Tutorial: size a position without blowing up
Being right is not enough. Survival is a separate problem, and it is solved by size.
Choose a position size that lets you be wrong without being finished.
How size a position without blowing up works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Volatile is not the same as risky
The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.
- 1
Accept that you will be wrong roughly a third of the time
Even excellent investors are wrong often. The good ones are not more accurate; they are sized so that being wrong is survivable and being right is meaningful. That is the entire trick.
- 2
Understand why a good edge still ruins people
Bet enough on each flip and a positive edge still ends in ruin, reliably, because losses compound just as gains do and zero is absorbing. Run the simulator below and watch a 55% win rate wipe people out at large bet sizes.
- 3
Size by what you can lose, not what you hope to gain
Ask what happens to the portfolio if this position goes to zero. Not what happens if it triples. If the answer to the first question is 'catastrophe', the position is too big, no matter how good the idea is.
The most dangerous position you will ever hold is the one you are most certain about.
- 4
Never let a position force your hand
Leverage does not change your expected return. It changes the probability that you are still solvent when the return arrives. A margin call converts a temporary decline into a permanent loss by removing your ability to wait, which was your only real advantage.
For every holding, you know what a total loss would do to the portfolio, and you can live with it.
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Being right is not enough. Survival is a separate problem, and it is solved by size.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.