High Conviction Is Ruining Investments

Even the smartest investors on Earth have learned this lesson the hard way.

The Dangerous Allure of Conviction

Conviction sounds heroic. It’s the mark of the “visionary investor”; the one brave enough to bet big when others doubt.

But time and again, history shows that conviction without humility destroys portfolios. The problem isn’t believing in your ideas. It’s believing you can’t be wrong, and staking everything on it.

In investing, certainty is the enemy of compounding.

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John Paulson From Wall Street Legend to Gold Casualty

In 2008, John Paulson made $15 billion by betting against the housing bubble. It was the single most profitable trade in history. He became a symbol of conviction paying off.

Flush with fame and investor cash, Paulson launched a Gold Fund in 2010, convinced inflation would soar and gold would explode higher, and obviously, investors were interested.

The trade didn’t go his way. Gold prices plunged. Paulson’s fund lost nearly 65% by 2013, and billions in client money evaporated.¹

You know what could have saved that fund? Diversification. And it’s really humility that pushes us to diversify.

Michael Burry The “Big Short” That Never Ends

Michael Burry was famous in the investor world following his big wins in 2008, but The Big Short made him more of a household name. Like Paulson, he also built his name on conviction. He bet against the housing market in 2008, and he was spot-on, making him a very wealth, well-respected legend.

But since then, Burry has spent more than a decade betting heavily against the market. He has been predicting bubbles, crashes, and collapses that never came. In 2023, he took a $1.6 billion short position on U.S. indices.² When markets instead hit new all-time highs, it wasn’t great for him or his investors. Someone like Burry or Paulson can afford to take big bets because the upside is so high for them, but…can you?

Even if you’re right once in a generation, conviction without timing discipline can make you miss the long compounding that builds real wealth.

Bill Hwang The Archegos Implosion

Bill Hwang’s Archegos Capital Management might be the most spectacular modern collapse of all.

Hwang quietly built a $160 billion portfolio using extreme leverage, betting almost entirely on a few “can’t-miss” stocks like ViacomCBS, Discovery, and Baidu.³ He didn’t diversify. He didn’t hedge. He just doubled down.

In March 2021, ViacomCBS dropped 25% in a week. Archegos couldn’t meet its margin calls. Within 48 hours, the entire fund imploded, erasing $20 billion of wealth and triggering $10 billion in bank losses worldwide.

This is the same year that the S&P 500 was up 28% in a diversified and far more stable portfolio.

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The Common Thread

Across all three stories, the pattern is the same:

1. A winning streak breeds overconfidence.
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2. Conviction turns into concentration.
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3. Markets shift and the lack of humility destroys everything.
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It’s a timeless reminder that we diversify because we have humility. We know we can’t tell the future, and we know to always expect the unexpected.

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The Quiet Power of Simplicity

Meanwhile, the humble investor holding a few broad-based ETFs has quietly outperformed most “star managers.”
According to S&P’s 2024 SPIVA report, only 8% of active large-cap managers beat the S&P 500 over the last decade.⁴

A simple, diversified ETF portfolio:

• Keeps fees low.
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• Avoids single-theme blowups.
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• Doesn’t depend on timing.
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• Let’s the power of compounding work, quietly.
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Conviction Belongs in the Plan, Not the Bet

You should absolutely have conviction in your process, but not in your predictions.

Have conviction in saving consistently, staying diversified, and letting markets work over time.

That’s the kind of conviction that builds generational wealth.

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If you would like to discuss investing and financial planning, contact us at info@maddahiwealth.com.

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Best Regards,

Roxana

Sources:

1. Reuters, “Paulson Loses Big on Gold” (2013)
2. Newsweek, “Big Short Investor’s Billion-Dollar Bet Raises Red Flags” (2023)
3. Reuters, “Rise and Fall of Bill Hwang’s Archegos” (2024)
4. S&P Dow Jones Indices, SPIVA U.S. Scorecard, 2024
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