Beyond the Noise: A Framework for High-Conviction Investing

A conversation on holding winners & portfolio management

After Friday’s washout, I find this discussion more pertinent than ever. Volatility is just a function of generating outsized returns. If you want the monster winners, you have to accept the periodic shaking out.

In the last 24 months, I have left my fair share of multi-baggers on the table by being cute.

I sold AEHR at $25 from $10 and again at $50 from $33. I sold LITE at $400 from $240 and SNDK at $325 from $200. In every instance, I was early, and in every instance, I missed the meat of the move. These were top conviction positions in my portfolio, yet I let short-term noise dictate my exit.

The biggest lesson I have learned is that patience and deep-rooted conviction is where the alpha is made.

The Art of Sitting Tight

Trading is not easy; the market is designed to shake you out. I remember being a hyper-bull on DOCN at $54 in January/February. I watched it rip to $70, only to see it pull back to $50. That volatility shook me out of the name. It is now trading at $180.

You will not bat 1.000 in this game. I aim to bat over .600. The secret is recognizing that when you hit, you need to let those positions work over multiple quarters. You must know what you own. If you don’t understand the business, the supply chain, the trends ahead, and the inflection points, then volatility will destroy you.

When my winners draw down, I do not worry and obsess over the price action. I re-read my thesis reports. If the fundamental story holds and price is still above a rising 50 SMA, the drawdown is merely noise. It is an opportunity to remind myself why I have conviction in the name.

My Rules of Engagement

I keep my process simple. Complexity creates noise, and noise leads to self-sabotage. My framework rests on four pillars:

1. The 50-Day Rule: I do not own stocks living below their 50-day moving average. When a stock consistently closes below this level, the primary trend is broken. Opportunity cost is paramount, and I would rather rotate into a new leader than hold dead money. While I may continue to track a name after a breakdown, it has no place in my active portfolio.

2. Concentration as a Strength: I allocate to a concentrated portfolio of 5–10 stocks, sized between 5% and 30%. This range allows me to know my companies inside and out. It provides enough diversification for my personal mandate while ensuring that when I have a winner, it is large enough to move the needle.

3. Risk Management at the Entry: My goal is to keep risk tight on every entry. If that means trying 4-5 times to get positioned in a high-conviction idea, that is exactly what I will do. The positioning battle is often difficult, but when the thesis works, the effort becomes well worth it. Managing risk at the point of entry is one of the most important parts of the game.

4. The SMID Cap Edge: My universe tends to live in the $250M - $5B market cap space. Identifying early, major inflections in these businesses can yield special return profiles. I look for companies with the most leverage to emerging trends at strong valuation profiles. These are often businesses that institutions or the sell-side misunderstand, allowing me to position myself before the market catches on.

From Research to Execution

My research process is deep. I map supply chains and identify companies at the intersection of critical growth trends. I want players who can fundamentally reshape the market’s perception of their earnings growth.

When I have conviction, I am not afraid to average up. I have recently done this with PENG and FCEL. As I gather more information, my thesis moves from speculative to high-probability, and I press the gas.

In uptrends, I press the gas on my highest-conviction research. In downtrends, I move to cash or target high-quality shorts that meet resistance against key moving averages. I needed to be more aggressive in identifying that the trend was down earlier this year, but once I recognized the environment, I successfully pivoted to high-quality shorts as they met resistance against key horizontal and moving average levels.

Join the Community

If you want to see how this process looks in real time, consider upgrading to a paid subscription. I walk through my research, my thoughts, and my actual execution in real time for my members. This is the exact same process that has me returning 100% YTD with only shares, even after the drawdown we saw this past Friday.

Stop getting cute. Trust your research. Trust the management and the business to execute. You will have landmines. That is the cost of doing business. If you hold your monster winners through the volatility, those landmines will look minuscule in comparison.

Let price tell you the story, and when the trend is in your favor, have the courage to stay put.