This is the most important lesson in all of investing…
It’s how hedge fund manager George Soros delivered an average annual return of 30% per year for nearly 40 years.
Mutual fund pioneer John Templeton posted 14% average annual returns for 50 years using this philosophy.
And Julian Robertson posted the best hedge fund performance during the 1980s and 1990s—with 32% annual returns—by applying it to his portfolio.
I’m talking about position-sizing.
Position-sizing is about not overinvesting. You’ve been told your entire life not to put all your eggs in one basket. Well, it also applies to investing—yet it’s still widely ignored.
Soros didn’t make 30% per year for four decades by being right every time. His “win rate” was only around 60%, the same as Robertson.
In fact, your stock-picking ability might be as good as (or even better than) Soros or Robertson… But if you’re overinvested, one bad investment can crater your entire portfolio’s performance.
Soros succinctly described position-sizing in what may be the most important trading advice ever:
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.
This lesson is the pillar of investing success. Practicing it will put you ahead of 99% of investors. And in today’s issue, I’ll show you a simple way to calculate how to weigh your risks…
How the Wealthy Position-Size
To get an idea of how Wall Street players manage their risks, I reached out to former hedge fund manager Teeka Tiwari’s chief income analyst, William Mikula.
At PBRG, we call William our stealth-income weapon. That’s because he’s on an incredible win streak of 110 profitable trades straight since January 2016.
And William says a key difference between the 1% and everyone else is that the truly rich not only know how to make money in good times… but also know how to grow their wealth in bad times, too.
But before you can grow wealth, you need to protect what you have first. Here’s William…
Position-sizing is critical to your success in the markets. By using this simple position-sizing technique, you’ll never blow up your portfolio with one bad investment.
His simple rule of thumb is this: If an investment gets stopped out of your portfolio, your maximum loss should be no more than 2.5–5% of your portfolio’s value.
William explains how it works:
Let’s say you have $20,000 earmarked for trading. And let’s assume you buy a stock at $20 per share with a 20% stop loss. How many shares can you buy?
Well first, let’s figure out how much we’re willing to risk.
Let’s assume it’s 5%… 5% of $20,000 is $1,000. That means if you get stopped out of the idea, you can afford to lose no more than $1,000. And if you’re buying the investment at $20 with a 20% stop, that means your stop price is at $16.
So your stop-loss size is $4 (the difference between $16 and $20).
This means you can buy 250 shares ($1,000 divided by the stop loss of $4 = 250 shares).
Generally, William and Teeka have stop losses attached to their recommendations. But if they don’t have one, they simply position-size for a maximum loss of 2.5–5%.
A Simple Way to Calculate Risk
Position-sizing is another way hedge funds and big Wall Street investors protect themselves from catastrophic losses.
And if you want a simple way to calculate your own position sizes, William and his team have put together a free position-sizing calculator for our readers.
Just click here (or the image below) and enter the ticker symbol of the stock you want to buy… your portfolio’s value… how much you’re willing to risk… and the type of stop you want to use.
The calculator does all the rest…
The example above shows the number of Apple shares an investor could buy with a hypothetical $100,000 portfolio, a position size of 2.5%, and trailing stop of 20%. (Please note: This example is not a trade recommendation.)
This is a must-have tool for every investor. I strongly recommend you bookmark it for your next trade.
Analyst, The Palm Beach Daily
P.S. Teeka has used elite methods like position-sizing and risk management to help his former high-net worth clients make millions. And for the first time, he’s putting them in a free report, “My Top #3 Ways for Making More Money with Less Risk.”
Along with the free position-sizing calculator, the report will show you techniques pros use to limit their downside and make maximum profits in minimum time.