| The Waiting Game In developing your investing strategy, position sizing is the part that determines how much money to put into a given trade. A typical, conservative position size would range from 2% to 3% of your entire portfolio. Though this may vary based on your investment time frame and risk tolerance. When you size your positions appropriately, you gain the power to patiently await your “blue ribbons.” Or as Mr. Miyagi may put it, your black belt. Warren Buffett once remarked, “The stock market is a device for transferring money from the impatient to the patient.” He’s described his investment process as “lethargy bordering on sloth,” with his “favorite holding period” being “forever.” While most of us want our investments to succeed right now, the stock market is rarely that accommodating. Sometimes it gyrates as wildly as a Water Wiggler (Gen Zers… Google it) on its way to producing gains, which is why patience is such an essential investment trait. To be sure, losing money is scary, especially in a new investment that has not ever produced a buffer of previous gains. When one of our new investments falls immediately, we can never know how much further it might fall or when it might stabilize. That kind of uncertainty can be frightening. But over the long term, it is even more frightening to kick future winners out of your portfolio. Impatience is an emotional error, not an analytical one. So, we need to protect our portfolio from ourselves – from our reactive emotional decisions. The best protection is to know and establish clear investment goals ahead of time and to position-size accordingly. For example, if a losing stock represents 25% of your portfolio, panic would be unavoidable. It is such a large position that it would erase a huge chunk of your capital. But if the position is just 3% of your portfolio, you can give it a long leash to work its magic. Here’s the best part: Starting small doesn’t mean staying small. Small positions, like acorns, can grow into majestic oaks. If/when that stock starts to perform well, it can grow into a huge percentage of your portfolio. A 3% position that triples becomes a 9% position, all else being equal! Position sizing begins by establishing specific investment goals and time frames. Consider your proximity to retirement, risk tolerance, and investment horizon. There’s no one right answer for everyone, but there is one right answer for you. That’s why you need to be deliberate about aligning your portfolio construction with your investment goals and expectations. Applying Position Sizing Let’s examine position sizing in practice. Let’s say you’re an investor with a $100,000 portfolio, and you’re thinking about buying AI Widgets Inc. (AIW), a hypothetical, promising AI company. So, how much should you buy? To answer that question, let’s consider two hypothetical scenarios… - Scenario A: You allocate 3% of your portfolio to AI Widgets stock.
- Scenario B: You allocate 30% of your portfolio to AI Widgets stock.
After just five months, the stock has tumbled 50%, which means the allocations in both Scenario A and B would have fallen to half their original amounts. Scenario A results in a small 1.5% loss for the entire portfolio, while Scenario B suffers a hefty 15% loss. Obviously, a 15% loss would be much more frightening than a 1.5% loss. It would be so frightening, in fact, that most Scenario B investors would probably dump the stock to avoid suffering even larger losses. But in contrast, few Scenario A investors would be tempted to dump a stock that had produced only a 1.5% loss for their entire portfolio. Therefore, if/as/when AI Widgets eventually recovers, these investors would still be holding their original positions. This hypothetical example isn’t as hypothetical as it sounds. Back in 2002, I recommended buying shares of Valero Energy Corp. (VLO), the oil refining giant. That stock initially tumbled nearly 50% during the next five months but went on to post a 500% gain in less than four years – or 18 times more than what the S&P 500 delivered over the same time frame!  At that point, a hypothetical VLO position that started as a 3% allocation in your portfolio – which then shriveled to just 1.5% – would have swelled to about 18% of the portfolio, all else being equal. So, we cannot always avoid short-term losses, but we can always prepare for them. By applying these principles of patience and strategic position sizing, as I help the paid-up members of my Fry's Investment Report do, investors can better navigate market volatility while potentially reaping significant long-term rewards. To learn about the stocks I recommend exercising patience with – and to earn your investing black belt – join us at Fry's Investment Report. I hope you all have a safe and happy Independence Day holiday. I'll be back in touch with your next Smart Money on Saturday. Regards, | 
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