Topping Up

Historically, I have tended to buy 5% positions and not add to them. I have also experimented with sizing positions according to price volatility. Finally, I am ready to size by conviction.

It is hard to size positions well because investing involves high uncertainty which led me to conclude that doing so would involve false precision in my case. For example, if I choose outperforming stocks 55% of the time (hypothetically as I have not calculated this, but similar percentages are often quoted for successful investors), then the probability of overweighting a losing position is almost as high as overweighting a winner. Fortunately there is a solution to this conundrum, which is to add to existing positions as new information confirms the investment case provided valuation remains reasonable. The idea is well explained in the third part of this post by Matt Joass.

I have become more discerning over the past six and a half years since I began investing. This combined with a late stage bull market means I can only find a few stocks to hold right now (excluding those that are part of my quantitative strategy). Being more discerning is a good reason to increase typical position size (aside from the question of relative weighting), but a mature bull market is obviously not. It is hard to detangle these two factors.

I have decided to retain a 5% starting position, but buy more (up to 15%) if the business performs and price remains reasonable. This provides greater concentration (the right thing to do given experience has improved my judgement) and also likely means allocating more capital to the best ideas. With this in mind I have bought more Kip McGrath Education Centres (ASX:KME).

Comments

  1. You haven't lived Matt until you go all in! ;)

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  2. Ah Vestro, you would know! Let me know when you find the next all-in stock!

    ReplyDelete

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