Position Sizing: Money is Made in the Money Management Module
Legendary investors have always emphasized the same thing: risk management is the key to long-term superior returns. Stock picking is sexy, but vastly overrated. Risk management is boring but vastly underappreciated. In execution trader English, where market gurus focus on picking the right ingredients, market wizards concentrate on getting the right recipe.
At the end of the day, the primary determinant of long-term geometric returns is position sizing. The expanding nature of longs does not compel market participants to think about position sizing. After all, one good AAPL can make a basket of rotten apples look good. They can survive despite bad position-sizing algorithms. Short sellers do not have the luxury of logarithmic price declines. In this chapter, we will consider some classic examples of bad position-sizing algorithms. Those are the four horsemen of apocalyptic position sizing.
After we have taken a...