Spartan Group partner discusses investment strategy: Position sizing more important than picking winners

Spartan Group partner Jason Choi shared his views on position sizing, suggesting what percentage of total capital should be allocated for each order. Here is a summary:

Twitter link: https://twitter.com/mrjasonchoi/status/1483482302131089412

Position Size Matters More

Some personal principles:

1. Choosing the right investment is only half the battle; the size of the position matters more.
2. A wrong bet with the right position can be a valuable lesson, but a wrong position can ruin everything.
3. The right bet with the wrong position means wasted effort, while the position size represents victory.

Optimizing profits while having a tolerable risk of loss is a good position strategy. Everyone has a different tolerance for loss. If a hedge fund loses 20% in a month, it's just a matter of allowing investors to redeem.

When it comes to order strategy, you can typically decide to manage risk Top Down or manage profits Bottom Up.

• Top Down: Each order is limited to x% of total assets.
• Bottom Up: Position size is determined based on belief.

Good results come from a good process, but that doesn't mean you should trust your friends who put all their money into a junk coin and made millions with your own money.

In the investment game, long-term investment performance is the only truth.

Strategy Formulation

Top Down Strategy Formulation Demonstration: Only allocate a percentage of funds per order, regardless of the project or total capital size. This strategy is common among angel investors, accelerators, and spray-and-pray venture capital institutions.

Bottom Up Strategy Formulation Demonstration: Orders are only placed in situations where you believe there is profit potential. This is common in disciplined project evaluations and larger-scale venture capital institutions that are willing to miss out on small profits in favor of pursuing huge profits.

Strategy Formulation Based on EV Valuation: Determine the ideal position size according to the Kelly Criterion.

Kelly Criterion

Position Size = p – 1-p/b

• p = Win rate, your perceived win rate, or determined based on past performance
• b = Odds

The Kelly Criterion is common in the strategies of poker pros and venture capital institutions. For them, the risk of going to zero in an investment is real; however, going to zero is not common in the general investment market.

Assuming one investment may rise by 200% or fall by 50%, this is the same as another investment that may rise by 400% or fall by 10%. My current strategy is:

p/a – 1-p/b * x

• p = Win rate
• a = Maximum loss
• b = Maximum gain
• x = Tolerable loss

The benefit of this strategy is to highlight the asymmetry of an investment with low-risk a, and to pre-limit the position size based on X for specific projects.

For example, I limit my core assets to 50% of total funds, catalyst assets to 25%, and high-risk assets to 10%. This strategy is not perfect, but at least it provides a benchmark before making investment decisions. Is this strategy effective? I guess the answer may only come years later.

The key is having a systematic formula to determine position size before placing an order.

Finally, successful investors in history share a common trait: when they find asymmetric investment opportunities, they tend to bet big. Such investment opportunities may only occur once a year or once in an investment career.

However, beware of survivorship bias.

In the image, Stanley Druckenmiller, the former right-hand man of renowned hedge fund manager and financial titan George Soros, said:

I learned a lot from Soros, but perhaps the most important thing is not how much you make when you are right, but how much you lose when you are wrong.

Community Questions

Defi Dividends: What does X mean? If I invest 2% of total funds, does that mean the risk is 2%?

This is the investment cap set for a specific investment project. For example, if I don't want illiquid assets to exceed 20% of total assets, then x = 20%.

Kevin Ipkee: In successful trades, the money invested is never enough, and in failed trades, the money invested is always too much. How do you define win rate in advance? Won't there be more psychological biases?

There is no more scientific way to define it. Some traders will set win rates based on historical trades. I can only provide rough starting points, such as 20% = speculative, 65% = confident, 75% = very certain, and so on.