Hey Trader,
One holding can grow large enough to run your life. You feel like you cannot afford to sell it.
The account stops working like a portfolio. It turns into a single bet.
That concentration bills you twice. It wrecks your sleep first. Then it takes your capital when the name finally turns.
My neighbor texts me every morning before the bell. He has 25% of his money in Microsoft. He is sitting in a therapist’s office as I write this.
I asked him why he will not just liquidate it. He told me he cannot stomach the tax bill.
So he holds and waits. He keeps telling himself the stock will come back. Nobody knows whether it ever will.
By the end of this article you will know the exact weighting I allow on any position. You will also know what to do when a tax bill stands between you and the exit.
The concept is position sizing. Selling is not your only way out of a name that has grown too large.
The Real Reason Traders Quit
When people lose big, they disappear. They sink into depression and anxiety. They swear off the business for good.
The stock picking never ended them. They never learned to manage risk.
I teach this at Loyola in Finance 553. It is the most rigorous PhD course on the schedule.
Last year I had 28 students. It was the largest class they had ever seen.
I tell every one of them the same thing. Asset allocation and position sizing keep you alive.
What Correct Size Looks Like In A Book
Every name I own sits between a 3% and a 5% weighting. Not one position runs above five. Not one runs below three.
That works out to roughly six shorts and twelve longs at the moment. On a weighted average basis the whole book runs around 3.5%.
I enter a stock at a 3% to 4% weighting. Once it grows past 5% or 6%, I trim it back down to where it started.
Make it concrete with a $100,000 portfolio. Two hundred shares of AT&T runs you about $4,500, which lands at a 4.5% weighting.
Options get a far tighter leash than that. No options trade of mine ever exceeds half of 1%.
My Neighbor Bet A Quarter Of His Money
He put 25% of his account into one stock. I have no argument with the name he picked. His problem sits entirely in the weighting.
He cannot sleep at night. He is on Xanax over a single line in his portfolio.
The tax bill is the reason he will not sell. That one number has frozen him in place for months.
Doing nothing carries its own bill. At this rate he will not have anything left to pay tax on.
A position that dictates your mood has already outgrown your size limit.
Selling Is Not The Only Exit
Tax pain convinces people that the sale is the only door out. They find that door closed. Then they take no action at all.
He needs an accountant and a hedge. Hedging the exposure buys him time without triggering the bill he fears.
I have not blown out an account in 25 years. The reason is painfully boring.
My sizing runs so small that a brutal session barely registers. A bad day for me is half a percent. A good day looks about the same.
My worst loss across close to 40 years runs 10% to 12%. I have never taken a massive one.
How You Handle This Tomorrow
Open your account and do the arithmetic before you place another trade. Divide each position’s value into your total portfolio.
Then work down the list in this order:
- Flag every name carrying more than a 5% weighting, because five is your hard ceiling.
- Trim the flagged positions back toward the 3% to 4% range where they started.
- Call an accountant and hedge the exposure wherever a tax bill blocks the sale.
Spread the risk across more names once the trimming is done. Then the market can fall out of bed and you will survive it.
Your opinion on the market will not protect you. The numbers keep you alive.
My neighbor never stayed in his lane. He bet a quarter of his money on one name. Now he cannot function.
Run your weightings tonight and fix anything above five. A position you cannot afford to sell owns you, and you will not talk your way out of it later.
Size every position before you ever worry about being right.
Professor Jeffrey Bierman
Creator of the Genesis COG System
