Tuesday, July 24, 2012

Colm O’Shea on position size

From the book Hedge Fund Market Wizards (largely different from how most value investors operate, but interesting nonetheless):

“First, you decide where you are wrong. That determines where the stop level should be. Then you work out how much you are willing to lose on the idea. Last, you divide the amount you’re willing to lose by the per-contract loss to the stop point, and that determines your position size. The most common error I see is that people do it backwards. They start with position size. Then they know their pain threshold, and that determines where they place their stop.”