Meditation help - Am i observing a thought like I should or entertaining it?
What you have described is not really "observing". It is "thinking". 

Thinking &amp; observing are basically two different &amp; antagonist activities. 

While there is a place for thinking, pondering or 'reflection' (yoniso manasikara) in Buddhist meditation, it is not observing (anupassi). 

Therefore, if you just let thinking continue instead of addressing it, you certainly might subconsciously believe it.



If the thought arises: "I am a bad person", you should investigate or examine the truth or falseness of this thought; but in terms of emotions &amp; actions rather than 'persons'. 

In Buddhism, there are five precepts which are about: (i) killing; (ii) stealing; (iii) unwholesome sex; (iv) dishonesty; &amp; (v) drugs &amp; alcohol. These five are bad or harmful actions. In addition, thoughts &amp; emotions of greed, anger/hatred &amp; selfishness are also considered bad or harmful. 

In Buddhism, a meditator does not think: "I am a bad person". Instead, a meditator acknowledges or refects: "This is a harmful emotion" or "This a harmful action". The focus here is upon the emotion or the action rather than the person. The meditator then reflects (thinks about) why the emotion or action is bad or harmful, which, in itself, will change the emotion &amp; action towards a good emotion &amp; good action.