INVESTOR LETTER #130
Position Sizing
Finding a great company is only half the job. The next question is just as important: 'How much should I invest?' This is called position sizing. Investing too little means your best ideas won't make much difference. Investing too much can expose your portfolio to unnecessary risk. Great investors don't just decide what to buy—they also decide how much to buy.
INVESTOR NOTE
A business owner thinks in decades. A speculator thinks in minutes.
A Great Business Can Still Become a Bad Investment
Imagine you have ₹10 lakh to invest and put all of it into a single company. Even if it's an excellent business, an unexpected event could significantly damage your portfolio. Position sizing is about balancing conviction with risk.
What Is Position Sizing?
Position sizing simply means deciding what percentage of your portfolio should be invested in a particular stock. It's one of the most important decisions an investor makes, yet it's often overlooked.
Not Every Idea Deserves Equal Money
You won't have the same level of confidence in every investment. Some businesses are easier to understand, have stronger financials, and trade at more attractive valuations. Those may deserve a larger allocation than ideas you're less certain about.
Conviction Should Be Earned
A large position shouldn't come from excitement or confidence alone. It should come from deep research, a strong understanding of the business, trustworthy management, and an attractive valuation.
Respect the Unknown
No matter how much research you do, surprises can happen. New competitors, regulations, fraud, technological disruption, or unexpected economic events can affect even outstanding businesses. Position sizing acknowledges that uncertainty always exists.
Diversification Has a Purpose
Owning multiple companies reduces the impact of any single mistake. Diversification isn't about buying dozens of random stocks—it's about ensuring that one bad outcome doesn't permanently damage your wealth.
Avoid Making Every Stock Your Biggest Bet
Many beginners become emotionally attached to their latest idea and keep increasing their investment without objective analysis. Every position should be sized thoughtfully, not emotionally.
Review Your Portfolio Regularly
Over time, some investments grow much faster than others. A stock that originally represented 10% of your portfolio might eventually become 30% or more. Regular reviews help you decide whether your allocations still match your conviction and risk tolerance.
There Is No Perfect Percentage
Some investors are comfortable holding concentrated portfolios, while others prefer broader diversification. The right position size depends on your knowledge, experience, financial situation, and ability to tolerate volatility.
Think in Terms of Portfolio Impact
Before investing, ask yourself a simple question: 'If this investment falls by 50%, how much would it affect my overall portfolio?' Your answer often reveals whether your position size is appropriate.
Protecting Capital Comes First
Successful investing isn't just about maximizing returns—it's also about avoiding devastating losses. Position sizing helps you stay invested through uncertainty, protect your capital, and let your best ideas compound over many years.
INVESTOR PRINCIPLE