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whatheheckaboom.wordpress.com /2010/10/30/position-sizing-in-value-investing/
Posted by whatheheckaboom
Position sizing is something that can make the difference between whether you can be slaughtered by shortterm fluctuations, or can stick around for the long run. This is tied very closely to diversification, the smaller the
number of positions, the greater the ideas can make an impact on your portfolio, but the greater the volatility and
the risk of permanent capital impairment if the ideas dont work out. Conversely, the greater the number of
positions, the closer your portfolio moves towards having average returns.
To figure how I should do position sizing, thought I would first survey the landscape and see how other famous
investors are doing it.
Seth Klarman (Baupost)
1. You diversify away most of the diversifiable risk by having a portfolio of 20 or 25 positions.
2. You should be able to tell a great investment from a good investment, so there is no sense in having the
same size position with your best idea and your 100th best idea.
3. A position is defined as the total investment in a companys securities (which could span different asset
classes).
4. A concentrated position is a ~10% position (every 2 years or so)
1. A post here shows in the 5.5 years from Oct 95 to Apr 01, Baupost only made two 10+%
investments, and five 7-10% investments.
2. We would own a 10% position in a senior, distressed debt investment where there was a plan in
place, where the assets were very safe either cash or receivables or something where we could
count on getting our money back, and where we saw almost no chance of principal loss over a
couple of years and a chance of a very high, meaning 20% plus, type of return.
3. We would not own a 10% position in a common stock that was just plain cheap unless we had a
seat on the board and control, because too many bad things can happen.
5. Most of the time, our most favorite ideas have 3%, 5%, 6% positions.
6. Position size will increase when a cheap position becomes much, much better a bargain or when theres
a catalyst for the realization of underlying value.
1. A catalyst gives you a much shorter duration on the investment and greater predictability that you
will in fact make money on that investment and arent subject to the vagaries of the market and the
economy and business over a longer period of time.
7. New inexperienced managers will have some 20% positions which might even be correlated, thats
absurdly concentrated.
8. 1% positions are too small to take advantage of the relatively few great mispricings that you can find.
9. Source: here.
Mohnish Pabrai
1. Previously had a 10-position policy with each position at 10%. His reasoning then was based on the fact
that estimating the probabilities and the odds (i.e. the gain if you win) is error prone, and his own
experience is that many times the bottom three to four bets outperform the ones he felt the best about.
Hence he decided to weight them all equally.
1/5
2. Recently he realized that if he has 10% positions its very hard to recover from a mistake (in the mortgage
crisis, his bet on Delta Financial Corp (DFC) got killed).
3. Since 2008, most positions will be 2-3% (basket trade) or 5% (baseline) of the portfolio and if the seven
moons line up he will allocate 10% (home run).
4. Basket trade: when the risk is slightly elevated he will buy a basket of companies with small weightings.
5. Sources: here, here, and his Dhandho Investor book).
Zeke Ashton (Centaur Capital)
1. A 15-25 stock portfolio has enough concentration to allow a skilled investor to really stand apart from the
market, but is not so concentrated that bad luck, bad timing, or one or two mistakes can sink an otherwise
competent investor.
2. Zeke did an excellent summary of position sizing styles:
1. Ultra-concentrated
1. Fewer than 10 stocks. Large position sizes usually ~20-25% and larger.
2. Practitioners: Chieftain, Eddie Lampert, Tom Brown
2. 10-stock model
1. Standard position size of 10%, with 1 or 2 larger positions, and a handful of smaller
positions. Total of 12-20 positions.
2. Practitioners: Clipper
3. 20-stock model
1. Standard position size of 5%, best 2-3 ideas modestly larger, many ideas are smaller. Total
of 25-40 positions.
2. Practitioners: Robert Hagstrom, Bill Miller, Wally Weitz, Longleaf Partner, Tweedy Brown
Value
4. 20-stock model (super-sized)
1. Same as 20-stock model but best 2-3 ideas are super-sized to 10-15%. Fewer sub-5%
positions. Total of 20-30 positions.
2. Practitioners: Tilson Focus, Fairholme, Sequoia, Oakmark Select
3. Centaur long positions
1. 6 7.5%: Outstanding idea, 1-2 best ideas per year, compelling valuation with significant margin of
safety.
2. 4 6%: Standard great idea, top 8-10 ideas.
3. 2.5 4%: Solid idea with one or more minor risk factors (e.g. valuation, industry quality, liquidity,
political risk)
4. 0 2.5%: Interesting idea but may be illiquid, bet with a good reward-to-risk ratio, or a very cheap
low quality business.
4. Centaur short positions
1. > 4%: Shorts or hedges using market or sector specific indices.
2. 3 4%: Most compelling individual short idea with very low risk.
2/5
3/5
9. A quote not in the 1966 letter: With each investment you make, you should have the courage and the
conviction to place at least 10 per cent of your net worth in that stock
Note that those are Buffetts thoughts in 1966. We know from the more recent comments by Buffett/Munger that
the variance of the portfolio is no longer a concern once they have moved to the Berkshire Hathaway holding
company structure as opposed to a hedge fund / partnership structure. Hence adding in a large number of
stocks to lower the variance, and incurring a performance hit in the returns, does not make sense any more.
Another thing to note is the explicit use of calculating mathematical expectations for the potential returns of each
investment, and also looking that the probability of a really poor performance despite having a high expectation.
One thing that I thought should not be done is to try to calculate the outperformance relative to the Dow. To do
that will require you to project how the Dow will do, and that is difficult. It also does not serve the point as it is the
absolute return that matters. There might be some debate here as many value mangers (including Buffett in his
letter) that if the index went down 30% but your portfolio went down 15%, then it is a good year. I would say that
what needs to be evaluated is the execution, whether or not you monitored closely and moved swiftly to protect
capital, as opposed to saying that the timing is too hard so ignore it. Firstly you need to determine whether the
event would lead to a market-wide downturn (e.g. the credit crisis yes, but not the dot-com boom-bust where
staple stocks like JNJ maintained their value) If there is an event that will lead to a market-wide downturn, I
would say that a good manager would have known of that possibility early on, just that the timing of which is hard
to predict. The manager should be watching the appropriate indicators and to get the hell out when the crumbling
starts (e.g. for the housing crisis, when the delinquencies hits, margin calls start, etc., and for trading exuberance
like the dot-com boom, and you are in tech stocks, could be if a stock dropped under its 20-day MA for 4 days,
etc.)
Sir John Templeton
1. No more than 50% in a single country.
2. No more than 25% in a single industry.
3. Source: here.
Anthony Bolton (Fidelity)
1. Based on following factors
1. Conviction level for the stock
2. How risky it is
3. How marketable these shares are
4. Percentage of equity you hold in the company (absolute limit of 15% as the maximum exposure)
2. Position size changes over time as the conviction level changes.
3. For large portfolios, start with a 25bp (0.25% of your portfolio) holding. As conviction level increases,
increase the holding to 50bp, then 100bp, then 200bp, and finally 400bp. With a smaller portfolio, can
start with 50bp.
4. May go above 400bp in a mega-cap share. Company would need to be FTSE 100 company to go over
200bp.
5. Make incremental moves and not large adjustments to the position size.
6. Source: His book titled Investing Against The Tide: Lessons from a Life Running Money
Michael Price
1. Say he has $100M.
2. Top 5 names to be each 3-5% of assets.
4/5
5/5