thank you. Humility via a large loss is the next best thing to having a wise mentor. I wish I had read this advice during the dot com euphoria. Learned humility the hard way instead. Great article for those in the midst of another euphoric era to learn from your wisdom.
Way too long a post and had to skim many parts. I will disagree with a few things, but first, i might suggest the name of his business should really have been Situational Unawareness. He clearly demonstrated his having too many blind spots.
I will disagree with if i noted correctly a starting point being price; instead i would suggest starting with "story" something Prof D emphasizes in his teaching with the linking of stories and numbers. Then i would look at how is the market pricing the story and is the market in an investors view missing the story. Experience if not wisdom is necessary to see if the market is doing so. I have countless examples of the market even if it is pricing the current story fairly not understanding how the underlying business model and TAM for a given company might be changing. So , for many investments i had conviction, and bought shares accordingly , unlevered and in amounts that made sense for tthe size of my wallet at the time. Not the next Buffet, but 10 year track record of outperformance of the market calculated by a third party, and not me speaks to something.
You start off with telling one of the GOATs of valuation, with 60k subscribers for fairly niche content, that your brain got tired of reading his words.
Then you straight up admit you didn't read his article, but this will not hold you back from disagreeing anyway. Fortunately your grammar was so obfuscating it is impossible to comment on your objections.
Great post, I would say that there might be investors that have the real edge but even with the most simple bussineses that can get mispriced from overreaction after one bad quarter etc It is still beyond me how one can be so certain how and when and if the market will correct that blind spot? So highly concentrated portfolios are really for rare breed indeed. But on the other side once you have a position that runs wildly and becomes big part of your portfolio it kind of does make sense not to rush with trimming ( selling). But overall staying humble and disciplined is the recipe for long term success. I hope you will write more about how you deal with those huge winners and is always the case that you trim back to some fixed predetermined percentage. I believe you mentioned somewhere that any position at any point will not be over 15% of your portfolio .
Your attempt to objectively assess the lessons from someone's setback to enlighten the investment community but without any criticism/ judgement of the concerned (Leo here) is impressive.
With the Steepeners Carry Trade which funded the Rise of The Bundle™ of stocks Gold Silver and Bitcoin since 2023 we are witnessing UNPRECEDENTED Leverage.
230FLATTENING® of the Yield Curve anyway is going to produce the Biggest Ever DELEVERAGING Event since 1929
The leverage point is the one that connects to what we track every day. A fund can be right on the macro story and still get liquidated if the position sizing assumes the correction arrives on schedule. We watch funding rates on crypto derivatives for the same reason, a stretched funding print tells you how much leverage is stacked on one side of a trade, not whether that side is correct. Conviction and leverage getting priced as the same thing seems to be the recurring failure mode across every asset class, not just this one fund.
Thank you for this masterpiece on the behavioral and structural pitfalls of investment conviction. Your points on how conviction distorts position sizing and leverage are spot-on, particularly regarding the fee structure's built-in incentive toward asymmetrical tail risk.
I’d love your take on two portfolio construction friction points this blow-up brings to light:
Illiquidity Mismatches: Holding locked-up private assets alongside leveraged public positions creates a brutal duration gap. When cross-asset correlations spike toward 1.0, the liquid book becomes the sole shock absorber for broker margin calls. How should valuation-driven position sizing factor in this implied liquidity haircut to avoid forced liquidations?
Valuation vs. Execution: Intrinsic value models look years out, but leveraged books live on daily equity curves, dynamic VaR, and prime broker margin limits. When conviction meets market microstructure, a temporary drawdown can trigger forced liquidations long before a DCF thesis plays out. Is there a clean framework to embed real-time risk overlays (cross-asset hedging, trailing drawdown constraints) directly into fundamental allocation models?
Curious where you draw the line between valuation discipline and live risk execution.
The distinction between an investment thesis and the way it gets implemented feels important. A thesis can be directionally correct and still produce a poor outcome if the portfolio leaves no room for uncertainty, timing errors, or simply being early.
Investment conviction after data analysis basically comes down to a gut feeling after all the data analysis...a lot like investor anxiety about luck vs skill... Gut feelings are very important for myPortfolio because there is both things about investing that no one cannot ever know as well as things that can be but are not yet known. Gut feelings part of luck and part of skill...
MyPortfolio has been in correction since jun02, dbc and xle are up because of war, and mySpaceX is up 2.0% along with xli, iwm, ita, and qqq. MyPortfolio holds 35% etfs but smallCaps and foreign are up 26% ytd with cash down to 2.7%. The Market seemed to be taking off, but aug30 says not...
The Anthropic stake staying intact while the public book got cut in half is the real tell — private marks don’t get margin calls, and that gap between “the position I believe in” and “the position the market can force me out of” is where conviction actually gets tested.
Thanks for sharing, it was a lovely read. Conviction is one of those elements (just like patience is one) that can set apart good from great investors, in my opinion. Of course, only if that conviction doesn’t slip into a glorified gambling outfit because of leverage.
A couple of thoughts pop into my head in response to all of this. First is the old saying that the market can remain irrational longer than you can remain solvent. Also, there's a wonderful book called "Being Wrong" which talks about how we delude ourselves. It isn't about investing but should be required reading for everyone who thinks conviction has anything to do with being right. Like confidence, it's probably one of the most essential underlying qualities in the success of any difficult human undertaking, but it's twin is hubris, and we know where that leads. Lastly, the real culprit is leverage, no? But for that, the returns even after being cut by 2/3rds weren't bad, and they would not have had to liquidate. .... but then, I'm happy with a reasonable return over a long time, so what do I know.
Thank you. Humility via a large loss is the next best thing to having a wise mentor. I wish I had read this advice during the dot com euphoria. Learned humility the hard way instead. Great article for those in the midst of another euphoric era to learn from your wisdom.
Way too long a post and had to skim many parts. I will disagree with a few things, but first, i might suggest the name of his business should really have been Situational Unawareness. He clearly demonstrated his having too many blind spots.
I will disagree with if i noted correctly a starting point being price; instead i would suggest starting with "story" something Prof D emphasizes in his teaching with the linking of stories and numbers. Then i would look at how is the market pricing the story and is the market in an investors view missing the story. Experience if not wisdom is necessary to see if the market is doing so. I have countless examples of the market even if it is pricing the current story fairly not understanding how the underlying business model and TAM for a given company might be changing. So , for many investments i had conviction, and bought shares accordingly , unlevered and in amounts that made sense for tthe size of my wallet at the time. Not the next Buffet, but 10 year track record of outperformance of the market calculated by a third party, and not me speaks to something.
You start off with telling one of the GOATs of valuation, with 60k subscribers for fairly niche content, that your brain got tired of reading his words.
Then you straight up admit you didn't read his article, but this will not hold you back from disagreeing anyway. Fortunately your grammar was so obfuscating it is impossible to comment on your objections.
Great post, I would say that there might be investors that have the real edge but even with the most simple bussineses that can get mispriced from overreaction after one bad quarter etc It is still beyond me how one can be so certain how and when and if the market will correct that blind spot? So highly concentrated portfolios are really for rare breed indeed. But on the other side once you have a position that runs wildly and becomes big part of your portfolio it kind of does make sense not to rush with trimming ( selling). But overall staying humble and disciplined is the recipe for long term success. I hope you will write more about how you deal with those huge winners and is always the case that you trim back to some fixed predetermined percentage. I believe you mentioned somewhere that any position at any point will not be over 15% of your portfolio .
Thanks Aswath for educating us.
Your attempt to objectively assess the lessons from someone's setback to enlighten the investment community but without any criticism/ judgement of the concerned (Leo here) is impressive.
With the Steepeners Carry Trade which funded the Rise of The Bundle™ of stocks Gold Silver and Bitcoin since 2023 we are witnessing UNPRECEDENTED Leverage.
230FLATTENING® of the Yield Curve anyway is going to produce the Biggest Ever DELEVERAGING Event since 1929
https://alejandroscorpio.substack.com/p/230flattening?utm_source=share&utm_medium=android&r=8mzfdf
The borrowed money gave the fund no room to wait. I keep wondering how this ends without so much of it.
The leverage point is the one that connects to what we track every day. A fund can be right on the macro story and still get liquidated if the position sizing assumes the correction arrives on schedule. We watch funding rates on crypto derivatives for the same reason, a stretched funding print tells you how much leverage is stacked on one side of a trade, not whether that side is correct. Conviction and leverage getting priced as the same thing seems to be the recurring failure mode across every asset class, not just this one fund.
"...buying a (naked) call option is equivalent to borrowing the underlying asset with debt..."
a) this sentence makes no sense as written
b) even if we assume the author meant "buying" instead of "borrowing" it is still incorrect
I gave up and stopped reading at that point.
Professor,
Thank you for this masterpiece on the behavioral and structural pitfalls of investment conviction. Your points on how conviction distorts position sizing and leverage are spot-on, particularly regarding the fee structure's built-in incentive toward asymmetrical tail risk.
I’d love your take on two portfolio construction friction points this blow-up brings to light:
Illiquidity Mismatches: Holding locked-up private assets alongside leveraged public positions creates a brutal duration gap. When cross-asset correlations spike toward 1.0, the liquid book becomes the sole shock absorber for broker margin calls. How should valuation-driven position sizing factor in this implied liquidity haircut to avoid forced liquidations?
Valuation vs. Execution: Intrinsic value models look years out, but leveraged books live on daily equity curves, dynamic VaR, and prime broker margin limits. When conviction meets market microstructure, a temporary drawdown can trigger forced liquidations long before a DCF thesis plays out. Is there a clean framework to embed real-time risk overlays (cross-asset hedging, trailing drawdown constraints) directly into fundamental allocation models?
Curious where you draw the line between valuation discipline and live risk execution.
The distinction between an investment thesis and the way it gets implemented feels important. A thesis can be directionally correct and still produce a poor outcome if the portfolio leaves no room for uncertainty, timing errors, or simply being early.
So many lessons from this one. No factor (like conviction) can win alone
Investment conviction after data analysis basically comes down to a gut feeling after all the data analysis...a lot like investor anxiety about luck vs skill... Gut feelings are very important for myPortfolio because there is both things about investing that no one cannot ever know as well as things that can be but are not yet known. Gut feelings part of luck and part of skill...
MyPortfolio has been in correction since jun02, dbc and xle are up because of war, and mySpaceX is up 2.0% along with xli, iwm, ita, and qqq. MyPortfolio holds 35% etfs but smallCaps and foreign are up 26% ytd with cash down to 2.7%. The Market seemed to be taking off, but aug30 says not...
Superb analysis, particularly the LTCM parallels. The “smart money vs humble money” divide is defined by behaviour.