“Everyone has the brainpower to make money in stocks, not everyone has the stomach.” - Peter Lynch
This post is about sizing, but specifically, the mental hurdles and various forms of cognitive dissonance that get in the way of "correct" sizing. I initially wrote this as a thread 4-5 months ago, it was sloppy, I expanded on it over the weekend and added a lot of charts and examples for improved clarity.
# "Riding a Multi-Year Winner in Size"
I first wrote a lot of this material down around 2019, and the best phrase I could come up with was “riding a multi-year winner in size” in terms of what historically generates the bulk of an investor's outperformance.
Go look at the greats, study how Buffett and Munger did it, and you’ll recognize the following patterns and principles:
1. When they’re right, they’re RIGHT IN SIZE. A top idea can be sized 15-25% at cost and run to 40%+ at market.
1. They press their winners, and they’re willing to buy more at higher prices.
1. They hold for multiple years, two to five, if not longer.
# Theoretical Support
Munger:
• “The idea that you have to have fifty stocks in your portfolio is insanity. It’s not brain surgery. If you can identify three wonderful businesses, that’s enough.”
• “Very few people have gotten rich on their seventh-best idea. But a lot of people have gotten rich with their best idea.”
• “If you’re right about a few things, that’s all you need in life. Don’t make it complicated. When you find something that makes sense, bet heavily.”
• “If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience.”
• “The typical investor should be content with 3 or 4 good stocks.”
• “You’re not going to get 20 great opportunities, you’re going to get maybe 3.”
• “We’re comfortable with concentration. There are worse situations than having 80% of your net worth in your best idea.”
• “There’s nothing wrong with having an investment that’s 30% or 40% of your net worth if you understand it and if you’re right. That’s the way the big fortunes are made.”
• “We’re comfortable with huge positions in a few investments. That’s the way to get rich.”
Buffett:
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