Detachment vs Conviction in Investing | Durable Value Ep 84
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Joe Muratore: Well, this is a great one. Life is full of tension and paradoxes, and today we're gonna talk about probably the, the greatest, uh, tension in investing, which is detachment versus conviction. How these live together, they're each a topic on their own. So detachment is the stoic idea of making decisions without wanting the outcome so much that you overpay or chase deals.
Conviction is the offense. It's the belief in something, both a deal or a market, a thesis. You have to have both. You have to be doing enough things to be detached from the outcome, uh, agnostic enough to, uh, to get the result, but you have to have conviction to know what you want. If you don't know what you want, you can't detach enough to get it It's confusing.
Tell us what you think.
Ryan Swehla: You know, it's, it's interesting because y- uh, you could use the word for conviction, you could use the word risk, and for detachment, you could w- use the word riskless or, you know, low risk. And when we put it in that context, it comes up with a couple ideas. The, the one idea is like, well, we're investing, and it's other people's money, so we should just be detached.
Well, the problem is we're not paid to be detached. Yeah. We're paid to make decisions and have conviction. And, um, so there is this natural tension because the reality is, you know, football teams don't win by having detachment. Right. They win by having conviction. The reason we need detachment is because it is almost like a, a little bit of a pressure release valve on that conviction.
So there, uh, i- in investing, there is this play between the two, but there is a, a heavy emphasis, as there should be, toward conviction, because conviction is what leads to outcomes. I've heard it said that our job is to have an a con- a contrarian opinion and be right. Yeah. It's a, it's a very important part.
Um, let, let's say it this way. I think that there's two schools of thought here, back to detachment or conviction. On the detachment side, most people invest by, by trying to be so conservative that they can't be wrong, by having so much conservatism baked in that even if things go wrong, they're still fine.
It's great. It's important. That's, for, for most companies, for many companies and investors, that's the whole equation. Like, is this still good enough with highly conservative assumptions that, uh, I'm either gonna kill it, or worst case, we'll be fine. And that is a very safe place to hang out, a, a very, uh, a, a strong place to be.
But there is, while preserving that and putting out that on the shelf, uh, the alpha here is conviction. Uh, a way to say this differently is, uh, attribute scoring. Creating, scoring your, your markets, your deals, uh, pieces of your deals, seeing your, uh, comp, both your comp set of what has been and then forecasting what you think will be, seeing how new inputs, uh, new laws or what's happening in adjacent markets are distorting demand or supply.
You can get to a place by coloring with crayons. You can say, "We are conservative," da, da, da. You can get to a place. But to be world-class, you both have to keep this mindset, or you will go, you'll, you'll be in trouble, and at the same time, become amazing at mapping all these, uh, distortions into a belief that's grounded in actual data, that's broken out into subsets and pieces so it can be reliably, uh, built to forecast what's about to be.
And that ... There's, there's conviction of just like, "I believe," and then there's deep data-backed convicti- conviction that can really fuel an expert level of belief. And not just g- a good gut, but reliable, you know, outsized outcomes that happen over and over again. That is, um, a very powerful and advanced and sophisticated way to live You have to have both, but I'd say 80% of firms do this.
A very small but growing number, especially in this AI age, are, are starting to do this. Yeah, and really you're talking about almost moving away from, um, emotion to data. And if we're candid about it, that's n- that will never be a complete move away because you're still taking data, and you're, you're making inferences about that, and you're still constructing a model based on your beliefs.
So there's always belief intertwined with that. But what data allows is a much greater ability to act both with conviction or detachment because the data and, and the modeling allows you to lift the emotion out of it to where conviction is much more driven by, you know, data and, and conclusions than it is by gut and intuition.
But also it allows for the detachment. Uh, w- I, I think of a, a recent investment committee meeting that we had where, uh, it, it almost felt like we kinda didn't need to vote. We voted because we all knew what the answer was, and because the, the process requires a vote. But there, there wasn't, you know, lots of conflicting discussion because we knew what the underwriting model had, we knew what this new, uh, due diligence item was bringing to it, and we knew that these, these two didn't reconcile each other, and that the, the gap was not, you know, overcomeable by the seller.
Mm. And so it, it is nice that when that detachment comes, it's not coming from a, this sort of a Zen state of giving up the emotion that I had invested in this. It's coming much more from this is the, this is the model, this is what the assumptions that we've all agreed are, are appropriate for this, and this isn't fitting it now.
Joe Muratore: And so we have to be okay with saying it doesn't fit. There is a, a delightful case of having your cake and eating it too in this scenario. And by that I mean what's largely gotten us t- here is, uh, uh, being detached, detachment experts of a sort when we've talked about market cycles and a lot of other things.
But in this case I wanna focus on we are really good at a, at a reverse funnel. We are great at putting out lots of offers, seeing which properties move towards us, which sellers move towards us. You know, e- even as we- Yeah ... we work on this today, we're going into escrow on a multi-tenant industrial deal and an apartment deal that are, like, incredible pricing, and it was six to nine months of, like, uh, actually both, one was nine months, one was over a year from, like, first engagements and a very long, you know, inbound process towards getting great pricing.
No broker funnel, no, you know, we're competing. Just, like, incredible In the regard that you make your money going in. In other words, our detachment has been stoic- Yeah ... monk-like, uh, to get to here. Uh, our rents are conservative. We're great at conviction. We do map very well. Uh, our, our underwriting is conservative, but as we mature as a firm, I could see that we're gonna get more and more data points and better at synthesizing, uh, you know, events that create events that create events, and scenario playing and building that conviction because if, if we can, uh, continue to get better at seeing what will be, then when we buy it right, it's that much better.
Ryan Swehla: You know, it's interesting because the, the purpose of an investment committee almost creates that balance of conviction and detachment because, y- you know, when we're off to make our own decisions, a lot of times we can be in this echo chamber where everything's reinforcing what we already think, and we go down a path.
And, and what the, the investment committee does is it doesn't... A properly functioning investment committee should not be dampening conviction, but rather it should be sensing and seeing that conviction and reinforcing it, but be there to provide some detachment when the process doesn't go as we expected.
Um, it's, it's very rare that, you know, my committee, they get approved, we go through due, due diligence, everything's fine, and we move on and close. There, there's, there are always these, uh, moments along the way where we have to balance our conviction level with has this deal moved in a way that we should h- be really drawing on our, on our detachment.
I think that's where the investment committee provides an, a, you know, kind of a safe place for that.
Joe Muratore: Well, we'll keep going down that path. Investment committee is, um I think it's really crucial for them to add their pieces of value, um, b- and they come from a lot of d- different backgrounds, and they're also not, uh, at the deal.
They're detached by nature. Yeah. The person presenting is often so in the deal that, like, they know every piece of leverage. They've been working on it for six months, sometimes a year. Uh, it's tempting to be married to a deal, and investment committee can provide, uh, that piece of detachment. But I also think it's really important for investment committee to be-- It's almost like investment committee's a, a blunt tool versus a, a scalpel, and it's, it's, it's important for the investment committee to know how much force to exert because they aren't the investor directly.
Their job is to avoid catastrophe, uh, make sure that we're on the right path, uh, without being, uh, the king. You know, it's like a right balance because the, the, the, the people with ears to the ground are hearing things in real time, and the inve- the investment committee, you know, is a step or two removed.
That's both powerful and valuable and makes them a little tone deaf. So they've got to be, uh, aware enough to spot that You know, it, it, it's an interesting, uh, discussion. I thi- I think we do it well. I think it's something that, um, is tricky for a lot of firms. You know, one of the other constructs that we've talked about is this idea of the reverse funnel.
Instead of working through a broker's funnel and their marketed process, we wanna work brokers through our funnel. Uh, let's talk about that in the context of detachment versus conviction. Yeah. This is such a powerful idea in that, um, you ... Sellers, the, the reason they hire brokers is they need to create an auction.
Like, in an auction environment be like, "Oh, I want that. I want..." You know? The more, the more people, the more interest, the higher the prices. Uh, it is our job to, uh, avoid auctions like the plague. We are not in the auction business. We are in the zen business. We are... It's our job to be de- detached in that regard.
You know, every day I come in and, uh, either us or someone on our team gets, "Hey," you know, "Da, da, da, what do you think of this deal? What do you think of this deal? What do you..." Like, every day. Some days we get... Y- you know what? Actually, at this point we don't really. It used to be that we would get all the standard broker emails like, "Hey, this is coming to market, and we will have a call for offers on this date."
Yeah. They don't even email us anymore. Like, we don't even get those emails anymore. That... Those people don't talk to us. That's beautiful. We've cultivated over several years, the people that reach out to us are like, "Hey, the... what do you think of this deal? Da, da, da, da, da." And personally, I do check the listings.
I think I've seen everything on the market in the Western United States that fits our criteria, and once every two weeks I look at that. I know our team does as well. But almost always we are waiting for a story. We are waiting for an inbound lead from someone who has an idea and a connection. This is their person that...
This is their seller they know directly, and for whatever reason, it's like, "Hey, what do you think of this?" They, they are thinking about it. Alternatively, sometimes things go to market. They sit. They go in contract. They go out, and then we get the call, and it's like, "Hey, this has been out there forever.
Like, it's just not taking. You know, I know you guys aren't the highest payers," but like, "Can you just give us a number? Like, what would it be?" And by then it's like, great. You know, we've, we've gone from being funneled towards an outcome to a stoic detachment of we put out lots of offers. We see them as a Ferris wheel.
You know, you get in the car at the top, and it works its way around a few times. And it's gonna go on a six to 18-month cycle. And, you know, it's really hard. I mean, it's really hard to go home and turn your brain off and not want a great deal, but that is where, uh, excellence and value live.
Ryan Swehla: Well, and in a sense, that's where detachment and conviction...
Detachment creates conviction, because by having lots of offers out there, lots of deals underwritten, through that process, we're actually able to better discern, oh, no, no, that is the deal that I should be pursuing right now. Yeah. And this speaks to kind of like mapping optionality and understanding how, you know, taking, uh, the- the detached ability to have a lot of deals out, a lot of offers out, and use that to build conviction.
Joe Muratore: Maybe speak to the discomfort of that. I'll add that it's so uncomfortable to write offers that you're not sure you want, you know, or that are at an- a price that's a little embarrassing. You know, I recently wrote an offer on a de- on a really nice deal at a pretty low number and, you know, didn't get a response for a few days.
And then finally the broker said, "Hey, I'm meeting with the seller. We're gonna- we're going to talk about that." And it was- it was a lot less than the seller wanted. But six months had gone by. And even now, I just have this feeling that, you know, give it another month, we're gonna- we're gonna hear back. And, um, but it's- it is 100% uncomfortable, and you have to understand that the offers you're making today, you- you're not gonna go into contract on it tomorrow.
It's gonna be one to two quarters away, maybe three, and you just have to, you know, put it out there. But that reverse funnel has been key to our success. And when- when we have several deals in escrow, and we have lots of offers out, we're happy. And when things start to get thin, and we start to get pushed into a corner, man, that is an unhappy, un- uncomfortable place, so, uh, a piece of wealth is having a full Ferris wheel.
Yeah. A- a- and fundamentally, again, our job is to have conviction and to move toward conviction and to act decisively, and, um, that's why we're paid for the work that we do. But having that healthy level of detachment both early in the deal stage and late in the deal stage really allows us to ultimately make- make better investments.
In this episode of Durable Value, we dive deep into one of the greatest paradoxes in investing: the tension between detachment and conviction. How do you balance making data-driven, unemotional decisions with the need to act decisively and believe in your thesis? Join us as we explore real-world examples, investment committee dynamics, and the strategies that set world-class investors apart.
Timestamps:
00:00 – Introduction: The Paradox of Detachment vs. Conviction
00:24 – Defining Detachment and Conviction in Investing
00:47 – Risk, Conservatism, and the Two Schools of Thought
01:42 – The Power of Conviction and Attribute Scoring
03:13 – Data-Driven Decision Making vs. Gut Instinct
05:14 – Investment Committee: Balancing Conviction and Detachment
07:17 – The Reverse Funnel: Creating Opportunities
08:07 – Avoiding Auctions and Broker Funnels
09:14 – Building a Network for Inbound Deals
12:06 – The Ferris Wheel: Managing Multiple Offers
13:52 – Discomfort and Optionality in Deal-Making
15:32 – The Key to Success: Detachment Creates Conviction
16:53 – Acting Decisively and the Value of Detachment