95 - How to build conviction in a stock idea (FAQ)

Mental Models discussed in this podcast: Opportunity Cost Margin of Safety Conviction Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode95 Conviction Formula Conviction is a function of Opportunity Cost, Margin of Safety, Position Sizing, and Upside How much conviction do you need? Opportunity Cost - If you have a lot of good current positions, you need greater conviction to overcome that opportunity cost Position Sizing - Smaller positions need less conviction How to build conviction in stocks Margin of Safety - You want it all! (Build a checklist) Above Average Industry Above Average Company within the industry High Returns on Capital Durable Business Skilled Management Management with skin-in-the-game No dilution with buybacks preferred Lower than average prices "Conviction is like a checklist. The more boxes you can check, the greater your conviction." Upside - How high can this stock go? Is it possible to be a 10-bagger or 100-bagger? Summary: Conviction is a function of opportunity cost, the margin of safety, position-sizing, and upside. Your required conviction is determined by opportunity cost and position sizing. You increase conviction by improving the margin of safety and upside potential.