The Conviction Mirage
An enlightening conversation that is relevant to AI and Nvidia.
[The context is that I was a stock analyst in the 1990s, and one of my top names, BEA Systems, which has created generational wealth for my family and many others, is under siege in the market. The stock is down sharply on news that IBM has launched a “killer product.” BEA Systems provided the software to prepare the new Internet for e-commerce and commercial transactions. It was key to the latest wave of “internet infrastructure.”]
The Convo
[BEAS stock is indicated down sharply.]
Salesman: Did you see this? IBM could be serious competition. Looks bad!
Me: It’s horseshit. Ignore it. I’m busy.
[When the market opens, the stock drops even more than indicated.]
Salesman: Hey, I have our client (huge fund and largest shareholder) on the line, and they want to talk to you about this.
Me: Okay, put them on.
Fund: Hi, we are concerned about this, and the stock is down a lot. What is going on?
Me: Nothing. IBM is losing deals. They updated their product and put out lots of fluff in a press release. But it’s not real.
Fund: How can you be sure?
Me: Well, two reasons - IBM has no support in the field for their product, and they only implement about 6 of the required 12 services for the product to be useful in real applications.
Fund: Oh great, that’s fantastic. Thank you so much for your help!
[Stock goes down more; client calls back.]
Fund: Hey, listen. I appreciate all your help here, but we don’t know what these services you speak of. Our portfolio managers are panicking.
[Interlude: It occurs to me that the largest institutional shareholder doesn’t know what the company does. Despite being an “axe” on this particular stock, I'm still relatively young in the business, and I think to myself, holy moly!]
Me: I take the next 1/2 hour on a call with a bunch of analysts and portfolio managers at this fund, explaining things from the ground up, from “naming services” to other distributed transaction types.
I think the call was definitive, but I don’t know how they interpreted it. Remember, these guys own a lot of stocks. Think of how easy it is to own Costco, Walmart, and Netflix. Then you have this thing getting cut in half.
Yes BEAS recovered and folks like me made even more money but that’s not the point.
The Point
When stocks go up, everyone feels firm in their convictions. But when something happens, and stocks fall sharply, their ability to articulate and believe in their own convictions often goes out the window.
My concerned self might say, “What are you doing owning individual stocks?!?” But the fun part of me says, “Do your work, go deep, and think independently.”
FWIW, I can tell you that I’ve been involved with AI applications for over 40 years, and this is a big deal. Unfortunately, you need to allocate 20 hours of your work week right now to keep up with it if you want to stay close to the edge.
Every ten years in this business, I say, “Wow, there is no better time to be a technology-focused investor!” Here we go again…