CW8888: How can retail investors fully practice this position sizing well across volatile market cycles?
9. Position sizing (maximizing the payoff from edge). Puggy Pearson was a cigar-chomping gambling legend who won the World Series of Poker and was one of the world’s best pool players. When asked about his success, Pearson said, “Ain’t only three things to gambling: Knowin’ the 60-40 end of a proposition, money management, and knowin’ yourself.” Great investors take to heart all three of Pearson’s points, but money management is the one that gets the least attention in the discourse on investment practice. The book Bringing Down the House by Ben Mezrich tells the story of a half dozen students from MIT who deployed a card counting system to make lots of money in Las Vegas. Their system had two parts. The first was the method for counting cards. Here, members of the team fanned out to different tables and developed a signal to indicate when the odds looked good. But the second part of the system is commonly overlooked. The team members knew exactly how much to bet given the odds at the table and the size of their bankroll. Similarly, success in investing has two parts: finding edge and fully taking advantage of it through proper position sizing. Almost all investment firms focus on edge, while position sizing generally gets much less attention. (CW8888: It can be easily understood across market cycles by common wisdom in the investment sphere that it is never wrong to take good profits and leave a smaller position to ride the future market. Position sizing is never easy when we are sitting on giant gains. We will start feeling the emotional pain when market turns against us as we don't like losing! Read? When a Giant Gain Causes Pain (4) Position sizing is far more difficult in practice for retail investors as it is more than just the theoretical or Mathematical part of limiting your position sizing to 10% or less to control risks and damage. How do we sit on giant gains without worrying too much of losing back? High doses of Panadols to cause illusion of not losing or simply don't bother anymore since we will never lose our hard earned saving or compartmentalize our money e.g. house money effect/OPM Read? House Money Effect Bias : The Little Lie We Tell Ourselves. It Helps To Calm Our Investing Mind Across Market Cycles )
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