Proper Sizing of Investment Positions

I've had quite a few big winners this year in my stock portfolio, i.e. OSTE, NAVI, TZOO, VOCL, and of course I keep asking myself the basic question: "Why didn't I buy more of XYZ stock? I knew it would triple."

This is the common doubt asked whenever greed takes precedence over fear in the stock market Casino. It almost seems that when stocks go up, you should have had more, but when stocks go down you wish you had less.

The truth is that I, and probably noone else, has any idea where a stock price is going both in the near-term or long-term. One analyzes the investment situation, and takes a risk, hoping that it will work out. At any time, it's possible that some flawed analysis and/or overall market conditions will conspire to cause a large paper loss, of between 30% to 50%. And in 5% of cases, it's very conceivable to suffer an 80% loss, even if your investment thesis is ultimately proven correct (e.g. PWER).

So because you cannot know in advance which investments will appreciate and which will decline, it makes no sense to ruminate about what one should have or could have done. The better approach is just to make decisions based on the prospects of a potential loss. So before one makes an investment it is best to envision a loss of 50% and see how you feel about it. Could you suffer a 50% loss without major financial consequences and without your investment judgment becoming compromised? Assuming the situation did not change, would you buy more stock at a 50% lower price?

The 50% loss vision should provide some direction on what to invest in any one particular situation. It provides a constant reminder that like any Casino, we are not ultimately in control of the outcomes of our investments, and we do not know the future. So it makes no sense to ever risk an amount of capital we do not feel comfortable losing, even if that means that we may in retrospect have left alot of money on the table.