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There’s something almost religious about the way investors talk about their forever stocks. The conviction in their voices resembles the certainty of a spouse saying “til death do us part” or a parent declaring unconditional love. And like those profound human commitments, the forever stock narrative contains a beautiful truth wrapped in a dangerous assumption.
The Fundamental Confusion
The assumption is this: if you truly believe in something, hedging against its failure is a betrayal of that belief. It’s as if buying insurance on your convictions somehow dilutes them. But this confuses two entirely different things. One is about probability. The other is about consequences.
Consider life insurance. You buy it not because you doubt you’ll wake up tomorrow, but because the consequence of being wrong is catastrophic for people you care about. Nobody interprets a life insurance policy as a lack of faith in your continued existence. It’s simply an acknowledgment that catastrophic outcomes, however unlikely, deserve preparation proportional to their impact. Your forever stocks, no matter how thoroughly researched or emotionally cherished, exist in the same universe of uncertainty.
When Forever Doesn’t Last
The funny thing about forever is that it keeps not arriving. Pan Am was forever until it wasn’t. Kodak owned a technology that would last eternally until it didn’t. General Electric was so permanently woven into American capitalism that removing it from the Dow Jones Industrial Average seemed almost unpatriotic. Then it happened. These weren’t failures of analysis. They were failures of imagination about what forever actually means in a dynamic system.
When you declare a stock a forever hold, you’re making a claim about the future that would make a fortune teller blush. You’re saying that the company will navigate every technological disruption, every regulatory shift, every management transition, every competitive threat, every change in consumer behavior, and every macroeconomic crisis for the rest of your investing lifetime. Not just survive them, but survive them well enough that selling and reallocating would be a mistake.
That’s not a bet. That’s a prayer.
Protecting Capital, Not Thesis
The intellectual case for buying puts on forever stocks starts with a simple question: what are you actually protecting? The usual answer is “my conviction” or “my thesis.” But that’s backwards. You’re not protecting your thesis. You’re protecting your capital from your thesis being wrong. And here’s where it gets interesting: you can do this while still maintaining and even acting on your thesis.
Think about how professional poker players approach a hand where they have strong odds. They bet aggressively because the probability favors them. But they also calculate their risk of ruin. They know that even a 90% probability of success means a 10% chance of failure, and if that failure comes at the wrong time or the wrong size, it can knock them out of the game entirely. The solution isn’t to stop making positive expectancy bets. It’s to size those bets so that the unlikely bad outcome doesn’t eliminate your ability to keep playing.
The Single Game Problem
Your forever stock portfolio is a collection of positive expectancy bets. But unlike poker, where you play many hands and the probabilities average out over time, you might only hold five or ten forever positions. The law of large numbers doesn’t save you. One catastrophic failure can permanently impair your wealth in a way that the gains from your other positions might never recover, especially if that failure comes early or when you’re older and have less time to rebuild.
Buying puts on forever stocks is essentially acknowledging that your portfolio exists in N-of-1 conditions, not in the averaged world of expected returns. You’re playing a single game, not infinite games. And in single games, tail risk isn’t a statistical curiosity. It’s an existential threat.
The Conviction Paradox
The counterintuitive insight here is that hedging your highest conviction positions might be more important than hedging your speculative ones. Your speculative positions are sized for uncertainty. You expect some of them to fail. The position sizing already reflects doubt. But your forever stocks are sized for certainty. They’re your largest positions precisely because you think the downside is minimal. Which means if you’re wrong, the damage is maximal.
This creates a strange paradox. The stocks you’re most certain about are the ones where being wrong hurts most. Not because they’re likely to fail, but because your certainty led you to concentrate your exposure. The hedge isn’t a statement about probability. It’s a statement about consequences.
A Concrete Example
Let’s get concrete without getting numerical. Imagine you’ve built a portfolio around a magnificent technology company. Maybe it dominates cloud computing or has an unassailable position in social networking or manufactures chips that power artificial intelligence. Your thesis is sound. The moat is wide. The management is brilliant. You’ve done the work. This is a forever stock if one exists.
Now imagine a scenario, not likely but possible, where the regulatory environment shifts dramatically. Perhaps antitrust enforcement takes an unexpectedly aggressive turn. Or a geopolitical event restricts access to critical markets or supply chains. Or a technology you didn’t see coming solves the problem your company solved but in a way that makes their approach obsolete. Or fraud surfaces in a division you thought was clean.
These aren’t predictions. They’re recognition that the sample space of possible futures is larger than your model of the world. The put option doesn’t say these things will happen. It says that if they do happen, you still get to stay in the game.
The Time Value Problem
Here’s another way to think about it. Your forever stock thesis has an embedded assumption about time. You assume that given enough time, temporary setbacks will be overcome and the fundamental value will be recognized by the market. But puts force you to specify what happens if time doesn’t work in your favor. What if the stock drops 60% and stays there for five years while the company restructures? What if it happens right before you need the money for retirement or a health emergency or your child’s education?
The value of time is not evenly distributed across your life. A 60% drawdown that recovers in seven years is manageable when you’re 35. It’s devastating when you’re 65. Puts on forever stocks become more valuable, not less, as you age or as your need for the capital becomes more time sensitive. The hedge isn’t about doubting the company. It’s about respecting the uncertainty of your own timeline intersecting with the market’s timeline.
The Psychological Advantage
There’s also a psychological dimension that deserves attention. Holding forever stocks without protection requires maintaining conviction through drawdowns. This sounds noble until you experience it. When your forever stock drops 40%, every news article about the company feels like an attack on your judgment. Every quarterly report becomes an emotional event. Every talking head on television who doubts your thesis triggers a defensive reaction. This is exhausting. It clouds judgment. It makes you less likely to objectively reassess your thesis when reassessment is genuinely needed.
A put option creates emotional space. It says “I can be wrong about the magnitude and timing of this move without being wrong about the ultimate direction.” This sounds like a small thing, but it’s profound. It lets you hold conviction without holding rigidity. It separates your identity from your position. You can remain a believer while acknowledging that belief exists on a spectrum, not as a binary.
Rethinking the Cost of Protection
The cost of puts is often cited as the reason not to buy them. They decay over time. They’re a drag on returns in the base case where your forever stock keeps going up. This is true. But it frames the cost incorrectly. The cost of puts isn’t measured against your returns in the scenario where everything works out. It’s measured against your returns in the scenario where you get stopped out of a position at the worst possible time because you couldn’t stomach the drawdown.
Think about insurance premiums on your house. In the base case, where your house doesn’t burn down, that premium looks like wasted money. But you don’t calculate the value of insurance by comparing premiums paid to claims received. You calculate it by comparing your financial position with and without insurance across all possible scenarios, weighted by their probability and impact. The same math applies to portfolio insurance, except the probability of a severe drawdown in a concentrated forever stock portfolio is orders of magnitude higher than your house burning down.
The Diversification Difference
There’s a broader point here about the nature of financial conviction. We’ve inherited from value investing this idea that conviction means unwavering commitment. Buy and hold. Ignore the noise. Trust your analysis. This worked in an era when information moved slowly and markets were less efficient. But it also worked because the investors who championed this approach were managing diversified portfolios, not concentrated forever stock positions. When you read about Warren Buffett’s conviction, remember that Berkshire Hathaway owns dozens of businesses outright and positions in many more. His forever stocks sit within a structure that inherently provides diversification.
For individual investors, forever stocks are often a concentrated bet. The conviction isn’t supported by the same structural diversification. Which means the same level of certainty carries more risk. Puts are a way to import some of that structural protection without diluting the position.
Hedging as Offense, Not Defense
Another angle to consider is the relationship between puts and position sizing. If you’re truly convicted about a forever stock, you want to own as much of it as you responsibly can. But responsible position sizing requires considering downside risk. If you knew with certainty that your forever stock couldn’t drop more than 20%, you could size the position much larger than if it might drop 70%. Puts effectively put a floor under your position, which means they allow you to size more aggressively into your convictions. The put premium becomes the cost of concentrating your portfolio around your best ideas without taking disproportionate risk.
This flips the script on how we think about hedging. It’s not defensive. It’s offensive. It’s not about doubting your thesis. It’s about enabling you to act more boldly on your thesis because the catastrophic outcome has been contained. A fighter pilot ejects from a plane not because they doubt their flying skills, but because the ejection seat allows them to push the aircraft to its limits knowing that the worst case scenario won’t kill them.
The timing and structure of puts matter, of course. Buying short dated puts on forever stocks is probably counterproductive. The decay is rapid, and the protection window is too narrow. What makes more sense are longer dated puts, perhaps a year or two out, that protect against the medium term catastrophe while still allowing the long term thesis to play out. Or put spreads that define a floor without paying for tail protection you don’t need. The specific structure depends on what you’re protecting against and how much protection costs relative to its value.
Alternatives and Tradeoffs
There’s also a conversation to be had about alternatives to puts. You could size positions smaller. You could diversify more. You could hold more cash. Each of these has tradeoffs. Smaller positions mean less exposure to your best ideas. More diversification means diluting conviction with compromise. More cash means drag in up markets. Puts are not the only answer, but they’re an answer that lets you maintain maximum exposure to maximum conviction while defining maximum loss. That’s a powerful combination.
Conviction and Humility
In the end, the case for buying puts on forever stocks comes down to intellectual honesty about uncertainty. Forever is a long time. Your thesis, no matter how well researched, is a model of a complex reality. All models are wrong. The question is whether they’re useful. But usefulness doesn’t eliminate wrongness. It just makes the wrongness worth tolerating in the base case. Puts are your acknowledgment that the base case, however probable, is not the only case.
The investors who understand this aren’t the ones lacking conviction. They’re the ones who understand that conviction and humility can coexist. That being right about direction doesn’t mean being right about path. That loving something doesn’t mean being blind to risk. That insurance isn’t betting against yourself. It’s betting that your future self will be grateful you thought clearly about consequences when probabilities were all you had to work with.
Your forever stocks might actually last forever. The puts might expire worthless year after year. That would be wonderful. But wonderful outcomes don’t retroactively make the protection irrational. They just make you lucky that your model matched reality. And luck, by definition, is what happens when preparation meets opportunity.
Sometimes preparation looks like buying puts on the things you love most.
