How Big Should Your Bet Be in a Single Stock? | Joel Greenblatt | Investment

If you have this great investment, unless it's Tesla last year that's going to go 10x, and you put 2% in, and it goes up 50% or 100%, you could have blown it. That could have been your worst investment of all time, because you should have had a 10% or 20% position, and really moved the needle. And so I almost think that position sizing is the most important thing. Being too timid on the few good ideas that come your way is the biggest mistake people make. But of course, to take a large position, you have to be willing to be wrong and take big losses. You have to be patient to wait for that big position to know when it's there. And I would say that the biggest positions, and this is key, the biggest positions I've had are not my best ones, the ones that I think will go up 5 or 10 times. I'm really looking down, not up, when I take a big position. So in other words, I will size the position larger if I don't think I can lose much money. It's not like the thing that's going to pay 10 or 20 times. Obviously, if you have a $10 stock that's sitting with $9 of cash and no debt, and they have a little business attached, you can buy a lot of that one as long as you don't think they'll dissipate the cash. As long as there's a chance for a big upside, you're looking for asymmetric returns. One of the best things I think I ever wrote was, you can be a stock market genius. I wrote, if you don't lose money, most of the other alternatives are good. And so the chance for asymmetric returns and the fact that I took, whether it's, I think people look at the size of their position, that's the wrong way to look at it. It's looking at how much can you lose from that position. When I say lose, crazy things happen, whether it's COVID or 2008, Lehman goes down or something like that, where over a short period of time, stocks or other securities can trade at any price. That's not what I'm talking about how much I'm risking. As long as you don't leverage too much and you can wait it out. What I'm talking about is, if a reasonable person won't lose much money, if they can pick their spot to sell it over the next couple of years, that's what I'm viewing is how much I have to risk. If I can be patient, sell it when I wanna sell it over the next couple of years, what's the worst I really think I'm gonna do? That's how much I'm at risk for. And then how much does the reward pay off relative to that? So, if something I can lose a dollar or two in, I could easily have a 20% position in because I'm not risking that 20%, I'm risking, it's almost like, let's say you're buying, and I've given this advice to kids and friends and whatever, if you're buying a house, which is usually one of the biggest purchases most people can make, it's obviously gonna be a lot of money relative to your net worth most of the time and how much you earn and everything else. Better to look at how much do I think I could lose in this investment rather than that big, hairy number that's scary because houses are expensive relative to almost any context of most people, how much they will include in their salaries. But if you then can say, you know what, I think I'm only at risk for 10 or 20% of whatever I pay for my house, realistically, that maybe makes it more sleepable. You don't wanna bet, you wanna be able to sleep well. So, you contextualize it. That way, most people can take that risk or at least can take more risk than they think in that way. So, same thing with investing, I would say. It's how much it's at risk, not what the actual size is of all its 10 or 20% position.