Position Sizing

"Position sizing is the first and probably most important way investors can protect themselves from what's
known as the "catastrophic loss."

The catastrophic loss is the kind of loss that erases a large chunk of your investment account. It's the kind of loss that ends careers... and even marriages.

The catastrophic loss typically occurs when a trader or investor takes a much larger position size than he should. He'll find a stock, commodity, or option trade he's really excited about, start dreaming of all the profits he could make,and then make a huge bet.

He'll place 20%, 30%, 40% or more of his account in that one idea. He'll "swing for the fences" and buy 2,000 shares of a stock instead of a more sensible 300 shares. He'll buy 20 option contracts when he should buy three.

The obvious damage from the catastrophic loss is financial. Maybe that investor who starts with $100,000 suffers a catastrophic 80% loss and is left with $20,000. It takes most folks years to make back that kind of money from their job.

But the less obvious damage is worse than losing money... It's the mental trauma that many people never recover from. They can get knocked out of investing forever. They just stick their money in the bank and stop trying. They consider themselves failures. They see years of hard work – as represented by the money they accumulated from their job or business – flushed down the toilet. It's a tough "life pill" to swallow. Their confidence gets shattered.

So clearly, you want to avoid the catastrophic loss at all costs... And your first line of defense is to size your positions correctly."

Want to read more about position sizing, read the full interview here;
http://oldschoolvalue.s3.amazonaws.com/resources/047.stansberryresearch.com-Position_Sizing.pdf

Position Sizing