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Position Sizing Quotes from the Greats by The Intellectual Edge
The legends make it clear, and the data makes it quantifiable. Position sizing is the bridge between great research and great returns.
One of our clients forwarded a great article from “The Intellectual Edge” on Substack called “The Most Underrated Skill in Investing”. Well, anyone that knows me can guess the skill they’re talking about, Position Sizing.
In the article, the author cites, generally with video, investors like Stan Druckenmiller, Howard Marks, Joel Greenblat, Warren Buffett, Charlie Munger, Bill Ackman, Chris Mayer, Chris Hohn, and Bill Nygren talking about the importance of position sizing.
We've spent the last 20 years working on position sizing at Alpha Theory and we agree with Michael Mauboussin when he says:
Position sizing and portfolio construction still do not get the attention they warrant.
The investment process begins with "picking stocks". This involves determining which stocks to investigate. Step two is properly forecasting the probabilistic outcomes (i.e. Howard Marks video – start the video at about 9:50). Step three is sizing positions based on those probabilistic outcomes. This is the part that is too often overlooked because, many times, they skip the second step of explicitly forecasting probabilistic outcomes.
However, our data shows that overlooking this step may lead to alpha being left on the table (Read more). Disciplined position sizers generate roughly six times more incremental return than the average hedge fund from sizing decisions. In our experience, if you make probabilistic forecasts, it will lead to disciplined position sizing. It’s a natural evolution.
One last thought. Overall, this is a great article. I have just one small caveat. A closing thought of the article was:
“Don’t size based on upside; size based on downside risk.”
We think this thought is well-intended, as it implies a ‘do no harm’ approach. However, in our experience, you do size based on upside. Downside is important because it caps the position size, but upside matters as well. For example, if you have two names, each with a 50% probability of 20% downside, but one has a 50% probability of 30% upside and the other a 50% probability of 50% upside, you should size them differently.
Great article and thanks to The Intellectual Edge for pulling all of these great quotes together.
Learn the fundamentals of position sizing in our latest e-book: Ultimate Position Sizing Guide.
