I’ve recently done some soul-searching over the failure to adhere to my own money management rules in the past half-year. I’ve identified two main causes of failure. Firstly, I over-committed, putting too much of my net worth into stocks. Furthermore, I designed my portfolio with too few positions (only about 10), and therefore had too much money per position. And to compound that, I doubled my position size with selected stocks. Over-commitment means there is too much emotional valence attached to each stock, making it difficult to pull the trigger and take losses when necessary. Secondly, my method of scaling into and out of positions was too complex. The complexity introduces multiple decision points, and increases the chances of emotional failure.
To prevent over-attachment, I’ll gradually scale back the proportion of my net worth that I’ve put into stocks in the coming months, and spread that over 20 positions, never exceeding position limits. To avoid the problem of complexity, I’ve vastly simplified my money management system. Firstly, scaling into positions is out. I’ll commit the full position size in one go. I’ll sell out the full position size in one go if I suffer a 50% loss (because I usually buy only severely undervalued stocks, a 50% decline suggests that my original analysis was incorrect, and that the position should be liquidated). I will also liquidate half the position size if the stock reaches my target price. The above liquidation rules will be implemented as mechanical stops, and will be tax-insensitive. The remaining half-position that I retain even if the stock goes above intrinsic value is a guard against seller’s remorse, because my intrinsic value is often very conservative. I’ll liquidate the remaining half-position a minimum of one year after buy-in, and only after re-evaluating my intrinsic value calculations.
I would appreciate it if some of my readers will share some of their own money management rules and tips with me. What system do you use, and how robust is it under times of stress?
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As I’m sure you know, two ways to limit losses are to buy puts or to have a firm rule to sell after a stock after it reaches a loss of a certain percentage. I usually don’t fight the market, even as a contrarian investor. If a major position decreases more than 25%, I have learned the hard way to sell. I agree with you on NVDA.