Saturday, April 18, 2015

Investing in Your Best Ideas

One of the things I struggle with the most as an investor is knowing how much capital I should put behind each of my investments.

Indeed, the biggest mistakes of my investing career haven't been those where I've lost a little money, it's been the ones where I haven't invested enough in my top ideas.

Case in point, in the summer of 2010, I started researching TradeStation, an online brokerage company here in the U.S. that I thought was significantly undervalued. I did a lot of due diligence, spoke with the CFO, users of the product, etc. and thought the odds were favorable that I'd make money on the investment. It was the best idea I'd had in some time.

Feeling confident in my thesis, I bought some shares for my portfolio.

Fast-forward eight months and TradeStation gets acquired, producing a 60% gain on my investment.

Good news, right?

A 60% gain is nothing to sneeze at, of course, but the problem was I only put 1% of my portfolio behind my idea. While the investment had a positive impact on my returns, it also didn't have a very meaningful impact. It was akin to getting the proverbial "fat pitch" only to lay down a bunt instead of taking a full swing.

What I took from this experience was that you need to invest enough in your best ideas that they can have a meaningful impact on your long-term performance, up to the point where you start to lose sleep over the size of the position.

This will vary by each investor's ability to handle risk. Some investors don't mind putting 20% or 30% behind a single stock while others will blush at a 5% position. Either way, it's important to give your best ideas a chance to make a difference.

How do you approach position sizing? Let me know on Twitter @toddwenning or in the comments section below.

If you're going to be in Omaha for the Berkshire Hathaway meeting on May 2 and would like to meet up, please drop me a line!

Related posts:

Stay patient, stay focused.



Subscribe to Clear Eyes Investing by Email