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Position sizing


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I don't think the issue of size can be overstated. Some of my greatest mistakes have been cutting huge positions because they became too conventionally large. Size may be the only real investing question. I had zero in Amazon when it went from 10 to 150. But I have also sold 10-baggers and paid taxes before they went on to sextuple from there. How do you guys think about portfolio construction and sizing? We need to embrace the fact that our ability to see the future of a company is excruciatingly limited. I am way too enthusiastic about Nintendo and MSGE so I need some guard rails and head gear.

Edited by Cod Liver Oil
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I have been investing in the stock markets since 2006, and had done very well with gold dating back to the late 90s. I've had an evolution as an investor, and I've been spending a lot of time thinking about position sizing and risk especially as I move more money into securities rather than privately held investments under my own control.

 

I have had many experiences in the stock market where I've sold far too early, let's say after a double, only to see a stock go to 10x or more. I actually had this happen with probably close to 10 stocks over the last 15 years. I also took a huge loss back in 2016 when I took a too large position in Kinder Morgan warrants that got wiped out. If the position had been in the common stock of KMI, it still would have been a lousy investment, but not nearly as devastating. 

 

My new theory is to diversify my holdings based on INVESTED CAPITAL rather than the market value of the stock. I hope to hold stocks long term, and perhaps cull the losers or underperformers after several years. The goal is to hold the winners and allow them to run and compound, limiting my losses on individual mistakes, and hopefully hit a few huge winners that have a large position sizing in the portfolio 30 years from now. 

 

This has been complicated due to the fact that I have a lot of new cash available to put into stocks (or other attractive investments) so I'm really trying to set my position sizing on a hypothetical portfolio size available over the next year or two to invest, and trying to remain conservative (e.g. I think I'll hopefully have more cash to deploy that the number I'm using in setting my position sizing). 

 

But I'm aiming for 5% single stock position size by invested capital. Up to 10% in a rare situation with a super safe company like Berkshire, no more than 25% per sector. No more than 60% in investments that benefit/suffer from a rise or fall in interest rates. I'd like to have some investments that perform well in both high or low interest rate backdrops. Then the goal is to hold these 15-20 stocks for a long time, but over time to try adding new positions and removing laggards as market conditions permit. I should have new capital coming in, so at some point I will either increase the max position size or start diversifying into more stocks. 

 

This approach is meant to be relatively tax efficient, avoid missing big long term winners, but also avoid blowing up due to user error because I do something stupid while trading too often. 

 

 

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Great topic. Super important And severely under-appreciated by most investors. The financial services industry cannot suggest an investor should concentrate their portfolio. They will likely get sued / fired / disbarred if an investor blows up their portfolio (lots likely would given enough time). And so we are all taught that concentrating is dumb, stupid, idiotic, gambling… 

 

I love Druckenmiller’s thinking on position sizing. This is from the ‘Stanley Druckenmiller interview (2018)’ thread:

—————

Great interview with Druckenmiller from June 9, 2022 (link at bottom). Some thoughts:

 

1.) to do what Druckenmiller does (in terms of strategy) you pretty much need to be a full time investor; at a minimum very committed/focused. That is my (Viking’s) opinion.

2.) where are we now? 6 months into bear market that has some more room to run.

- there is no historical analogue for the situation today

- he is trying to be open minded about all the possible outcomes

3.) what are you doing today? Waiting for a fat pitch. 
- low conviction now

- had been aggressively shorting

- owns some oil
4.) general strategy: 

- looks out 12-18 months

- develops high conviction idea 3-4 times per year

- put all eggs in one basket; watch very closely

5.) lesson from Soros: sizing is 70-80% of the equation

- its not whether you are right or wrong

- its how much you make when you are right

- and how much you lose when you are wrong

6.) are you on a hot or cold streak (like a batter in baseball)?
- know the difference; size positions accordingly

7.) actual mechanics when you find an opportunity

- intuition says yes; also fits macro view

- buy

- then do the analysis

- get out if it doesn’t pan out

- if you wait to but you may miss the first big move

8.) current set up:

- high oil prices

- rising interest rates

- rising US$

- has ALWAYS BEEN TERRIBLE for corporate earnings looking forward

9.) advice for new investor

- DO NOT INVEST IN PRESENT

- envision the world in 12-18 months and what will drive security prices

- focus on what will move the stock (learned this from his original mentor); what will be the catalyst

- how are people going to think differently in 18-24 months about the security from what they are thinking today; it is change that moves the security.

10.) macro investors perform best in bear markets

- perhaps that is why so many macro people are so bearish

 

 

 

Edited by Viking
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34 minutes ago, Viking said:

And so we are all taught that concentrating is dumb, stupid, idiotic, gambling… 

 

Position sizing is very important! In general I agree with you but you have to take into account different goals and abilities. Would you concentrate if you're already rich and have way more than you need?

When I was 25 I didn't mind to put 100% of my portfolio in one name (and did so), today I wouldn't do that under almost any circumstances.  

I'm not Druckenmiller, Buffett or Li Lu, so I don't invest like them. Especially Druckenmiller is an enigma to me, I couldn't invest like him if my life would depend on it. I guess I'm no good at macro investing.

 

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2 hours ago, maxthetrade said:

 

Position sizing is very important! In general I agree with you but you have to take into account different goals and abilities. Would you concentrate if you're already rich and have way more than you need?

When I was 25 I didn't mind to put 100% of my portfolio in one name (and did so), today I wouldn't do that under almost any circumstances.  

I'm not Druckenmiller, Buffett or Li Lu, so I don't invest like them. Especially Druckenmiller is an enigma to me, I couldn't invest like him if my life would depend on it. I guess I'm no good at macro investing.


@maxthetrade i agree entirely. The ‘problem’ i am having is i am learning old habits are hard to change (especially when they have worked well for +20 years).

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the 10 bagger that goes up more, I would not worry about it. Just don't eliminte it completely. I also had 10 baggers go back BELOW the buying price! 

as for missing out, that cant be helped. get in when you have the ah-ha moment , better late than never. 

Most of all, read and study like crazy if you're full time. If part time, well ask someone who does it full time and you trust )

 

 

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I inherited a few stocks in 1975 and began work as an insurance and banking analyst in 1978.  I have basically gradually acquired stocks now for all these years and have not sold any stocks.  The reason for not selling is probably deeply psychological given my parents early death and my connection needs.  But anyway I have a few 100 baggers.

 

Anyone in my shoes would have the same if you, for whatever reason (and there could be many), accidently acted as I did.   I tend to do well avoiding losses but I did own several stocks that went to zero.  One was Bank of Granite, the CEO John Forlines, was asked by Warren Buffett to stand and be honored at one of the annual meetings, I was there and watched.

 

But I own some NSC.  Plug in that I inherited a small bit of my Grandmother's shares, it has now been in the family 81 years.  11% a year annual return.  That looks pretty good in a compound calculator outcome.  

 

I don't do well with timing nor absolutes, most things are gray to me.  But I love reading Gregmal's strong opinions and Parsad's reasonable responses.

Edited by dealraker
to add a bit
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I tend to have a slightly different approach when it comes to position sizing. For me it’s determined by the length of time the opportunity presents itself. 
 

I’m young so I’m not investing with a large stack of cash I’ve accumulated over decades. I’m more of a monthly budget investor. 
 

So when I see something I like, I will prioritize adding to that equity until the opportunity has reached its fruition or surpassed what I find to be a reasonable deal. I don’t stick to any certain percentages, rebalance or anything. My positions are what they are based on the opportunity that presented themselves. 
 

Some examples would have been ATCO. I added to that consistently for the better part of a year. Yes I added to core positions if I felt they were cheap. But 90% of what I would be contributing went to what I thought was the best deal. This lead to me having something like 30+% of my portfolio in ATCO.  
 

Another example was back in 2018 when I was getting my feet wet. MSFT took a big nose dive. I piled into that as well. Still holding it today. I think back then it was something like 50% of my portfolio (which wasn’t much at the time lol) 

 

One area I think a lot of investors fail in is not adding to their holdings on the way up given it’s still reasonable priced and you don’t have any other big ideas. People buy XYZ at $10 say it’s worth $16 but never buy between on the way up. 
 

One area I’m bad in is buying starter positions, then abandoning them never taking a serious position and just letting small amount flounder instead of adding to things in much more confident in that are still cheap. Diversification is nonsense if all it means to you is owning a shit ton of positions in small amounts. I like Mungers comments on that. I also try to avoid anything complex. I’ve gotten burned before when starting out and it’s just a waste of time. I’m almost never interested in some obscure company that some egg head wrote a 50 page thesis explaining how management will turn it around and it’s “deep value” because of xyz. 1. I’m not smart enough to understand that shit. 2. I don’t have the time, energy or patience to try to. 3. If you’ve gone that far you’re probably working against yourself and not being honest. Buying a stock should be EASY to justify. Something I really need to do better at is ignoring those companies/pitches more. 
 

So to sum up my ramblings. Position sizes for me are constrained/determined by the window of opportunity. 

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5-10 big positions. the most important thing is depth of understanding, not breadth.

you can make berkshire your entire portfolio and make more money trading the stock. look at boilermaker. dude earns the ROI of the stock and juices it with options trades. 

 

then i have a bunch of little things to keep my trigger fingers at bay. just as fun to trade around ATCO's merger arb. or buy a lot or two of some rinky-dink stock that looks interesting. but i don't do a deep dive on them. and they are all for sale, any day. 

 

there's a lot of good businesses out there and it's a fools errand to try to find them all.

 

ash the pokemon trainer didn't catch em all but still became a pokemon master.

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I think it's all about tail risk of the permanent variety (not volatility).

 

Buffett's performance among many other things can be accounted for by a simple mantra: "leverage sure things and be patient until you're sure". The best stocks in the SP500 have done about 25%-30% compounded over the last 10 years in a raging bull market (except for some true outliers TSLA etc.). Realistically, a handful of stocks that do 15% plus some modest leverage is good enough to achieve a really good performance.

 

So position sizing to me is really dependent on how the distribution of outcomes look for any particular stock. Humans generally have a hard time mentally calculating geometric means, but this is crucial for investing, so I think getting some intuition via some Monte Carlos rollouts is a useful exercise.

 

 

Edited by snowglobe
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I aim for 8-10 positions which typically ends up being about 12 by the time I factor in odds and ends - things I'm moving out of/in to or have had trouble building a position to the size I'd hoped for.

 

I think that size/concentration just seems to work best for me psychologically. 

Being that concentrated doesn't concern me - portfolio swings don't particularly worry me and I find it difficult to tend to many more positions than that.

I've found in the past if I have say 20+ positions of equal weight, I lose interest/find it difficult to follow such a number. I'm not able to tend to my portfolio full time and positions 5% and under *feel* (perhaps irrationally) too small to be meaningful to me.

 

I can't say I've come to the above in an overly objective way - it's just where I tend to end up/feel best.

 

A shortfall is definitely that there's certainly times where I hold a larger cash balance than I think might be ideal, purely due to the fact I find it difficult to find ideas at times which i guess brings the questions of whether I'd be better having some less heavily weighted positions which I'm reasonably confident will add to performance and if they do detract, aren't too meaningful. In saying that, as above, I tend to just end up neglecting them and not following them closely.

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Some good advice in this thread. I’m aiming at 10-15 holdings: I’d like to concentrate it further but I think it would affect the “sleep at night” factor

 

One quote I always think about was from Andrew Jones in “The Art of Value Investing”: “if the only way you can get comfortable about an idea is to own less of it, to my mind that tells you something about the quality of the idea”. He basically says to look elsewhere if you won’t make something a 5%+ position. Part of the reason I don’t bother with tracker positions

 

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Interesting to learn these perspectives.

 

I've evolved my strategy to the following:

 

1. Primarily invest for cash flow. Ie. Dividends. The core of my portfolio.

Mainly banks and infra.

I add to these (or optionally pay down margin debt, whichever is more advantageous in any given month).

 

2.  Secondary positions in blue chip tech.

 

3. Other Bets

Smaller, higher risk positions.

 

Why focus on dividend cash flow?  

For me,  it's simpler metric to understand. 

Its also easier to know when to add to these positions. 

 

 

 

 

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Druk. shares DNA with Soros. Like most HF managers, they got paid for pre-tax performance which strongly influences their approach. If you took his 30% for 20 years but taxed it at ordinary income tax rates, the results would regress accordingly. Does anybody want to run that regression? No shade on Druk, he is a legend. If you are an after tax, compounding type investor, the proposition is significantly different. Your time horizon may be orders of magnitude longer. Sloth may be more rewarded than aggression. Your focal point is different. If you are a vanilla wealth manager taking 50 or 100bp of AUM, you play a lot of defense trying to manage relationships with a likable portfolio. If you are dealing with family wealth that may be passed down, you are paying attention to the stepped up tax basis benefit. I am fascinated by trying to construct a forever portfolio which you don't fuss with much, like Dealraker who has owned the same things for 50 years. I have heard about guys who never sell stocks at all but only buy when cash is available. My five largest positions (75% of the portfolio)  have remained the same since the GFC. Now I am cleaning out the underbrush and adding a couple of other large positions that seem interesting. Companies with long histories like Nintendo and Bollore are cool the way they have persisted for 100 years+.

 

Margin, currencies, a short book and derivatives are a whole other set of variables that many successful guys have used. In the name of simplicity, I have not done a lot of that.

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I am too old for excitement. I aim for 40 positions, but they are not equal weighted. I typically don't go above 5% much (based on funds invested), but I do go larger occasionally (LAACO was an example) when I think I understand the business very well and feel it's bullet proof. Few business are. BRK may is another one, but something like FFH is not (imo).

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For me, the approach that seems to make sense is thinking more about the "nature" of an opportunity more so than being diversified. Excessive diversification is not for me, but having at least 7-8 issues helps one sleep better at night (and prevents getting wiped out). The level of your research/conviction IMO should be one of the primary considerations in allocating capital to a position. A consideration of the general level of the market is also helpful. When personal research/study leads to a high conviction and the general market is low as indicated by rational measures, then taking significant positions often makes a lot of sense. When the general market is high and there is also high conviction, taking a decent sized (but not outsized position, say < 10%) is probably the more prudent move.

 

Obviously, this "personal conviction" should come from getting a large NAV discount when the investment is made in the first place. And this conviction should be based on a strong consideration of what the past has looked like business wise over a long time frame (e.g. look at earnings for years before COVID and then normalize for COVID bumps). The "future" (which no one is ever truly certain of) IMO should not be the entire basis of an investment. Consider the future, but really look at the past before doing anything. 

 

Also helps to not feel the need to be fully invested all the time. Being antsy and wanting to always allocate cash has been a source of many investment mistakes on my end. Cash is an actual position. It can really hold up performance when things are blowing up in the economy. And it also provides dry powder to take advantage of opportunities when most are cash poor.

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8 hours ago, Rustycage said:

Some good advice in this thread. I’m aiming at 10-15 holdings: I’d like to concentrate it further but I think it would affect the “sleep at night” factor

 

One quote I always think about was from Andrew Jones in “The Art of Value Investing”: “if the only way you can get comfortable about an idea is to own less of it, to my mind that tells you something about the quality of the idea”. He basically says to look elsewhere if you won’t make something a 5%+ position. Part of the reason I don’t bother with tracker positions


I use sell offs as an input. If a stock i own goes down and i:

1.) get worried (my gut) it usually means my understanding/thesis is weak.

2.) want to but more (my gut) it usually means i am on to something. 

Edited by Viking
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There is no one size fits all for position sizing. Risk tolerance, ability to take risk, goals in investing, and confidence in your analysis all play a part.

 

When I first started investing I believed in being concentrated and I figured being fully invested would look like 10 positions at 10%. Problem is when you first start investing If you are maxing out IRA contributions you are doubling your account in year 2, 50% year 3, etc... and a position you hold when you make contributions might not always be a buy when you have cash available. I ended up owning 3 stocks up until I had 50k and I would have been comfortable with 1. I'm now fully invested owning 5 names. This works for me because I have a high risk tolerance, high ability to to take risk, and my goals are to outperform the market, which can be done by being different and taking concentrated positions.

 

That being said what works for me might not work for you or anyone else. Position sizing is more of an artwork than a science IMO. I think the most important thing is that you are comfortable. If your losing sleep over a large position because it is declining than the position is too big. 

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I have been thinking a lot about position sizing over the last couple of weeks because I have been offered the opportunity to manage the stock portfolio of a family office. This family is already richer than most of us could dream of. Would it be appropriate to put their money in a concentraded portfolio like my own? I don't think so, their goal is not to get rich but to stay rich under almost any circumstances. If I accept the mandate I'll probably put 70% of the portfolio in self managed equal weight indices (it's cheaper than buying index funds) and a few simple quant strategies. The remaining 30% I would put into a concentrated portfolio. This combination makes sure that they don't loose money under almost any circumstances over time (I'm not speaking of volatility which is pretty much irrelevant if you have enough money) and gives them a decent shot at outperforming the indices by a couple of percent. On top of that I can save them almost a million bucks every year in fees they pay to banks who churn the portfolio for their own profit. Disgusting.

 

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Family investments are little different to institutional investments; they require a very clear Investment Policy Statement, reviewed every 3 years.

Purpose, objectives, risk constraints, etc.

 

Our primary objective is training, and not a minimum return. We're in it to make money, and fund various objectives - but it's really all about transferring skills, and walking the talk. Our best return is an investment blowing up, that requires the uncles expertise and experience to fix - hence crypto and UK housing development as desirable long term investments.

 

SD

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