Joel Greenblatt: How To Think About Position Sizing

In this interview on The Investor’s Podcast, Joel Greenblatt discusses how to think about position sizing. Here’s an excerpt from the interview:

Most people say, oh I took a 10% position. I took a 20% position. Oh I’d never take a 30% position and I don’t think that’s the right analysis.

If you’re good at what you do and you have confidence in what you’re investing in and realizing that maybe you’ll be wrong so you have to factor that in… so your level of certainty, but I look down not up when I invest.

If I think I can make 10 times my money that doesn’t make it my favorite investment. If I can invest a lot of money and I don’t see how I’m gonna lose anything, or maybe lose one percent, but maybe I could make five or ten percent that might be a much better risk reward for me.

So typically when I’ve done it correctly my largest positions have been the ones where, largest positions on an aum basis or percentage of a assets under management business, would be those I don’t think I can lose money.

I don’t mean losing money like a bad mark… stock market mark it means that if you own a stock for ten dollars that has nine dollars in net cash and a good operating business, that has a nice franchise, doesn’t mean that stock can’t go down to six dollars it just means the way I’m looking at risk is, boy if I had my choice of when to sell this over the next few years I don’t think I’m going to lose more than a dollar or two in that name, not where it could trade on any particular day.

But if I can patiently get out of that position sometime over the next couple of years what’s my realistic loss, that would be my risk in my mind, and if that risk were not large relative to my purchase price then I could take a very large position.

You can listen to the entire discussion here: