This is a great little article by Wesley Grey of Alpha Architect highlighting the benefits and challenges of investing with conviction and staying the course. Basically the article describes the construction of a perfect foresight portfolio i.e. God is at work here. Perhaps not surprisingly this portfolio has a CAGR of almost 50% and being God clearly is an advantage when investing. Now comes the fascinating part; for suppose this 'God' would have been investing his clients’ money then he would have seen his investors run for the exits on multiple occasions. Why? The answer lies in the last table of the article showing the top 10 drawdowns over the investment period. The maximum drawdown of the portfolio would have been -60% and what makes matters worse is that the index was up almost 100% in the same period.
The article reminds us that we must have a long horizon when investing. It also tells us that when we invest with conviction we must be prepared to suffer and potentially be ridiculed in the interim.