Performance review May 2013 – Comment “Position sizing”


May has been s surprisingly good month for the portfolio. Despite ~15-20% cash, the portfolio gained +4.9% against +4.5% for the benchmark (50% Eurostoxx, 30% Dax, 20% MDax). YTD this results in +19.6% against +12.0% for the Benchmark. Since inception (Jan 1st 2011), the score is now +57.7% against 22.1%. As I have said many times, this is still highly unusual if the portfolio outperforms in such a strong month, especially now with the high cash percentage.

Main drivers were: EMAK (+27%), Dart Group (+22%), April (+16%) and Tonnellerie (+13%)

Portfolio activity

May has been an unusual active month. As discussed, the following transactions took place:

– sale of IVG convertible with a total loss of -16,3%
– sale of Buzzi with a total gain of +34% (incl. dividends)
– Sale of KPN shares & rights with a gain of 11.1%
– Purchase of IGE & XAO
– Purchase of EGIS
Edit: – Short Position Focus Media has actually been bough, exit with a loss -11.9%

Portfolio as of May 31st 2013:

EDIT: Buy out of Focus Media updated

Name Weight Perf. Incl. Div
Hornbach Baumarkt 3.7% 3.4%
AS Creation Tapeten 4.3% 49.3%
Tonnellerie Frere Paris 5.7% 83.3%
Vetropack 4.1% 9.7%
Installux 2.7% 10.1%
Poujoulat 0.8% 6.4%
Dart Group 4.7% 171.2%
Cranswick 5.4% 33.8%
April SA 3.6% 19.4%
SOL Spa 2.7% 35.8%
Gronlandsbanken 2.1% 23.2%
G. Perrier 3.0% 11.3%
IGE & XAO 2.0% 4.1%
EGIS 2.5% 0.4%
KAS Bank NV 4.6% 27.6%
SIAS 5.5% 59.5%
Bouygues 2.4% 7.0%
Drägerwerk Genüsse D 9.2% 186.2%
DEPFA LT2 2015 2.7% 64.1%
HT1 Funding 4.6% 58.2%
EMAK SPA 5.2% 64.9%
Rhoen Klinikum 2.2% 10.8%
Short: Prada -1.0% -20.4%
Short Kabel Deutschland -1.0% -5.7%
Short Lyxor Cac40 -1.2% -15.5%
Short Ishares FTSE MIB -2.0% -14.0%
Terminverkauf CHF EUR 0.2% 7.9%
Cash 21.0%  
Value 47.5%  
Opportunity 36.4%  
Short+ Hedges -4.9%  
Cash 21.0%  

Comment “Position sizing”

One topic which constantly bugs me is how to size positions.

There are two extremes:

On the one side, Modern Portfolio Theory (MPT) says that the only kind of “free lunch” available is diversification. Adding additional positions means more or less the same returns but with lower risk.

On the other side are very succesful investors, including of course our heroes, Warren and Charlie, argue that one should concentrate on the big ideas only as those are the ones which drive the returns. Similar results come out of the “Kelly criterion” which says that you should bet overp proportionally more if the odds ar in your favour.

Personally, as a “part time” investor, I have the following problems:

1) I can oversee only a limited amount of companies&investments, my max is around 25-30 based on experience. So further diversification on a single investment level does not make sense

2) As I am in general very sceptical and commit only a limited time per day on research, I never really came to a stage where I was 100% sure about any investment. Even if I am 95% sure I have the nagging feeling that I missed something

3) I usually find my “edges” only in small cap stocks or smaller special situations. Small companies have much more unique risk factors than large caps. It is a real difference in risk if you invest lets say 40% into a small French software company than investing 40% of your portfolio into an international company like American Express

Point 2) is really the major issue why I hesitate to commit more than 10% of my portfolio into a single stock. I am just not confident enough in any company or investment to do so.

Looking back, my historical best investments, like for instance German bank hybrid in 2009 was made under a lot of uncertainty and I didn’t really know for sure if it plays out the way it did. The same goes for Draeger. Yes it was a multi bagger, but at least for me I was never really sure about it.

On the other hand, some small ideas where I didn’t really have a lot of conviction, performed outstanding, like Dart Group which was rather a kind of “mechanical” buy. Also sometimes a basket approach to risky or very illiquid small caps (France) makes sense.

In general, I think that there is no single optimal strategy for postion sizes. As every part of the investment process, this has to fit with the overall character of the investor, including risk tolerance, investment style and time available. With regard to the “kelly formula”, I have the fundamental problem that I neither determine the payouts nor the probabilities, so this is not a big help eithet.

For the time being, I do not have a better system for my personal situation than my current one which looks like this:

–> Full positions at 5% (increase via peformance until 10%)
–> half positions at 2.5% if I buy into a stock
–> plus a basket approach for my illiquid French small caps.
–> occasionally small position for “half baked” ideas
IMPORTANT: Weed out weak conviction positions if overall numbers of investments get close to 30 single stock investments (long & short, ex index hedges)

So far it has worked quite well, but there is always room for improvement.


  • Thanks for the Post on Position sizing.

  • are you still considering to continue on shorting operations while it seems hurting your performance? if so what’s rationale behind this?

    • yes, although with the current high percentage of cash in the portfolio it is not first priority.

      Clearly, making money with shorts is much harder in the current bull market. But this is also a kind of “insurance” against tail events. For a fully invested portfolio, the funding effect is also important. You can fund long positions with the proceeds of a true short sale. As long as your shorts loose less than your longs gain, you are positive.

  • Hi,

    There is a mathematical relationship between stock risk and position sizing for a strategy. If you can quantify the risk you can determine the optimum number of positions for your portfolio.
    Of course, quantifying the risk is a contentious issue.
    Ralph Vince has written a number of books about portfolio mathematics. In one method he uses previous maximum drawdown of a strategy as a proxy for its risk. That figure is then iterated into the formula to derive the optimum number of stocks for the strategy.
    The maths is a bit complex, but I managed to apply it to my situation and found it quite useful.

    BTW your current methodology looks very sensible. It looks like you start top slicing your doublers. Over the long term I think I would have been a lot richer if I hadn’t done this.

    I have yet to see a persuasive analysis of strategies for taking profits so I am moving towards WEBs position of just holding on to good quality companies.


    • thanks for the comment. One remark: As a value investor, I don’t really consider stock price volatiliy as a very good proxy for the risk of a portfolio.

      A stock which is very undervalued but volaile in my eyes is rather safe.

  • By the way, seeing your “Gronlandsbanken”: Have you ever looked to “Svenska Handelsbanken”? They seem to be have a quite uncommon, but very succesful business model (only retail banking, thinking in small units), but I do not get a good to value their “fair” price.
    Their great performance in the finance crisis and this interview made me looking interested toward them:

  • Congratulation for your performance – but nearly even more for your well thought out postings and reports – and your openness for questions and critic.

    “1) I can oversee only a limited amount of companies&investments, my max is around 25-30 based on experience. So further diversification on a single investment level does not make sense”
    Am am even impressed how you can oversee nearly 30 investments. Personally I would limit the number of investments at around 15-20, as a hobby its difficult enough to handle.
    And perhaps putting them in boundles of 3-5 different “global ideas” (as you did with “french invesments” and “opportunities” to easen the overview of the shares.
    Of course the kind of “boundle”s should be used pragmatically and they should be closed if they dont work.

    • al,

      good idea I have to think about. Part of being able to track so many shares is that some of the stocks I know for a really long time, that makes things easier.


  • “Even if I am 95% sure I have the nagging feeling that I missed something”

    In my opinion this is a good sign, because it protects from overconfidence and overconfidence is known as one of the most dangerous traits for investors.

    You put an upper limit for your portfolio size. Is there a lower limit too or do you have always enough ideas, that a lower limit doesn’t matter?

  • Herrlich ehrlich und auf dem Boden geblieben für jemanden der über 50% Performance gemacht hat und damit sämtliche Benchmarks (inkl. Warren) hinter sich gelassen hat.

    ander würden sich hier aufplustern

    • Danke für den Kommenatr. Ein Track Record über 2 Jahre und 5 Monate sagt noch nicht allzuviel aus…..

      Aus Erfahrung weiss ich, dass auch ganz sicher wieder lange Durststrecken kommen werden 😉 Da ich hier nix verkaufe^, muss ich mich auch nicht aufplustern. Das ist das Schöne an dem Blog.

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