Reblog: The Debate Over Position Sizing

“If you wake up thinking about a position, it’s too big” Steve Clarke

“Make your position size more a function of not how much you can make, but really how much you can lose. So manage your position based on your downward loss perspective not your upward potential.” James Dinan

“We will make something a large position if we think there is an extremely low chance of losing money on a permanent basis. Even if we think it might be a 4X return, if the idea could be a zero, it’ll be a small position” Ken Shubin Stein

“I’ll limit position sizes when potential outcomes are too binary” Chris Mittleman

“We do not bet the ranch on any single investment; few positions have exceeded 5% of assets in recent years” Seth Klarman

“We size things based on how much we think we can make versus how much we think we can lose. We’ll probably be willing to lose 5-6% of our capital in any one investment” Bill Ackman

“You want to have no one position that can damage you or take you down. You always want to be in business tomorrow.” James Dinan

“Setting maximum and minimum position sizes helps enforce several disciplines, including diversification. Minimum position sizes limits guard against ‘di-worse-ification’’. On the short side, maximum size limits can serve as an important ceiling to reduce losses from large short investments that are growing the wrong way” Lee Ainslie

“All other things being equal, a larger maximum position size in relation to capital increases risk. Some people say that concentrating on just a few positions in which you have most confidence and focus is the way to both make money and decrease risk. I agree, but only up to a point” Paul Singer

“Leverage, concentration and illiquidity are the three things that can kill you” Steve Cohen

“There is no single correct answer the optimum diversity in a portfolio. My own policy is that no single stock should equal more than 12 percent of the total value of a portfolio and that no single industry should equal more than 25 percent of the total value.” Ed Wachenheim

“We have position limits on how much we are willing to put into a position.  I look at those position limits from a cost basis, so we don’t look at it based on current prices.  We are unwilling to commit more than 10% of assets to one position”  Mohnish Pabrai

“I wish I could describe some complicated algorithm that can tell us when a position is big enough. Without any such magic formula, however, what we have to do is this.. 1) look at each position 2) try and assess the downside case 3) envision the rest of the portfolio will look like when the downside case occurs 4) assess the quality of our effort and what we or the rest of the world might be missing; and 5) choose position size from there” Paul Singer

“You want to limit your size in a position so that fear does not become the prevailing instinct guiding your judgement.  Everyone will have a different level.  It also depends on what kind of stock it is.  A 10% position might be perfectly okay for a large cap, while a 3% position in a highflying mid-cap stock, which has frequent 30% swings, might be far too risky” Joe Vidich

“There are fantastic risk/reward opportunities that you are willing to do at 3% of your portfolio that you might be unwilling to do at 10%. When a position gets that big, you look for perfection and there’s no such thing. You become overly sensitive to the downside, remote as it may be. And for every unit of downside you eliminate, you tend to sacrifice multiple units of upside and over the long run, end up with lower returns” Andrew Wellington

“Once we own something, position size is driven primarily by expected return from today’s price, but we also consider other factors like quality of management, how well we believe we understand the business and how broad or narrow we consider the range of possible outcomes.”  Andrew Brenton

“When we consider a trade, we ask ourselves, ‘How much do we want to risk in this thing? How comfortable are we with it?’ We normally would start to have anywhere between 1% and maybe 3% in the portfolio. In a nice friendly stock-for-stock merger with no thorny issues we can put 5%-10% of our capital in, but you’ll be making a lesser return. In a more dicey corporate spinoff, you really can’t hedge out anything; that’s going to be a much smaller position. Once a position goes on the sheet, it has to earn the right to stay on the sheet almost on a daily basis.” James Dinan

“Even the best managers in the world have difficulty with sizing positions. Positioning is very correlated to conviction level. Look at risk management in totality. Position level and portfolio level. Have position level stops or targets. Portfolio wide have risk levels of down 2%, down 5% and down 10%. Down 10% is almost mandatory risk reduction across the board to live again another day.   Think about enormity of correlations when positions are large.” Kyle Bass

“Position size isn’t systematic it’s judgemental.  You try and find the best opportunities that you can discover and then figure out confidence level around them .  Sometimes the one you think could go up the most you also feel has the most risk factors.  There’s a limit to how big a position size you take in something that can be blown out of the water.  Smaller positions have less upside or more risk, usually less upside.  Larger positions are the ones with greater certitude given the nature of the business  or valuation. There is no formula.  We’ve had 20% plus positions”  Glenn Greenberg

“I keep cutting my position size down as I have losing trades. When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position when my trading is worst” Paul Tudor Jones

“During periods when we were losing money, I significantly reduced our overall exposure, and raised cash” Michael Steinhardt

“In my younger days I heard someone, I forgot who, remark “sell to the sleeping point”. This is a gem of wisdom of the purest ray serene. When we are worried it is because our subconscious mind is trying to telegraph us some message of warning. The wisest course is to sell to the point where one stops worrying ” Bernard Baruch

“In terms of sizing, our average long is twice the size of an average short” Lee Ainslie

“When you have a strategy where you put ten of fifteen percent of your assets in any one investment you can’t take even a very small risk of a catastrophic outcome”  Bill Ackman

“Position sizes are determined by estimated total return potential, perceived risk/reward ratio, and liquidity.  We manage a concentrated portfolio of 10 to 20 positions and continuously re-evaluate our assumptions to maintain what we believe to be appropriate position sizes” Chris Mittleman

“At any given time, we probably have only about 20 or so significant positions, which account for about 80% of the risk and are uncorrelated to each other”  Ray Dalio

“We would size the shorts as half as large as we would our longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment” David Einhorn

“Short selling is a portfolio, so for us globally we have 80 names.  Domestically we have 50 names.  Typically no one position will ever be more than 3% or 4% of the portfolio” Jim Chanos

“The question always is “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 versus number eight.  It also depends on the probability that number one could turn in a really poor relative performance.  The above may make the whole operation sound very precise, it isn’t”  Warren Buffett 1966 Letter

“At the position level, we use a risk budget for each position – what’s the most we’re willing to lose on each investment idea. That risk budget, together with hedging instruments, dictates the position size. The sum of the risk budgets on individual positions adds up to the utility curve for the entire portfolio.”  Adam Weiss

“What we have learned here is, “Don’t be so big where your eyes are bleeding and you’ve got to get out”. Size your positions so that you can withstand what happens if you are wrong” Craig Effron

“If a company meets all the criteria [Do we like the company? Is it cheap? Does it generate cash flow? Do we trust management? Do I have confidence in my projections? Is the macro outlook favourable? etc], then the next step is determining the appropriate position size.  Given the degree of company and country risk, what do I think is the appropriate position size?  If it is something very risky, a large position for me might be 1 percent to 5 percent of the portfolio.  If it is a lower risk position in which I have very high confidence, the position could be as large as 20 percent of the portfolio”  Martin Taylor

“I want to have sizeable positions because if you’re right that’s how you can do really well, but I know if it’s not expected by the market the path isn’t linear, so you just have to understand how much you can tolerate”  John Burbank

“In selecting the limit to which I will go in any one investment, I attempt to reduce to a tiny figure the probability that the single investment can produce a result for our portfolio that would be more than 10 percentage points poorer than the Dow” Warren Buffett 1962 Partnership Letter

“The minimum position was 5%, with the thought that if you don’t have enough confidence in an investment to put 5% of your assets in it, you shouldn’t be in it. So we generally had about 10 stocks in our portfolio, which meant we knew them well and we followed them closely. They tended to be businesses that didn’t have much downside risk, because you’re not going to gamble with 10% of your money.” Glenn Greenberg

“I’ve always had the view why not own the best 10 or 11 investments as opposed to idea 12 to 25 or to 100 which is more typical.  I think there are very few great investments at any one time.  So the ability to concentrate is an enormously valuable asset as a strategy.  The problem is it leads to bumpier returns.  If you want to make high rates of return over a long period of time its hard to do that being very diversified.  If ou look through the Forbes 400 wealthiest people in the world, most of them made their fortune in one business or a portfolio of two businesses.  Very few made it in a portfolio of 100.”  Bill Ackman

“We typically hold 20 to 25 positions.  While we’ll cut back on a position that gets over 10% for the most part our position sizing is a Darwinian process.  We usually let our winners run, creating bigger positions, while those that are disappointing become relatively smaller” Francois Rochon

The original article appears in the Investment Master Class on valuewalk.com and is available here.