@Goldfish I’ve never felt comfortable using the term “High Conviction”. To me it has a ring of arrogance to it. Usually when I buy shares I feel uncomfortable for a while. I definitely do not have an overwhelming sense of high conviction!

I tend to agree with Howard Marks. I look for a “value proposition” in terms of annual return on investment whether that be from growth, or deep value, and risk always comes into it. I think it is just as risky buying the best business on the ASX and overpaying for it as buying an average business and getting it cheap! What I think we need for outperformance is to pick a great business at a very reasonable price and then wait for Lady Luck to meet you along the way!

Howard Marks says luck can work for you, or against you. You may select a great business for all the right reasons and do poorly, or select a poor business and with a streak of luck and some market madness do very well!

On the average over a long period of time great businesses acquired at reasonable prices should do better than the market.

It could be just wordsmithing, but I like to look for “good value propositions” for the medium to long term.

As for new picks for 2026 which I have added IRL over the last month: WTC, XRO, JIN, TEA, UNI and ABV.

One that didn’t work out and I sold was COS.

I know what you're saying there @Rick - and I often feel the same when I first buy shares in a company, however I do manage to develop a healthy calm and feel very comfortable with some companies that I've held for a number of years already, and whose management have demonstrated a track record of doing the things I'm looking for them to do in regards to those matters I mentioned - like capital allocation, M&A, etc. Once I own a position in a company I am naturally drawn to read more about them and search out answers to further questions around their competitors, industry position, how their clients / customers and their competitors view them, etc. and around the dynamics and outlook for the industry or industries / sectors that they operate in.

So, I guess what I'm saying is it usually takes a few years for me to build high conviction in a company but only when that company actually does continue to tick all (or the vast majority) of the boxes I'm looking for it to tick. I can then become very confident that I'm invested in a high quality company with management I can trust, and that to me means I have high conviction in that company. That's my take on it anyway.

Most companies never make the grade in that regard, including most of the companies I hold. Very few get to that level for me, and those few that do, take years of holding them to get there.

My highest conviction companies (like LYL) are companies where I'd be happy to have my shares escrowed for 5 years and not be able to sell any during that period. Those sort of companies are few and far between for me.

That's a great question @Goldfish and I suppose it will mean different things to different people; to me, my highest conviction company would be one that I would be willing to invest my kids' money in for them at the current share price with a minimum 3 year outlook. Or give as a stock tip to a family member who is going to let me know about it if that tip turns out to be a dud. And I need to be holding a decent amount of it myself already - otherwise I clearly don't have enough conviction in the company.

So price definitely plays a part, it's not going to be high conviction for me if I think it's already overvalued by the market.

However the quality of the company would be the most important aspect, including the company's management; they have to have skin in the game and have a track record of excellent capital allocation decisions, including around the company's M&A track record.

Next the company has to have a decent growth runway and some tailwinds rather than headwinds, so industry position is a factor also - it helps if they are industry leaders or right up there as far as having a great reputation within the industry or industries that they operate in.

There's more, but they're some of the most important ones: Price, quality, management, tailwinds, industry position, track record.

When we asked this question in November 2024, my immediate pick was Lycopodium (LYL) and it was my largest position then and still is today, and it's up by around 40% since then. It's also the only stock in a portfolio I "manage" for my kids. Not much management required with that particular one-stock portfolio. It doesn't scream "value" in share price terms any more (at over $14/share now compared to around $10/share then), but it is definitely quality. And I believe there's further upside still, so they remain my highest conviction company at this point in time.

In terms of the company I hold that I think is most undervalued, that depends on what happens. If the gold price keeps rising, it could be Black Cat Syndicate (BC8) but a safer bet would be ARB Corporation (ARB) which only needs to prove that they aren't getting smashed by Trump's tariffs while they roll out their USA stores and they'll get a decent positive market re-rating I reckon. They are also very high quality, with very good management, with a great track record, who have this new growth avenue through a continuing successful USA store roll-out, with great industry position, albeit intentionally positioned at the quality end of the market, so people don't go there for the cheapest 4WD gear, they go there for the best gear. Manufacturing everything currently in Australia and Thailand and importing some other stuff from China, there is a perception that their USA roll-out is going to be derailed by tariffs, but I have confidence in Andrew and Roger Brown to navigate through those obstacles just as well as they have navigated through every other obstacle that they've been presented with over the many years they've been running the company. So ARB would be another company I have high conviction in, and I do hold ARB in my SMSF; I should probably add more ARB to my Strawman.com portfolio actually while they're down around $30 to $32/share.

Hey @Goldfish, first happy new year to you and all the Strawfolk!

IMO, high conviction means the stock you’re most confident will deliver the strongest risk-adjusted return. the one you’d allocate the largest position to.

To me, conviction combines expected return (undervaluation  [your point 2] and upside potential [your point 3]), confidence in your thesis, and your risk tolerance

So, it’s the stock you’d invest the most money in - number 1 of your 3 would represent your best idea with the strongest conviction.

Been thinking about my highest conviction picks for 2026...am not yet sure but two that are in the running in the ASX are BB1 and QOR. In the US RKLB and HBM

Hi @Goldfish , thanks for the input!!

I guess everyone will define it slightly differently so thanks for categorising.

For me, it was the companies I am most excited about in 2026.

@Goldfish i think you are right to struggle with the term "high conviction", im not sure what that means, and in finance interpretation of words varies greatly. i think in terms of risk/reward and categorisation of risk/reward. i find frameworks useful in assessing what type of risk we are dealing with as a starting point, and go from there. i was toying with writing a post on it, so far i have the headline, lol. maybe this inspires me to finish it.

BTW i know the coal companies and CSL, i don't recognise the codes of the others, and that says something, imo. Is ART Airtasker? The point is, risk is the issue you are dealing with here. How to recognise it and what to do about it in the context of a portfolio. imo