Position Sizing
Position sizing without a formula
This post is part of my How I Run My Portfolio series—where I break down how I actually manage my capital. You can find the full series here.
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Introduction
Position sizing looks like it should be math. In reality, it’s mostly judgment. My approach has evolved over time, and I’m not particularly dogmatic about it.
Position sizing is the biggest driver of outcomes—and one of the easiest things to get wrong and have your portfolio underperform.
I used to believe in structured, mechanical rebalancing. That’s what most models suggest when you back-test for optimal performance. Or when hear things like “90% of the stock market gain came from 2% of the companies”. But it’s one thing to see those results after the fact. It’s another to live them in real time.
Minimum Size
It goes without saying that you need a minimum position size for it to matter.
I don’t think in terms of a single position size—I think in ranges. An initial position might be 5–10%, but that’s not always the final size. I scale into positions as I build confidence or as the setup improves. There are times when I will commit 10% or more of my capital to an initial idea, but 10% is generally the maximum for initial capital. From there I let the position percolate. It grows or shrinks as I own it. With new information (and hopefully more knowledge) I will scale the position up or down accordingly.
The exception to this would be a position that is part of a basket. Generally I shoot for baskets to be made of a bunch of “half positions”. So 2-3% positions. Of course this is a moving target as things change as I scale into and out of the positions.
Maximum Size
Since I don’t have mandates on position sizes, I use “gut feeling” to let me know if a position is getting too big. If it’s a company that I know well and I’m comfortable with, I will let the position run until it gets very concentrated.
There have been instances when I have a company that just gets too big for what I am comfortable with. Some companies I get nervous when they hit 10%.
I have some triggers that push me to revisit my large positions. 25% will push me to do some extra checks that I wouldn’t do for a 10% position. I would check in with other investors more frequently to see if I have missed something.
At 35-40%, the position will start to get too big for my comfort. I usually mechanically trim regardless of the set-up. Even taking the position down by 10% will help me psychologically. I will still be way over exposed but trimming allows me to stomach a potential pullback. (Un)fortunately this has only happened a couple of times. Once was with XPEL and the other was with Cipher Pharmaceuticals.
I think something we don’t talk about is the type of bets or companies that will actually be able to grow into this level of concentration. It would have to be a business that checks all the boxes—and then some. It wouldn’t be something cyclical or debt laden.
When I Size Up/Down
When I Size Up
I’m more likely to increase a position when the thesis is playing out as expected, I understand the business better, and the path to making money becomes clearer. In those situations, risk is often being reduced—not increased—even if the price has already moved.
When I Size Down
I reduce positions when the setup becomes less clear, timelines stretch, or new risks emerge. And sometimes it’s simpler than that—the position just gets too large relative to the rest of the portfolio.
Small Positions and Edge Cases
These examples aren’t about moving the needle, they are me being mindful of my own bandwidth.
Tracking Positions
I have found that once a company ticks enough boxes off , I will start a “tracking position”. This is usually around a 1% position. This won’t blow up the portfolio if I’m wrong. And it won’t be the reason I outperform the benchmarks if I’m right. What it does is nudge me from a psychological standpoint. I have capital committed and I’m already interested in the company. It will push me to focus on continuing my research and to dig deeper.
AGM Invites
There are times when I buy a token amount of shares to get an invite to an AGM. This could be me wanting to attend for a variety of reasons.
Positions in Limbo
There are times when I’m building a position and something happens to shift my expectations. Maybe I think the timelines got pushed out or there is an unexpected leadership change. I tend to sit on my hands with these positions. I may like the upside at the current price, but I’m less confident.
Every once in awhile I will just liquidate a few of these positions to raise cash levels.
Closing Thoughts
There’s more art than science here. I’m not trying to optimize for a perfect number—I’m trying to size positions in a way that lets me be right in a meaningful way without taking unnecessary risk.
How do you think about position sizing? Do you have any hard and fast rules? I would be interested to know what that looks like for you.
Thanks for reading my work.
Dean
If you found this useful, you can follow the full series here.
Always interesting to hear how other think of this. In my own personal portfolio I will have a position as large as 50% but when it comes to my family’s RRSP account I won’t usually take a position size that is initially greater than 10%. I find that 6% to 8% is my initial position size but it has never been a hard rule.
I am OK with holding a “great” company that has grown but I wouldn’t let a “cigar butt” setup grow beyond 20%. This is especially important for cyclical or commodity type businesses.
One thing I know with certainty though… everyone else on Substack seems to have a plan to find “multibaggers” but I kind of just keep plodding along.
Great read, always good to read about the logic behind portfolio construction