Choose your own advernture - Investing Edition

[mrholty]

I've come to realize that my biggest inability is position sizing.  The result of that is that I size all my investments the same and while I try to let winners run I do trim occassionally (I have it on my calendar 3x year) which probably has hurt my performance.  I only carry about 8-12 positions at any one time.

 

That said- I really struggle with special situations. 

 

Lets say there is a security that is a CVR or something.  The Market values it at X.  Your research says that its most likely worth 3x in 2-3 years.  You can see an outcome where its worth 5x but there is a non-zero option of it being worth 0.  You've tried to find others in the market but what you have found has not been helpful or less informed than yourself (or you may be overestimating your abilities).

 

If you were me (and this is what I am thinking on a private investment) how much would put into a position size.  My thought is to make this 1/2 of my normal position size.  Small enough that it will not hurt but if I am right it could be valuable in the future.  I feel like this is what I would feel comfortable investing in a friends dream business that I supported.

 

 

[StubbleJumper]

Have you read about the Kelly Criterion?  That would be a starting point to help you think about it.

 

 

SJ

[mrholty]

Have you read about the Kelly Criterion?  That would be a starting point to help you think about it.

 

 

SJ

 

I have.  I struggle applying my estimates as if they are real outcomes.  My concern is that either I am very wrong or everybody else is.  Naturally my belief is that everybody else is but I also know that I am kind of an idiot and occassionally make decisions with blinders.  (My wife would say I am too analytical however).

 

Valuing normal stocks I can build ranges and feel comfortable with it.  With this its a much Yes or No outcome and then from that the ranges of outcomes can swing wildly.

 

 

[StubbleJumper]

Have you read about the Kelly Criterion?  That would be a starting point to help you think about it.

 

 

SJ

 

I have.  I struggle applying my estimates as if they are real outcomes.  My concern is that either I am very wrong or everybody else is.  Naturally my belief is that everybody else is but I also know that I am kind of an idiot and occassionally make decisions with blinders.  (My wife would say I am too analytical however).

 

Valuing normal stocks I can build ranges and feel comfortable with it.  With this its a much Yes or No outcome and then from that the ranges of outcomes can swing wildly.

 

 

So you struggle most with asymmetric bets?  That's certainly a problem of mine.  When the upside vs downside is 4 or 5 to 1 and you handicap the stock at a 75% probability of the favourable outcome, Kelly would say you should bet a hell of a pile of money.  But, given the dearth of opportunities, it's not like you can tell yourself that you'll win over the long-term by applying the law of large numbers.

 

So, it's more emotional/personality than intellectual/knowledge?  That would be true of most of us.

 

 

SJ

[mrholty]

Have you read about the Kelly Criterion?  That would be a starting point to help you think about it.

 

 

SJ

 

I have.  I struggle applying my estimates as if they are real outcomes.  My concern is that either I am very wrong or everybody else is.  Naturally my belief is that everybody else is but I also know that I am kind of an idiot and occassionally make decisions with blinders.  (My wife would say I am too analytical however).

 

Valuing normal stocks I can build ranges and feel comfortable with it.  With this its a much Yes or No outcome and then from that the ranges of outcomes can swing wildly.

 

 

So you struggle most with asymmetric bets?  That's certainly a problem of mine.  When the upside vs downside is 4 or 5 to 1 and you handicap the stock at a 75% probability of the favourable outcome, Kelly would say you should bet a hell of a pile of money.  But, given the dearth of opportunities, it's not like you can tell yourself that you'll win over the long-term by applying the law of large numbers.

 

So, it's more emotional/personality than intellectual/knowledge?  That would be true of most of us.

 

 

SJ

 

Correct.  I know its an issue for others as well.  I am wondering how others deal and manage it.