Slide 9- I had done a presentation on the same topic in last VP annual meet in goa which contained examples- you can find it here
Slide-10: Capital allocation is an individual choice and we must create a framework that suits our investment style, investment objective, financial condition, risk bearing capacity and most important our own psychology. Hence, I guess, there is no right or wrong approach here. Coming to my approach
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No of Positions: Typically I have 70-80% of my portfolio on 7-8 positions, 15-20% in opportunistic bets and rest 10% in 5-6 ideas where I create tracking positions as I find something interesting but do not have sufficient information/conviction to allocate large capital. These ideas are more like sowing seeds and nurturing them to see which will eventually grow up and bear fruits.
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Allocation of capital: I find the VP allocation framework very intuitive and effective. High conviction- Low Valuation- will get the highest allocation- for me it means around 9-10% of capital. You can refer to capital allocation thread on VP for more understanding on the framework
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Managing risk with position sizing: It is indeed a risk return trade off. Generally, trimming one’s position means, selling the winners. On the contrary, I have heard from many senior investors that one must allow the winners to run its course to make big money. Being a risk averse guy, I am generally more conservative and trim positions if it goes above certain threshold and is sustained at that level for some time. The argument that has appealed to me is - Inspite of all over hard work and conviction, businesses do operate in environment where there are many uncertainties and uncontrollable factors. In short, SHIT HAPPENS. And when it happens, you still should be able to have a good night’s sleep.
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Reallocation of capital: There is absolute meritocracy here! The weakest idea has to give way to the new entrant. However, considering the looming reinvestment risk in selling the existing idea and buying a new one, the new entrant has to offer significantly better risk-reward over the incumbent one to merit a place in portfolio. It is generally a good idea to keep the relative ranking of one’s portfolio stocks ready as we do keep our buy list ready.
Hope this answers your queries.