My strategy around position sizing
Initial thoughts on position sizes
Position sizing is something that’s long troubled me and indeed getting position sizing right seems to me to be one of the most important parts of portfolio management.
My current strategy around position sizing is:
Only hold core positions in companies I have conviction in that can outperform the QQQ over my investment time horizon. Conviction is a must because it's what helps me lean in on down turns and hold overweight positions on upswings. If a position isn't going to outperform, it's not worth the time and energy spent on it over holding the QQQ or SPY.
Positions should be scaled into over price and time. Just like stocks become more attractive at a lower price, they become more attractive the better I know them, and this only happens over time.
Positions with outsized risk/reward can be very large.
Positions should follow a Kelly criterion framework, where sizing is a factor of both conviction and risk-reward.
In regards to position sizing I've been doing the following:
"Invest and investigate" positions: these are companies or themes I want to learn more about, so put skin in the game to start off. These will be up to 1% of my portfolio.
Starting position: These are positions in companies I have conviction in or am building up a deep conviction. A starting position is 2-4% based on how the stock has been trading. 2% is a fairly small position to impact a portfolio, so for conviction buys, I like to get closer to 4%, however if a stock has been trading at all time highs, or hasn't had a significant pullback recently, my starting position will be 2%.
Core positions: These positions vary between 4-10% and are based on starting positions that are built out over time and price fluctuations - both up and down. Buying the dip is stock common wisdom, but buying the rips is less talked about. I have no problem violating my cost basis and 'averaging up' if a company has merited it over time and my position is still <10%.
Outsized bets: Positions that have either grown to become more than 10% or have an outsized risk/reward that I've double downed on.