Jan

12

On sizing and return

January 12, 2024 |

Mauboussin re Druckenmiller and Soros:

There's one other thing [Druckenmiller] talked about and it was about position sizing. Broadly speaking, when you're trying to maximize your returns, you need two things. One is you need some sort of an edge….The second thing is how much you can bet on that when you have that advantage. And the intuition is quite straightforward. If you had perfect information, you knew your bet was going to make you money. You would bet everything you could, right?…He has this sort of zinger, where he says, people said, what did you learn from Soros? And he said, the main thing that he learned from Soros was that position sizing was 70 to 80% of the game. The reason that struck me is because, first of all, purportedly George Soros made money on fewer than 30% of his trades. And that alone is worth letting settle in a bit….It means that he made a lot of investments that lost money. They probably did not lose much money. And when he did make money, he made a lot of money, both by betting a lot of money and by letting it run simultaneously. That I thought was a really interesting lesson.

H. Humbert responds:

Imagine that you have this ability to make win enough on 30% of your trades, and the edge is enough to compensate for the losses on the other 70%. If you take lots and lots of time to study and prepare for your positions or you must have only 1 or 2 at any one time for any reason, it makes sense that position size becomes a very important consideration. But what if you don't spend a lot of time? Or what if you can easily have 200 (or whatever, but a large number compared to 20) positions? Than it would seem that having a very large number of positions makes sense and position size is not an important consideration.


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