Sizing your positions

"Very few people have gotten rich on their seventh-best idea, but a lot of people have gotten rich on their best idea."

Very few people have gotten rich on their seventh-best idea, but a lot of people have gotten rich on their best idea.

Not every idea deserves the same amount of room in a portfolio: how much you put into it depends on how much conviction you have and how much margin of safety it offers.

One approach is to weight every position equally: the same percentage of capital to every idea, regardless of how solid it looks. It's simple and stops you from falling too much in love with a single thesis. A different approach is to weight by conviction: more capital to ideas with a wider margin of safety and a stronger fundamental score, less capital to the more uncertain or speculative ones - without ruling them out entirely, if they still offer an interesting upside.

Whichever approach you choose, no single position should be big enough to turn one analysis mistake into a crisis for your whole portfolio. Sizing positions and diversifying are the same decision seen from two sides: one decides how many bets to make, the other how much each one weighs.

This isn't an invitation to put everything into a single idea, however convinced you are of it: even the idea that looks the most solid can turn out to be wrong, and no single thesis deserves to decide the fate of all your capital on its own. It's an invitation not to treat your twentieth marginal idea as if it deserved the same weight as your first, just because it too cleared your filters.