Conviction Without Certainty: How Great Investors Move in Uncertain Times

What’s the difference between conviction and certainty?

In this episode, Arie van Gemeren — fund manager, real estate investor, and author of Timeless Wealth — unpacks one of the most overlooked distinctions in investing and decision-making.

Certainty can blind you. It locks you into narratives, filters out risk, and creates fragility.

But conviction? Conviction is different. It’s not about being right — it’s about building a process you trust, having the courage to act, and the humility to adapt when the facts change.

Drawing on insights from Daniel Kahneman, Nassim Taleb, and Philip Tetlock — plus real-world investing stories from the 2020–2023 real estate cycle — Arie explores why the most successful investors aren’t the ones who are sure, but the ones who are prepared.

If you’re an operator, LP, capital allocator, or just someone trying to make smarter decisions under uncertainty — this is the episode for you.

Articles referenced in this podcast:

The Overconfidence Bias 

Alpha & Beta In Real Estate Investing

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Think Well. Act Wisely. Build Something Timeless.

Transcript

SPEAKER_00: 0:00

Most people think conviction means you're sure. But I think conviction means you act even when you're not sure. And that difference is literally everything. Because here's the truth. The most dangerous kind of investor isn't the reckless one. Although let's be clear, being a reckless investor is not a good thing. But I think the most dangerous investor is the one who thinks they're right. The one who believes their model wholeheartedly believes the story, believes the market will reward their vision because it always has. But here's the thing. Markets do not reward certainty. They reward adaptation. Real estate fund manager. So let's start with the basic premise of this podcast show today. There is a false link between conviction and certainty. And there's a reason that there's a false link. investors of all stripes, people that give you capital, people that allocate capital, they think conviction equals certainty and that your certainty equals strength. People are compelled. They are driven by the visions of the people that they invest with. And there's a lot of reasons for this, right? I mean, I'm going to riff for a moment here. If any of you have read Sapiens, it's a fantastic book. It's a little high level, but it's a really, really good book. And one of the One of the core premises early in the book is that Holosapien outcompeted other versions of humans that existed at the same time because, you know, Neanderthal and human coexisted for tens of thousands of years. And at some point, Neanderthal disappeared. And one of the central premises for why this happened, because Neanderthal, from what we understand of skeletal structures and whatnot, was bigger and stronger than Holosapien. But Homo sapiens are able to cooperate on a large scale in a way that Neanderthal couldn't in theory, right? We're talking about theory here. But this is true of Homo sapiens. This is true of humans. We have the ability to coalesce around vision. We have the ability to coalesce around myth. These things, the belief in the divinity of the emperor, right? The belief in the manifest destiny of your nation, right? is something that Homo sapien is uniquely situated to buy into and to align behind. So think about that in the context of investing with a visionary investor or a visionary leader. Their certainty, their story, the coherence of their story is something that people get behind and buy into and it's something that they're susceptible to because we as a species are inspired by stories. We are inspired by the epic hero of Saga that goes out and does something great. And think about that in terms of when you make an investment decision in an investor. Are you going to put your money behind somebody that sounds uncertain? I doubt it. You want that certainty. We crave certainty. And so investors that can show you certainty seem strong, but I actually think it's fragility. Because the more certain you are in your outcome, the more certain you are about your beliefs, the less likely you are to adapt when reality shifts on you. And it will always shift on you. That is the reality of investing. Investing is like riding a wave of chaos. And your ability to manage the chaos inherent in investing is critical. And if you think about it, Like, if you're a... Not to push my metaphor too far here, but if you're like, you know, a standing tower... dealing with a tsunami wave, you might buckle and break. You're going to need to be flexible and dynamic in dealing with it. That is investing. That is investing every single day. That is investing in the stock market. That's what it's like investing in real estate. Things change. Things are constantly in flux. And certainty can create a weak spot for you. There's a quote I want to bring in from Daniel Kahneman from Thinking Fast and Slow. He said, confidence is a feeling, not a statistical measure. The confidence people express is often unrelated to the actual accuracy of their beliefs. So Kahneman, who literally won a Nobel Prize for this stuff, said that confidence is just a feeling. It doesn't actually track how right you are. You can feel incredibly sure and be totally wrong. Because what we call certainty is usually just a story that feels tight. The model works. The narrative makes sense. The spreadsheet checks out. But the feeling of being right is not the same as being right. And that's why the best investors do not rely on certainty. They rely on process, margin of safety, and humility. And that is Kahneman's core warning here. We trust ourselves and we trust others more when the story feels tight, even when they're wrong. And it goes back to the homo sapien point. We are you know, pre-programmed to like good stories, right? So stories is a huge deal. So let's pivot now and look at this through a historical and behavioral lens. We wrote an article last week on the Timeless Investor Newsletter, which I will link in the show notes, on the overconfidence bias. This is people's ability, or I should say people, investors, who overrate their ability to predict or control outcomes. There's many examples of this. I think the last decade in real estate investing is a classic example of rising overconfidence bias at work. Okay, so conviction versus certainty, right? Overconfidence is in the certainty bucket. Here's what happened. We had 10 to 12 years of fantastic real estate markets and returns. And a lot of that is just market beta. And I've described market beta versus alpha in real estate as well on the Timeless Investor newsletter. But just to clarify really quickly, market beta is what the market gives you as an investor over time, not rewarding your unique skill. It's just that the market's doing well. So if you're a stock market investor and you invest in the S&P 500, you're not doing anything special. You're just investing in the S&P 500. You're just getting market beta. So you can think of this in the stock market. As in somebody started investing in the stock market in 2010 and by 2020, they've made a killing. But this person started to think that they made a killing because they were such a uniquely empowered and incredible investor, right? Now, we think that sounds ridiculous when I say it because it's the stock market and anybody would say, well, you didn't do anything wrong. per se, you just invested in market beta. But that's exactly what happened in real estate. So over the last 10 to 12 years, before interest rates rose and inflation spiked post-COVID, people made a lot of money in real estate. And they made a killing. And many of them started to believe that they made a killing because they were a uniquely good real estate investor. not recognizing that they just rode the wave of market beta that whole time. So by the time we got to COVID, many of these operators, these experienced operators, started taking on incredibly risky deals because they'd been rewarded for 10 years with really risky deals that worked and overconfidence bias at work. So Sunbelt Multifamily 2021, floating rate debt, thin margins, an absolute confidence and certainty that things were going to work out the way they expected it to work out because it had always been that way. And boom, it blew up. There's another quote I want to pull in from Nassim Taleb in The Black Swan. The more you believe in your own certainty, the more you are setting yourself up for a black swan event. To say it differently, the more confident you are, the more certain you are in the outcome, the more fragile you have become. That is a big problem. And LPs who invest behind sponsors should try to figure out how much of this is conviction in process versus certainty in story and narrative. Because again, we are all inspired by stories. I'm sorry to keep saying the same thing, but I just think it's a fascinating point. That is a big thing. It is a big behavioral issue that all humans have to deal with. So let's talk about what real conviction actually looks like. Conviction is not to say, I know I'm right, right? And I wanna come back to this central premise here, which is, it is systems and discipline and well-managed processes that produce good results over time. It is not stories. The problem in this industry is it's filled with storytellers because we're all raising money, right? And we all know good stories sell deals. So everybody sells stories, visions, things they have in mind that they wanna do. But it's the underlying conviction and process that actually produces the great results in this business. So I think I would put it almost like I am prepared to act but I am open to new information. If you are certain in something, you might not be open to new information because it challenges previously held beliefs that you have. And it is very uncomfortable to have your beliefs challenged. Look at our political state in this country today. Look at religious wars across the years. Belief challenging is a massive problem for humanity and people don't like it. So you don't like it. I don't like it. So you have to let go of it. You have to have conviction in your process, but be open to having your beliefs challenged because that's the way that good results can actually happen. And that's also the way you can navigate really trying times because there's good times and there's bad times. Both will happen to all investors over the course of our lifetimes. So separating these two is really, really critical. So I think conviction looks like having a margin of safety, space for your certainty to be wrong, understanding that things will not go according to plan. you know, I find underwriting to be a fascinating exercise and that, you know, I'll probably do a long riff on this at some point, but underwriting of any sort assumes a linear trend. Think about that. Any underwriting model assumes a trend and we assume the trend will continue on a go-forward basis, right? If you have too much certainty in your model, you are setting yourself up for problems because the reality is most deals, most real estate investments, most big acquisitions by private equity groups of companies are assuming a linear trend in their model. But life is not a linear trend. Things are going to look radically different over a three to seven year hold than your initial underwriting did. And you need to understand that in any investment you make, that the odds that your deal does what you initially predicted five years ago, it's pretty low. You can do it. It happens. But I would almost say that's more like a white noise, right? Like when it happens, it's great. But like the reality is you could do better than your model. You could do worse than your model. Both outcomes are equally likely because there's so many unforeseen variables that will happen. So having conviction in your process but being willing to change your perspective as things come in is absolutely critical. We'll pull another quote. Philip Tetlock, Super Forecasting. This is a fantastic one. The more famous an expert is, the worse their forecasting record tends to be. And why is that? The loudest ones were usually wrong, and the best ones were always updating their view. There's something to be said about that anecdote, by the way. It's analogous, a super forecaster is analogous in many ways to an investor that's had a lot of success. If you are considered a super forecaster, you've probably had a long string of success, which means that your certainty and your own unique genius has risen to a level that is problematic for you and for your investors, right? So we need to always be looking at that and thinking about it. So what are the tactical takeaways here? Because This is all great in theory, but we have to figure out how to manage our processes in a way to remove certainty and improve conviction. So you want to build conviction without rigidity. So, I mean, these are pretty straightforward. Shock your underwriting, like really shock it. So like, I'll give you some examples from my own career. So we bought a building in Portland in 2021 on a three-year bridge loan. And I did shock it. I shocked it, right? I put a high cap rate for exit. We assumed relatively low rents on terms, but we did it with a three-year bridge loan. Bad idea. We got out of it. We did actually refinance the deal and it's fine. Everything's gone well. Let me tell you what went right, what went wrong. We underwrote to relatively low post-renovation rents. And on average, we exceeded those post-renovation rents on turn by over$100 per unit. Good outcome. Really good. We underestimated The scale of expense increases over the same period. Insurance premiums were 2x in our case on this building. Management companies started experiencing severe stress on labor inflation, right? Your best personnel were moving around constantly to different companies and they were getting like a 20% pay raise every time they moved. So really good property managers became a massively expensive thing That's really, really valuable because property management and managing residents and managing assets is a people intensive business. So having the right person at the front is a really important thing. And we underestimated that. We obviously underestimated the scale of rent increases. Here's a really interesting point though. So I said we underwrote to a high exit cap rate on our deal. What is a high exit cap rate? Well, there's the historically high exit cap rate and there's the high exit cap rate in the context of sort of irrational market. So when we bought in 2021, think about where the market was at that point. COVID had already hit, things were starting to look better, rates were incredibly low, and the Fed was pouring money into society. So cap rates were way down. And this was a time where if you could have a real estate deal that produced a 3% to 4% cash yield, people were really, really happy. Because if you remember, money market yields at the time were like 20 basis points. It was like nothing. So this was a 4% to 4.5% cap market. Well, we underwrote to a 5.25% cap exit, which is conservative at the time. It's not conservative in hindsight. In hindsight, we missed the mark. Like we... Cap rates are in the high fives to low sixes right now. So we missed the mark, right? So we did a bunch of different things on that deal that felt conservative at the time. I won't say that I had a ton of certainty in the model at the time. I felt pretty good about our process that we went through to try to hedge risks on that deal. And we did shock the underwriting. In the context of the market at the time, obviously, we could have shocked it much more. We might not have done the deal in hindsight if I'd shocked it to the extent that the market actually moved on us, which is a whole different topic. But we did our best in that situation to manage the process and manage our expectations for the deal. And I do think those things ended up protecting us. Another thing you can do is... to create downside narratives alongside upside ones. And this really leads into this idea that one should be writing investment memos for deals you do, especially in real estate. Why? Because we deploy a lot of capital into real estate. If you're a solo practitioner that's buying your own properties, it's really, really, really important for you to hedge all possible risks. There is a prevailing myth, or I don't think it's a myth, I think it's true, but there's a prevailing myth ethos in real estate investing that time solves all problems, which is generally true. The difficulty with real estate is that you have time sensitive debt attached to it. So if you're a commercial real estate investor, you can't get a 30 year fixed rate loan on a 10 unit building or a 20 unit building. You are always constrained to five to 10 years on the term of your loan. So you can't really solve all problems by holding forever. Now, if you take on a relatively conservative amount of money on debt and it's amortizing, I would argue that's a pretty safe deal and you'll make that work. But the main point is, I'm a big proponent of writing investment memos before you do a large real estate deal. And the premise of it is basically that you want to step back and think about your investment, pros and cons, as if you're having to present this to an investment committee. And the investment committee is going to sign off or not sign off. And they're going to pick holes in what you're doing. And the beauty of the day and age that we live in right now is you can put your investment memo with all of your counterpoints and all of your arguing with yourself into your favorite AI application right now. And that AI and say to it, I want you to act like a very difficult investment committee and give me a really hard time on this deal. Let me defend it. Let's see where we wind up at the end of this. That is an incredible, incredible tool for checking yourself that has not existed historically. It is unbelievable. I can highly attest to the value of it. It is really powerful. A solo operator buying a fourplex can do this. They can run an institutional process on buying something and check their assumptions at the door and make sure that their process is sound. This is not a tool that existed historically. It is incredible. That's what we wanted to talk about today. Conviction versus certainty. Conviction is required. You have to have it or you will never act. And that is the key to investing. I cannot tell you how many people I have met that want to be real estate investors and have never done it for lack of conviction. They don't act. But there's a fine line where your conviction turns into certainty and you set yourself up for serious problems. Certainty is a liability. It hardens you. right before the system bends. It's not good. You have to avoid it. So the best investors and leaders move forward. They take action. They are courageous, knowing that they might be wrong. That is strength. It is not weakness. And a business plan that accounts for all the possible upsides and downsides and is honestly and transparently presented to investors should be favored over one that you know, hides the fragility of the business plan behind a really great narrative and a story. Conviction is a discipline. Certainty is a delusion. You can act decisively without knowing the outcome. In fact, you have to if you want to do something in this life that's great. I'm gonna leave you with that. Think well, act wisely, build something timeless. Thank you for joining us today. If you've enjoyed this show, we would greatly appreciate a review. Thank you so much. I hope you have a wonderful week and I look forward to hearing from all of you.