Author Topic: position sizing  (Read 28548 times)

Mohammed Al Alwan

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position sizing
« on: February 08, 2021, 05:47:40 AM »
any suggestion on good books that tackles position sizing for fundamental investors ,i liked the book art of execution by lee freeman but want some thing with more details and ideas.


StubbleJumper

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Re: position sizing
« Reply #1 on: February 08, 2021, 09:38:25 AM »
Have you read Fortune's Formula written by William Poundstone?


SJ

Mohammed Al Alwan

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Re: position sizing
« Reply #2 on: February 08, 2021, 09:49:33 AM »
no i have not read it, thanks for the recommendation will check it out.

winjitsu

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Re: position sizing
« Reply #3 on: February 08, 2021, 11:03:45 AM »
Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts by Annie Duke. A poker book but makes you think hard about position sizing with randomness and uncertainty.

Man For All Markets: Thorp's book and how he uses Kelly Criterion.

Buffett's investments in AMEX or Li Lu in BYD: -> Knowing when to plunge. As an inverse case, see Mark Sellers in Contango Oil and Gas -> when plunging goes wrong.

BG2008

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Re: position sizing
« Reply #4 on: February 08, 2021, 11:22:49 AM »
Look up Kelly Criterion.  Never bet full Kelly.  1/3 is probably best. 

Nothing beats experience.  Figure out what industry you really know.  Figure out what industry has low impact if you get it wrong.  If you buy a grower at 10x revenue, if it turns out you are wrong, that downside is probably pretty high.  If you buy Union Pacific, you probably don't get a zero.  Do some pre-mortem on what could go wrong.  If you see a chance where it is a zero, then you need to size it very differently.   Obvious stuff, but people get caught up in the weed. 

Over time, you will get better.  The books are guidelines, experience helps. 

spartansaver

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Re: position sizing
« Reply #5 on: February 08, 2021, 11:25:30 AM »
Buffett Jan. 1966 Partnership Letter
“How much do I put in number one (ranked by expectation of relative performance) and how much do I put in number eight?” This depends to a great degree on the wideness of the spread between the mathematical expectation of number one vs. number eight. It also depends on the probability that number one could turn in a really poor relative performance. Two securities could have equal mathematical expectations, but one might have .05 chance of performing fifteen percentage points or more worse than the Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the first case reduces the desirability of heavy concentration in it.



cherzeca

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Re: position sizing
« Reply #6 on: February 08, 2021, 07:28:03 PM »
whether it is Kelly or Buffett, I think you will find that position sizing is what I call a missing variable phenomenon...meaning that these rules all assume that you have ex ante the investment sizing a valid assessment of the risks/return of the investment that can only be really gleaned ex post.

Kelly uses the illegal mob time delayed wireline from the track to premise its baseline; Buffett in the 1966 letter posits a distribution curve not knowable at time of setting the investment sizing. so it is all skirting around the issue...which is you cant size for risk if your estimate for risk is uncertain and especially if faulty

you do want to avoid ruin. ergodicity helps some, but not much (Taleb's example of one person betting all or nothing on 100 coin flips vs 100 people betting all or nothing on a single coin flip...ruin will occur in first example with 100% certainty to the single player, less than 100% across the 100 players). beyond this there is not much to rely upon imo

Mohammed Al Alwan

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Re: position sizing
« Reply #7 on: February 09, 2021, 05:52:48 AM »
thank you all for the insights

BG2008

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Re: position sizing
« Reply #8 on: February 09, 2021, 07:03:47 AM »
Age and your overall net worth is important as well.  People quote Buffet and Munger all the time.  But you are not Buffett nor Munger. None of us are.  Yes, you maybe an Autist like Roaring Kitty. But that's a special breed of special.  If you are in your early 20s, have a good job and good prospect in life and have good safety net, you can probably do a few 30-50% bets.  If you are in your 40s, 50s, and this is a lot of your nest egg, you probably want to be a lot more diversified. 

Personal story, in 2011, 2012 ish.  I put 30-50% into my top ideas in my IRA.  The balance was $30k or so.  I was buying a cash box at 1/2 of liquidation value.  That sizing really helped as I got a payout that was almost double.  I did that a couple times and got my IRA into the med to high 5 figures.  But once I crossed over 6 figures, something in my mind mentally changed and I realized that I need to be more diversified.   I have 15 positions in my IRA now.  6 figures is real money and I am in my late 30s.  So I was much more aggresive in my early 30s and now that my balance is about 8x (some contributions, not all performance) from 2011ish, I manage the IRA a lot different.  I manage money for other people and it never reached the level of concentration that it did in my IRA.  Ironically, it is the stuff that I size in 1-5% that tend to out perform lately.  So all this talk about concentrating on your best ideas, sometimes it is good to get some "right tail" exposure to some Saasy companies that doesn't make sense using 2021 P/FCF multiples.  But if you understand the business and realize that this is a "winner take all" category that could be worth 5x the current price in 5-8 years, it's not a bad portfolio allocation strategy to put 1-5% into it.  I prefer 1-2%. So I have a basket of what Peter Lynch call multi-baggers that I don't necessarily have a ton of confidence in like my Griffin Realty idea.  But allocating 10-20% to a basket like that is a wise way to catch some of that "right tail" return.  I do think there is something about digital market places, software, and other digital native businesses that are different than traditional manufacturing that makes it different this time around.  Famous last words.   

There are others that are much smarter than me who have evolved and developed the skills to invest in purely compounders and YOLO investments, I am not there yet.  Not sure if I want to be fully there.  As Robert Downey Jr said in Tropic Thunder "You never go full retard."  I never go full compounder.  Sometimes the stuff that you size at 2% wind up returning the same as the stuff that you size at 10% because the former is a 5 bagger the latter is a double.  Nothing wrong with that outcome as your degree of confidence is likely much higher in the latter.   

Happy investing, good luck compounding, and may your mind be exposed to wonderful growth. 

SharperDingaan

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Re: position sizing
« Reply #9 on: February 09, 2021, 07:55:15 AM »
Couple of takeaways ….

There are some very good approaches (Kelly), but they almost always treat every bet as an isolated once and done transaction, settling in near real time. In the real world the bet is relative to your risk tolerance at the time, the time horizon, and familiarity with the company you’ve bet on.

At most, most people can keep up with maybe 10-12 companies, and 2-4 industries. The reality is that the investor is really swing trading the same group of companies across different cycles and time horizons, and using his/her depth of knowledge to minimize the adverse risk. Risk tolerance, and time horizons changing, as personal circumstance and industry prospects change. Fewer vs more choices, higher maximum weightings, and ongoing risk mitigation.

Eye on the prize, not the process. If the objective is a fully paid off house in < 25 years (via mortgage repayment), do you really need compounders? Or is an ongoing string of 3-15 baggers better? Even if it takes 15 years to do, the incremental reward is 10 years of interest savings. Risk vs reward.

Human vs algo. The algo can apply mechanical formula a lot more reliably and faster than you can, you’re just a liability.
Do only what you’re good at, and where you have the advantage.

SD