position sizing

[jfan]

What a great discussion. Thank you for all the perspectives.

 

This year has been a interesting/painful/hopeful experience in understanding the importance of position sizing and its effect on your portfolio.

 

I think when it comes to position sizing it depends on a bunch of additional factors:

1) Past stock picking skill/experience that in turn depends on ability to make good decisions, process information, ability to see around the corner, mentorship, team-based vs individual-based work, full-time vs part-time

 

2) Recent performance - Druckenmiller in an old interview gave advice that when he had a poor performance streak, he would size down future positions to regain confidence. I suspect that he recognizes the possiblity of poor cognition or bad investment framework

 

3) Ability to exert control/influence the direction of the business

 

4) Illiquidity - I think taking large positions in illiquid investment requires a little bit of all the above or a huge degree of trust in the management of the underlying business

 

5) Personality - Do you enjoy high risk or are you risk adverse? Are you holding on in the volatile times because you are confident vs feeling like a deer-in-the headlight? Can you stomach the pain on selling out a large losing position after a period of under-performance? What is your time-frame preference (ie can we hold something for 3-5-10-15-20 years)?

 

Just some of the questions I had to ask myself.

 

[Patmo]

We should also consider that position sizing isn’t just about how much you put in at the start but how you adjust the position size over time. Many people like to trim winners because they feel it’s too risky to allow their portfolio to become more concentrated. I think this is the wrong way to look at it. I’d be interested to know what others think.

 

On trimming winners. I’ve struggled with it. I’ve left a lot of money selling early. I’m going to try letting winners ride this year

 

Well if it makes you feel any better, I've lost a lot of money holding on too long lol... a 7 bagger to 0, and a 5 bagger to a 70% loss in the past couple years.

 

I'd rather regret squeezing another 20% of juice out of these investments if I had the choice.

[ourkid8]

What company was a 7 banger which went to 0? The fundamentals must have changed.

 

We should also consider that position sizing isn’t just about how much you put in at the start but how you adjust the position size over time. Many people like to trim winners because they feel it’s too risky to allow their portfolio to become more concentrated. I think this is the wrong way to look at it. I’d be interested to know what others think.

 

On trimming winners. I’ve struggled with it. I’ve left a lot of money selling early. I’m going to try letting winners ride this year

 

Well if it makes you feel any better, I've lost a lot of money holding on too long lol... a 7 bagger to 0, and a 5 bagger to a 70% loss in the past couple years.

 

I'd rather regret squeezing another 20% of juice out of these investments if I had the choice.

[Patmo]

What company was a 7 banger which went to 0? The fundamentals must have changed.

 

We should also consider that position sizing isn’t just about how much you put in at the start but how you adjust the position size over time. Many people like to trim winners because they feel it’s too risky to allow their portfolio to become more concentrated. I think this is the wrong way to look at it. I’d be interested to know what others think.

 

On trimming winners. I’ve struggled with it. I’ve left a lot of money selling early. I’m going to try letting winners ride this year

 

Well if it makes you feel any better, I've lost a lot of money holding on too long lol... a 7 bagger to 0, and a 5 bagger to a 70% loss in the past couple years.

 

I'd rather regret squeezing another 20% of juice out of these investments if I had the choice.

 

Yeah, FELP, lots of discussions on it here. To be fair I should have never put money in it in the first place, but that's a different topic altogether.

 

The other one is KRN, a cash box with a construction ready potash mining project that had its financing announced but the deal fell through quickly. Tons of boardroom drama in that one. The founder got in bed with the wrong people and got thrown out the window a couple times.

[scorpioncapital]

you will make mistakes. but remember the psychological studies: people hate losses much more than gains. think of future losses in a bubble market , even if you lose some upside. be aggressive if you don't think you know the position so well, if you use margin, if you don't need so much wealth because you can say this is enough. most important is to genuinely ask yourself if you really really know this problem , field or stock well. most of the time you'll feel better selling if you think this way.

[valueinvestor]

"Can anyone on this board tell me that 99% of their performance come from more than three stocks? Genuinely want to know - typically I find my best idea account for 90% of my performance, also 90% of my loss"

 

Performance can also come from strategic overlays. 

Example: FFH. Cash parking spot for us, since mid December through to about the end of next week. Four trades, an entry, a short-term BB driven swing trade, and an exit. Yet our 'all in' return will be around 25-30% - on simply cash management.

 

We prefer concentrated portfolio's, but strategic overlays are part of the return - occasionally, most of it.

Sometimes it goes your way, sometimes not so much.

 

SD

 

Agreed, but it typically is reserved for volatile times no? Unless you're able to do this every year? I typically reserve those in the workout basket.

[Guest cherzeca]

galloway writes interestingly on some of the issues raised in this thread:  https://seekingalpha.com/article/4405986-the-algebra-of-wealth?mail_subject=scott-galloway-the-algebra-of-wealth&utm_campaign=rta-author-article&utm_content=link-1&utm_medium=email&utm_source=seeking_alpha

[SharperDingaan]

"Can anyone on this board tell me that 99% of their performance come from more than three stocks? Genuinely want to know - typically I find my best idea account for 90% of my performance, also 90% of my loss"

 

Performance can also come from strategic overlays. 

Example: FFH. Cash parking spot for us, since mid December through to about the end of next week. Four trades, an entry, a short-term BB driven swing trade, and an exit. Yet our 'all in' return will be around 25-30% - on simply cash management.

 

We prefer concentrated portfolio's, but strategic overlays are part of the return - occasionally, most of it.

Sometimes it goes your way, sometimes not so much.

 

SD

 

Agreed, but it typically is reserved for volatile times no? Unless you're able to do this every year? I typically reserve those in the workout basket.

 

We initially thought this as well ... but experience to date is significant contribution pretty much every year (albeit different overlays). Part of it very likely is just rising volatility with the changing times (2020: 1700-2000 daily DOW swings), but a good chunk of it is also knowing your holdings, and their industries, very well. The skating to where the puck is going type thing....

 

In a workout, an overlay success bails you out. But in everyday use - overlay successes are cocaine candy. Get the gains out of the equity portfolio asap, before you start to think that you're invincible; shove wafers into a safety deposit box, repatriate, or just give it to charity - but get rid of it.

 

SD

 

 

 

 

[spartansaver]

I generally looked at how other fund managers did it and just copied them. Go find some highly rated mutual fund managers for a good idea. You’ll often notice they are diversified and never go all in gangbusters on a play (cough: ARK). You’ll also see generally a lack of turnover.

 

You can find investment letters and videos and see how other fund managers invest. I haven’t seen any books, if you see some do share what you find.

 

Kelly Criterion simply reinforces not to go 100% in any position as your risk of ruin is high. It teaches you an optimal ratio (which most find is too high).

 

Also Some people here have given good advice on how they see positioning sizing. 

 

To add to the discussion, you can maintain an excel spreadsheet with your portfolio weights, and update accordingly. Helps when you actually visually see what weights are where

 

I'll push back on this a bit. I think learning position sizing from good mutual fund managers depends on your goals. If your goal is to remain wealthy I don't have a problem with it. If your goal is to get rich from investing, these are the wrong people to be studying. Mutual fund managers get rich by managing other people's money, not crushing it from an investing perspective. The wealthiest people in the world who aren't in the investment management industry got wealthy by loading up on their best ideas.

[Ice77]

I generally looked at how other fund managers did it and just copied them. Go find some highly rated mutual fund managers for a good idea. You’ll often notice they are diversified and never go all in gangbusters on a play (cough: ARK). You’ll also see generally a lack of turnover.

 

You can find investment letters and videos and see how other fund managers invest. I haven’t seen any books, if you see some do share what you find.

 

Kelly Criterion simply reinforces not to go 100% in any position as your risk of ruin is high. It teaches you an optimal ratio (which most find is too high).

 

Also Some people here have given good advice on how they see positioning sizing. 

 

To add to the discussion, you can maintain an excel spreadsheet with your portfolio weights, and update accordingly. Helps when you actually visually see what weights are where

 

I'll push back on this a bit. I think learning position sizing from good mutual fund managers depends on your goals. If your goal is to remain wealthy I don't have a problem with it. If your goal is to get rich from investing, these are the wrong people to be studying. Mutual fund managers get rich by managing other people's money, not crushing it from an investing perspective. The wealthiest people in the world who aren't in the investment management industry got wealthy by loading up on their best ideas.

 

100%. Fortune 400 wealth was predominantly made in a concentrated fashion, whatever that might be. Concentration * Leverage of some sort (OPM, Fin leverage, float etc) * Time.

 

Diversification * No form of leverage * Time = Good outcome if you have an edge, but not extreme wealth.

 

Naturally, there is survivorship bias as concentration * leverage can often be disastrous. But it’s one of the main pathways to the elusive kingdom, however narrow it may be.

[D33pV4lue]

Going to pose a question because I don't think it's been touched on.

 

What is diversification?

 

Assuming 100% equity portfolio to make things easy, is it owning 100 stocks @ 1% position size or no more than x% in an industry or style of stock (growth/value/momentum)?

 

Take the current market environment right now. If you were given $100,000 today and it had to be fully invested by EOD where would you put it? If I don't want to invest in the FANGS at all-time highs and I think the only place to find value is in real estate and insurance so I put my money to work there am I not diversified? If my thesis/trade works out real estate and insurance outperform FANG did I even need to diversify? I know this is slightly different from position sizing but to put it another way, if you were going to allocate 10% of your portfolio to a specific sector why wouldn't you just want to own 10% of the highest quality most undervalued stock in the sector instead of the top 5-10 names within the sector? 

 

If you are a stock picker and are trying to beat the market diversification has its limits.  There is only so much risk you can diversify before your portfolio turns into a closet index at which point you should just index. I run a concentrated portfolio but 1) I'm young and can take the risk 2) the companies I own I want to own for the next 10 years (unless something changes) and 3) managing position sizes with new contributions every year that adds a significant % to my portfolio is difficult. That's why I base my position sizes on what my portfolio will look like in 10 years not today. As my portfolio grows I expect the number of names to increase slightly but I don't ever plan on it going past 10 names.

 

As an avid sports bettor, I don't use the kelly criterion and never have. I also don't think its application to position sizing is useful. When you gamble you know the risk and return before you place a bet. In the market you don't - you may have a target price before entering but lots of things happen and your target price can change during the time you are a shareholder.

[Guest cherzeca]

what is diversification is a good question to ask, and I think it is only one of many investing questions one should be asking. you can start with your knowledge base and objectives as context for asking the diversification question.

 

as to knowledge base, some members here are very knowledgeable about RE and while it may make sense for them to diversify somewhat away from RE, why diversify from your knowledge base into an area outside one's expertise? is diversification sufficiently worthwhile to venture away from what you know?

 

as to objectives, if you are willing to embrace risk (within your area of expertise and knowledge), then diversification is less important.

 

here are my objectives: never ever lose (much) money (hence large FI/cash component), be exposed to the secular increase in broad equity indexes (smaller), and invest in one or more special situations in what I consider to be my area of knowledge/expertise (smaller still). for me, diversification is not a holy grail, but not losing money is...and so I try to achieve my objectives without being too focused on diversification.

 

I keep coming back to buffett's punchcard....limiting yourself to 20 investments over a 40 year investing horizon. I cant do this...I dont have the mental bandwidth to do superior due diligence on 20 names nor do I have the patience to hold a name forever through the unavoidable rough patches, so I index that portion of my portfolio that I want to expose to equity risk, with the spice of a single focused special situation.  because everyone needs a little spice in their life

 

 

[ValueArb]

It's easy to have a focused portfolio. Simply research 2-3 investment ideas per day (10-20 per week), and only buy the top 1% of your ideas. As long as those ideas have a large margin of safety and no significant leverage or negative risk optionality themselves, succeeding with a ten position or less portfolio is easy!

[scorpioncapital]

position sizing is more art than science. However if you start to get a zoo, and start to feel uncomfortable because tending to the animals monthly takes too much time you might want to consolidate or question your thesis about the space and how you participate - or if you participate at all.

 

[Cigarbutt]

It's easy to have a focused portfolio. Simply research 2-3 investment ideas per day (10-20 per week), and only buy the top 1% of your ideas. As long as those ideas have a large margin of safety and no significant leverage or negative risk optionality themselves, succeeding with a ten position or less portfolio is easy!

So your average holding period is about 18 months? Is that right?

So i guess your holding period seems 'forever' as it is more than double the average period now for the average crowd.

i've started doing 'this' about 20 years ago and one of the most striking features has been the unrelentling rise in competition.

Some days i wish i'd have started in 1957 or something but then again, now is probably one of the greatest times to be alive.

[Spekulatius]

It's easy to have a focused portfolio. Simply research 2-3 investment ideas per day (10-20 per week), and only buy the top 1% of your ideas. As long as those ideas have a large margin of safety and no significant leverage or negative risk optionality themselves, succeeding with a ten position or less portfolio is easy!

So your average holding period is about 18 months? Is that right?

So i guess your holding period seems 'forever' as it is more than double the average period now for the average crowd.

i've started doing 'this' about 20 years ago and one of the most striking features has been the unrelentling rise in competition.

Some days i wish i'd have started in 1957 or something but then again, now is probably one of the greatest times to be alive.

 

I need someone to tell me what my top 1% of my ideas are, because I have no clue myself.

 

The present is almost always the best time to be alive. Exceptions were probably the 14 century (epidemics) in Europe ir if you were born in Germany before 1618 or 1914 (very ugly wars).

[SharperDingaan]

Diversification ..... by what?

Time (short, medium, long term), asset class (house, car, stock, bond), debt (LOC, CC, student loan, mortgage), income (FT day job, PT gigs, investment, pension, other), etc. Position size is far down the list.

 

A 50% position in a 10% asset allocation is 5% of your wealth. For most people, simply getting a temporary PT gig will have a more reliable and meaningful impact on your wealth.  Even more so, if the earnings were simply used to pay down CC debt. But not sexy. 

 

For most people, investing in the same industry that you work in, is a dumb idea - when you lose your job, you also lose your savings.

But for the few who can manage risk, it is often a very good idea; as many contractors, and financial folk can attribute to. Invest the time fretting about diversification, in risk management instead, and you will go a lot further - sooner.

 

SD

 

[JRM]

Diversification ..... by what?

Time (short, medium, long term), asset class (house, car, stock, bond), debt (LOC, CC, student loan, mortgage), income (FT day job, PT gigs, investment, pension, other), etc. Position size is far down the list.

 

A 50% position in a 10% asset allocation is 5% of your wealth. For most people, simply getting a temporary PT gig will have a more reliable and meaningful impact on your wealth.  Even more so, if the earnings were simply used to pay down CC debt. But not sexy. 

 

For most people, investing in the same industry that you work in, is a dumb idea - when you lose your job, you also lose your savings.

But for the few who can manage risk, it is often a very good idea; as many contractors, and financial folk can attribute to. Invest the time fretting about diversification, in risk management instead, and you will go a lot further - sooner.

 

SD

 

 

I think investing in the same sector where you work can be a trap for other reasons.  You tend to become an expert in things that are irrelevant to the stock performance.  I noticed I used to overweight my specific knowledge related to my company without a good view of the bigger picture.  There are even company specific events occurring right now, and I'm watching the stock price shrug it off.  I'm left scratching my head.

 

Aside from that, I think its beneficial to be an expert at something if you're going to invest in individual companies or sectors.

[SharperDingaan]

Depends on what you do, and what you are looking at.

If you're been very busy the last few weeks, and most that you know have also been busy, the market is not going to react until months later - when that activity (if significant) finally shows up in the numbers. You are really a leading indicator, and hence at an advantage. You see tops and troughs in your industry, before the market does.

 

Mr Market is also consistently and routinely wrong.

If you doubt that, check any pricing strip against the actuals as they become available;

you quickly conclude that the market exists to be exploited ;)

 

SD

 

 

[Cigarbutt]

...

I need someone to tell me what my top 1% of my ideas are, because I have no clue myself.

The present is almost always the best time to be alive. Exceptions were probably the 14 century (epidemics) in Europe ir if you were born in Germany before 1618 or 1914 (very ugly wars).

Actually, a point can be made that, as a result of the the great bubonic plague, your wages, longevity and standards of living could be materially improved if you were strong (and lucky) enough to survive. Of course, it means many 'friends' lost along the way.

https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0096513

The link with position sizing?: we each have to come up, individually, with position sizing (if any) related to anti-fragility versus the rest of the selective pickings.

[rkbabang]

It's easy to have a focused portfolio. Simply research 2-3 investment ideas per day (10-20 per week), and only buy the top 1% of your ideas. As long as those ideas have a large margin of safety and no significant leverage or negative risk optionality themselves, succeeding with a ten position or less portfolio is easy!

So your average holding period is about 18 months? Is that right?

So i guess your holding period seems 'forever' as it is more than double the average period now for the average crowd.

i've started doing 'this' about 20 years ago and one of the most striking features has been the unrelentling rise in competition.

Some days i wish i'd have started in 1957 or something but then again, now is probably one of the greatest times to be alive.

 

I need someone to tell me what my top 1% of my ideas are, because I have no clue myself.

 

The present is almost always the best time to be alive. Exceptions were probably the 14 century (epidemics) in Europe ir if you were born in Germany before 1618 or 1914 (very ugly wars).

 

Agreed on both points.  What that chart above tells me is that if I am holding for only for 1 or 2 years I will be competing against everyone else and I am not going to try to tell myself that I am some kind of exceptional genius that can compete with the majority of the professionals and win.  My competitive advantage is that I'm willing to hold for 5, 10, 15+ years.  All I need to do is find stocks with long runways, buy them and hold.  I won't win trading against professionals, or even algorithms.  And I am never confident enough to tell myself this stock right here is one of my top 1% of ideas for this year.  I'm just not that good.

 

[ValueArb]

It's easy to have a focused portfolio. Simply research 2-3 investment ideas per day (10-20 per week), and only buy the top 1% of your ideas. As long as those ideas have a large margin of safety and no significant leverage or negative risk optionality themselves, succeeding with a ten position or less portfolio is easy!

So your average holding period is about 18 months? Is that right?

So i guess your holding period seems 'forever' as it is more than double the average period now for the average crowd.

i've started doing 'this' about 20 years ago and one of the most striking features has been the unrelentling rise in competition.

Some days i wish i'd have started in 1957 or something but then again, now is probably one of the greatest times to be alive.

 

I need someone to tell me what my top 1% of my ideas are, because I have no clue myself.

 

The present is almost always the best time to be alive. Exceptions were probably the 14 century (epidemics) in Europe ir if you were born in Germany before 1618 or 1914 (very ugly wars).

 

My post was partly tongue in cheek, but if you are reviewing more than 50 investment ideas per month, I think it builds the muscle that helps determine which is best. It reduces the impulse to buy the latest hit idea and raises your bar for purchases.

 

Maybe not to the level that can discern best 1%, but surely best 10%.