This is the final part of Michael Mauboussin’s series of ten attributes of successful investors.
You can read the first four parts here in case you missed them — Part 1, Part 2, Part 3 and Part 4.
Position sizing refers to the adjustment of the size of an investment position according to its perceived risks and rewards.
Mauboussin argues that position sizing can make a big difference in returns and performance, even for two investors who own the same companies within their investment portfolio.
Position sizing does not receive quite enough attention in general as most investors are focused on what to buy, rather than how much to buy.
It’s important to note that your investment performance relies not only on how much money you make when you’re right but also on how much you lose when you’re wrong.
So how should you size your position for any stock?
It should depend on the potential return that the stock provides over time (i.e. a combination of both capital gains and dividend yield).
This fact should be balanced by the inherent risks relating to the business that may manifest themselves over time.
If you are not entirely comfortable with the risks but still wish to own a piece of the business, you can choose to buy a smaller position.
In this way, even if the stock performs poorly, it will not have a sizeable negative impact on your overall portfolio.
The final attribute of a successful investor is none other than — reading and more reading.
Mauboussin’s recommendation is to read as much as you can daily to enrich your mind and provide it with a wealth of knowledge about businesses and other events.
Reading is an essential quality for any successful investor.
In fact, Charlie Munger, Warren Buffett’s right hand man, says he knows not a single successful investor who does not read!
To soak up as much knowledge as possible, you should read from a wide spectrum of disciplines and not just limit yourself to finance and investment books.
For myself, I read about a wide range of topics including (but not limited to) management, marketing, science, geology, sociology, psychology and history (human and natural).
You never know when a certain fact or piece of knowledge may come in handy, especially when the world of investing encompasses a wide array of industries, people and countries.
Finally, you should actively read content and opinions that may run counter to your own beliefs.
Doing so encourages you to keep an open mind and can help you to avoid confirmation bias.
The act of constantly questioning your reasoning and logic in light of new evidence helps you to learn better, and also avoids complacency that may lead to poor decision-making.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
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