sizing
Size by edge
The rule
Bet more when your advantage is bigger. But bet only a fraction of the full amount, because one wrong guess can ruin you.
Where it flips
Betting small can turn into an excuse to make every position so tiny that a real edge never moves your money. The fix is to size to the edge you can actually defend in writing. Small when unsure, larger when the advantage is real and lasting, but never larger than survival allows.
How big a position you take should follow how strong and how sure your advantage really is. It should not follow how excited you feel. The perfect full-size bet is also very wild, and it assumes you measured your advantage exactly. But a home investor's edge is only an estimate. So betting a fraction of the perfect size trades a little growth for a lot of safety.
A worked example
A reader is sure a stock is mispriced and puts 40% of the portfolio into it, saying strong belief allows a big size. But the edge was smaller and less sure than it felt. A quarter-size stake near ₹1,00,000, rather than ₹4,00,000, would have let a wrong guess bruise the account, not break it. [illustrative]
How to spot it
- ·position size set by belief or excitement, not by measured edge
- ·the same size on a strong idea and a weak one
- ·a full-size bet on an estimate that could be wrong
- ·no fraction applied to guard against a wrongly-measured edge
Edward Thorp · A Man for All Markets