The Importance of Trading Size

In reality, the entry size is often more important than the entry price because if the size is too large, a trader will be more likely to exit a good trade on a meaningless adverse price move. A common mistake made by traders is that they let their greed influence position sizing beyond their comfort level.

Why put on a 5% position when you can put a 10% position and double the profits? The problem is that the larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience. Trading size needs to be kept small enough so that fear does not become the prevailing instinct guiding your judgment.

Another consideration is that good trades can go wrong because of bad luck. Sometimes unforeseeable events can sabotage a good trade.

Not all trades are created equal. One characteristics of the Market Wizards is that when the perceive exceptional trade opportunities, they will take a larger-than-normal position.

–  Jack D. Schwager

 The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully. -Stan Druckenmiller

-Stan Druckenmiller

Here is a good resource: http://ivanhoff.com/2014/03/06/difference-george-soros/

Personal comments

I will take a lion bite at all costs or pretend that I am whale to soak up whatever shares I can when a golden opportunity presents itself.

If I have a portfolio of 5 stocks, each stock will carry a weight of 20%. At any time of point, if a stock goes up by 100%, the impact on the overall portfolio is a 20% increase. While this is acceptable, I concur with Jack D. Schwager and Stanley Drunkenmiller that there are better ways to improve your performance through concentrated investing. Even Charlie Munger concurs that if you know your stuff, you should not bother too much about volatility.

I practice a concentrated investing where I hold 1 – 2 stocks at any given periods. At best, if a stock goes up by 100%, the overall impact achieved is a 50% increase. Of course, this means that I will pay extreme attention to whatever that is happening to the company and I will get close to their suppliers, employees, and other value chain players.