Too Much Conviction Can Hurt Your Returns... Even When You're Right

"Dish and Amazon deal 100% happening."

That was the headline of a July 25 post on WallStreetBets... the infamous Reddit investing forum. It acts as a message board where investors can commiserate, brag, and discuss investing ideas.

The "Dish and Amazon" post detailed a potential partnership between Amazon (AMZN) and Boost Mobile, a phone-plan provider that's part of the DISH Network (DISH). The poster wrote...

Just searched "Boost Infinite Sim" on amazon, and it brings up an inbuilt ad for the leaked $25 a month plan... This deal is 100% happening, almost certainly today during trading or right at market close today. Last chance to hop on the call train...

In other words, the poster had uncovered an unannounced wireless plan on the Amazon marketplace. This suggested that Amazon and Boost Mobile were planning on a partnership – which would likely be bullish news for DISH.

It was smart research. And it was an exciting idea. But you can probably guess where this story is going...

This Reddit trader still lost money.

You should have conviction in your investments... But getting too sold on an investing idea can lead to bad decision making.

Fortunately, two simple tools can help keep your emotions in check. They can help you stay invested longer – while also avoiding big losses.

Let me explain...

The Reddit poster encouraged readers to buy call options on DISH. That's very different from selling options (a strategy that our colleague Dr. David Eifrig has used successfully for years).

Simply put, when you buy calls, you're making an investing play where you bet the stock will go up. But there are two problems with buying call options...

First, you can't buy a "small" option position. Every option contract bundles together 100 shares of stock. So it's important to be aware of that if you're buying calls. Call-buyers are making a leveraged trade... with tons of cash at risk.

Second, options have an expiration date. They come due at regular intervals – usually once a month.

This delay lets you watch your option's performance and plan accordingly. You can even close the contract early if the trade goes against you. With the right interval of time, you can use this to your advantage.

But the Reddit poster was encouraging readers to buy options with just three days until expiration. The idea would risk tons of capital... on a trade that could go wrong almost instantly.

The poster had that much conviction in his research. And his idea was correct... The very next day, Dish announced a new Boost Mobile plan in partnership with Amazon Prime.

The problem was, shares of DISH fell anyway. Take a look...

In a follow-up thread that evening, the poster admitted he had lost about 30% of his investment.

This is unfortunately common. Investors make huge bets based on a single data point. They fall in love with their own research... and take massive losses.

Yes, analysis matters. But in practice, the market doesn't always reward analysis. It rewards the folks who stay composed and rational. If you can't do that, you'll likely lose money – even when you're right.

Here are two steps to keep this from happening to you...

First, keep your position sizes small. You can always buy more of a stock later. This also means you should avoid leverage unless you know, without a doubt, that your finances can handle it.

Second, always set and follow a stop price. This is the maximum amount of loss you're willing to take on a position before you sell. Stops mean you never have to decide when to close a trade – your exit strategy is baked in when you buy.

Remember, though, you never want to enter your stops in the market. Market makers can see these stops and shake you out of the trade. A mental stop is enough.

The market has a way of punishing folks who try to outfox it. But by managing risk properly, you can grow your wealth sustainably in the long term.

Good investing,

Sean Michael Cummings

Further Reading

"You're not in control of stock prices or interest rates or tomorrow's headlines," Dan Ferris writes. "You must be in control of yourself." As one gambler's story shows, a few key steps can help you make better financial decisions – and avoid devastating losses... Read more here.

"Focusing on being right is a distraction," Chris Igou says. Great forecasters are legendary in the stock market. But while it might seem like predicting what's next is the surest way to make big gains, the truth is much less exciting... Learn more here.

Market Notes



Booz Allen Hamilton (BAH)... "offense" contractor
Curtiss-Wright (CW)... "offense" contractor
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Interactive Brokers (IBKR)... online brokerage
Zillow (Z)... online real estate
Adobe (ADBE)... cloud services
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Bunge (BG)... vegetable oils
Wayfair (W)... home goods
Trane Technologies (TT)... HVAC manufacturer
Parker-Hannifin (PH)... motion and control technologies
Toyota Motor (TM)... automaker
Ingersoll Rand (IR)... manufacturing
MSA Safety (MSA)... safety equipment
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Constellation Energy (CEG)... utilities


Pfizer (PFE)... pharmaceuticals
Moderna (MRNA)... pharmaceuticals
Extra Space Storage (EXR)... self-storage
Enphase Energy (ENPH)... energy storage
Crown Castle (CCI)... communications REIT