Position sizing is deciding what share of a portfolio to commit to a single holding. It governs results more than stock selection does, because it determines how much a mistake costs and how much being right is worth. Most damage in individual portfolios comes from sizing, not from analysis.
Start from the downside, not the upside
The instinct is to size by how good the idea looks. The more useful question is what happens if the thesis is simply wrong. If a position could fall 60% and you would not be forced to sell or lose your composure, the size is defensible. If it would, the size is wrong regardless of how attractive the company is.
This is the practical companion to margin of safety. One protects against paying too much, the other against being wrong about anything at all.
What conviction should actually adjust
Conviction is a legitimate input, but it should be conviction about the business rather than about the outcome. A company inside your circle of competence, with a wide moat and a long record, genuinely deserves more weight than a speculative position in something you understand less well.
What conviction should not do is grow with how much you have read recently, or with how much the position has already risen. Both feel like conviction and are not.
Rough anchors
There is no formula that survives contact with a real portfolio, but the common shape among concentrated long-term investors is a starting position of 2% to 5%, a core holding of 5% to 10%, and a personal ceiling somewhere between 15% and 25% that is rarely bought up to deliberately.
The number of positions follows from this rather than the other way around, which is the subject of how many stocks you should own. Twenty roughly equal positions and five conviction positions with a tail are both coherent. Forty positions you cannot describe is not a strategy, it is an expensive index fund.
Letting winners run
The hardest case is a position that has grown to a third of the portfolio because it was right. Trimming it is the textbook answer and has cost investors more money than almost any other habit, because the companies that compound for decades spend most of that time looking too large to hold.
A reasonable middle is to let the winner run but stop adding, and to size new positions on the assumption that the concentrated one might halve. If the thesis is intact and the business is still compounding, the concentration is a result rather than a decision. If you would not buy more at today's price, that is worth knowing, but it is not by itself a reason to sell.
Build conviction on the business first
Stock Simplifier walks you through the moat, the growth and the risks for any US stock, so position size follows from what you actually understand. Free to start.
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Frequently asked questions
Related
- How many stocks should you own, the number of positions that follows from how you size them.
- Margin of safety, the other defence against being wrong.
- Circle of competence, what should actually drive conviction.
- When to sell a stock, the decision that ends a position.