For investors, conviction—the depth of your belief in an investment opportunity—is the most important compass.
And talking about your conviction with your colleagues is something that happens on every investment team. But it’s a minefield.
When the tendencies of how each person on an investment team forms and communicates conviction are poorly understood, it can inadvertently distort investment decisions, diluting fundamental analysis with interpersonal misinterpretations.
People’s Default Tendencies and Personality Traits
Personality and cognitive styles loom large when it comes to conviction.
Some people are simply more convicted people in general. They’re decisive. They love something—or they hate something. That oyster soup is damn delicious, or it’s reprehensible and get it out of my face. That Tesla Roadster is absolutely the model we should buy – or it’s definitely not.
Hell yes, or hell no. They’re gung ho personalities, decisive temperature, brimming with natural confidence. At their best, it’s not that these conviction-by-default people are incapable of subtle thinking. It’s more that their brains tend to work down or up from either a high or low starting point.
For example, I know investors of this breed who, upon encountering a credible opportunity, tend to start with 9 or 10 out of 10 conviction after one pitch. They default to, “What could go right?” They default to enthusiasm. As they undergo diligence, their enthusiasm sometimes lessens, and their conviction gets chipped away. If the investment gets done, the opportunity went from 10 out of 10 to 7 out of 10 – still above the bar.
There’s also the inverse. There are investors who start at “no” and default to skepticism. For whatever reason, they’re more jaded by nature. More cautious. They’ve seen too many failures. As they spend time with the founder, they warm up, and conviction creeps up from 4 out of 10 to 7 out of 10—and the investment gets done.
Still other types of people are equivocal by nature and tend to default to “both sides have good points”—they see the possible merits and demerits of every investment and have a measured way of forming and expressing opinions. These more deliberate people are constitutionally incapable of loving or hating anything – they start at 5/10 for everything.
All of these types of investors—the gung-ho, the skeptics, the aggressively even keeled—can arrive at 7 out of 10 conviction (or higher)—or whatever level necessary to pull the trigger on the actual investment.
Each person ended up in the same place. So I’d argue the difference in each person’s starting “conviction default” matter didn’t matter presuming it took each person the same amount of time to arrive at the right answer.
Talking about Conviction Casually Can Change Underlying Conviction in Unhelpful Ways
Investors gauge how much their partners believe in a particular opportunity by asking, “How much conviction do you have in this opportunity versus the others we’re looking at?”
In a team context where you talk about deals before a decision’s been made, these differences in personality and style as it relates to conviction introduce impurities as you try to calibrate how a colleague is thinking about an opportunity.
If you ask someone whose default posture is skeptical to provide an update on his in-progress thinking on a given idea, he might come off to the group as lukewarm. He’s still forming his views. His on-the-one-hand, on-the-other-hand narrative might undersell his potential to garner great enthusiasm. In that fragile state, the rest of the group might pile on to reinforce the skepticism—skepticism that may have had more to do with a personality disposition than fundamental analysis. And just like that, you’ve killed the deal.
These dynamics make it vital to know the tendencies of each colleague on the team, how they tend to default, and what “high conviction” sounds like in terms of the words they use and body language they display.
Interesting dynamics. I’m sure you all have done/experimented with this, and you also have way more experience in this are than me, but if you will permit me just one anecdote: What I have sometimes done in an recruiting context before is to write down what we all independently think about the candidate prior to discussing it. This way we have our own opinions formed/recorded which are less biased and we can use that information. It seems to help prevent consensus seeking. It’s still difficult/important, though, to account for the fact that some interviewers are more positive than others.