EVEN IMPORTED TRUFFLES and filet mignon can be ruined by a bad cook. Likewise, in investment portfolios, even the best trading ideas mean nothing without good technique. When you get right down to it, most people just want stock picks. But we’ve always tried to emphasize that it’s not what you trade, but how you trade that counts. No matter how skilled your stock-picking prowess, bad technique will prove ruinous every time.
As we wrote a few weeks back, investing is a game of speculation. No stocks come with guaranteed results. I’m from the school that says if you’re bullish on XYZ, buy it — mostly because the most influential decision isn’t necessarily which stock to buy, but how much of it to buy. Your position size shouldn’t be too big or too little, but just right.
The most obvious gaff investors make is betting too big. Even the best stocks fluctuate. Investors who put 10%, 15% or 20% of their assets in a single stock at a single price are just asking to get stopped out, most likely at a significant loss. There’s a difference between risk and recklessness; the point of trading is to grow big positions, not start out with them. (more…)