Interesting discussion guys, not sure if there is anything really new that I can add to it.
When it comes to determining portfolio weights, my main concerns are:
1) “Betting my beliefs” (i.e. giving a bigger weight to the investment propositions I feel most strongly about), but avoiding over-concentrated exposures: as a general guidance, I never invest more than 10% of my capital (on a cost basis) in one single name (and that includes multiple securities from the same issuer, e.g. equity and senior/subordinated debt of the same company). The reason is simply that I am not infallible; therefore, no matter how thorough I think my due diligence is, I always want to prevent any possible unforeseen/tail events from inflicting losses that go beyond what is tolerable. The only instance where I would contemplate allocating 30% or more of my capital to one business, I think, is if I were running that business myself.
2) Questioning my investment rationale on a continuous basis: If and when a position grows (on a mark-to-market basis) into a portfolio weight significantly higher than the corresponding initial allocation, I ask myself how comfortable I would feel starting a fresh position in that new size and at that new price. Obviously this can’t be taken too literally, or else one would be “cutting winners and adding to losers” all the time. There are also instances (in particular when highly speculative/conceptual stocks are concerned) where I calibrate the initial purchase amount based on how big a portion of my portfolio the stock could end up representing in the event of success, as opposed to how big the initial capital outlay is.
Hope this helps (and doesn’t sound too obvious), cheers.
