One of those strange terms tossed around the investment universe is conviction. At its core, conviction refers to how strongly or firmly you hold a belief about a potential investment. The number of times during an underwriting decision us Deal Guides have been asked—or as we matriculated in our career asked others—”What is your conviction level on that?”, are countless.

Among hedge fund traders, there is the phrase, “strong convictions loosely held”. This phrase is to encourage someone to do the work to back up a belief but in traditional public markets fashion, be able and willing to admit you were wrong—or mistimed the market—and dump out of the position.

In private markets, you don’t typically have the luxury of dumping your position on any given day. When you buy part or all of a private company you are married to it for the duration of your hold period. Typically, three to seven years, which averages close to five.

This long-term commitment is precisely why conviction, in private equity (PE), is built off the facts that support or disprove your investment thesis. Private equity has a high bar to proving out their investment thesis. Or at least it should in a healthy due diligence process. The cost of getting it wrong is not only a depressed ROI but also for the private equity group (PEG) having to own and advise the problem portfolio company for the duration. So much time is spent checking one’s own or teammate’s conviction level to try to avoid betting on a dog with fleas that will be by your side for three to five years.

Beyond avoiding bad bets, conviction is about ensuring your own intellectual honesty and rigor as an investor. Humans are easily fooled and one is regularly fooled by overconfidence in early thinking.  If you disagree with this, we recommend reading Thinking, Fast & Slow or The Black Swan.

Due Diligence is a process that usually plays out over months. The investment thesis is nothing more than early hypothesis that gets tested and at times reshaped as more is learned about a target, an industry, and the customer base. Just like the hedgies, PE investors’ returns often rely on strong convictions loosely held. Being wrong may seem costly, when due diligence on a business you walk away from just a few weeks from close might cost a firm into the seven figures.

When preparing for the investment committee or when working with diligence advisors preparing for a readout call, we ask ourselves early and often, “How much of my bonus would I put on that piece of information or on the totality of the deal?”. Doing so forces us to check in with ourselves and rationalize through what we believe to be true because the facts support it versus what we want to be true because it would make our life easier in the short run.  We explore this idea of Thinking in Bets more here.

We often put such thoughts in writing, as the act of writing and editing one’s writing, is an act of optimizing one’s decision-making process. Author Anne Lamott, renowned for her works on writing and faith, famously calls the first draft, “sh!tty first drafts” for this exact reason. Poor thoughts are easy to correct when they are on paper and separated from who we are.

It is here we find that conviction measuring serves a dual purpose: it optimizes our thought process while simultaneously checking our ego. The best investors know when to stand firm on well-researched convictions and when to abandon them in the face of contradictory evidence. This delicate balance—between confidence and flexibility, between intellectual rigor and humility—ultimately separates successful investors from those who cling too tightly to their initial hypotheses.