@hitesh2710 Sir, I wanted your views on conviction based position sizing v/s equi-weight, for a long term portfolio.
Conviction based: This may be conviction on management quality, succession, moat, growth rate, valuations etc. However, I personally find it quite difficult to translate the english (qualitative conviction) into a mathematical % number. There is also a chance that a low conviction idea outperforms a high conviction idea. This, I believe, is a very realistic possibility; here and here, by the description given, it is very clear (to me at least) that Rakesh Ji was more confident on Geometric than Titan. For those who do not wish to read the full text on the links, the relevant quotes are: “Rakesh Jhunjhunwala showed so much conviction in Geometric that…” and “He was so bullish on Geometric that…” When even legends like Rakesh Ji can go wrong on conviction, I surely stand no chance.
Equal-weight: This is simple and is spoken about in the book Coffee Can Investing. Easy to use and no extra effort required. I think the best part about equal-weight is that over a period of time, the winning stocks automatically become a larger part of the portfolio, and the losing stocks keep declining and eventually become insignificant. However, as highlighted in a Motilal Oswal WCS, equal-weight will obviously underperform a portfolio skewed towards the winners.
Alternatively, one could use Kelly formula- but I personally think this is easier said than done. There are no odds/probabilities of win written in stone while buying a stock, neither is there any fixed upside potential.
I believe that it is a tradeoff between maximizing returns (conviction based) and putting in the effort (and also the chance that a low conviction idea outperforms a high conviction idea). Is it worth trying to make a gradient of conviction even within a portfolio (where a stock would enter only if you have a good conviction)?
This also has implications on cloning as a model (which Mr Mohnish Pabrai talks about), as we should not clone only the highest conviction idea, but all the stocks. Of course, if you are a blind cloner, then you cannot use conviction based position sizing because you have not done the research yourself, so you do not have conviction in the first place.
I am personally biased towards equal-weight, and I would like to hear your thoughts on these and what approach you think is better. I would also like to hear if you have found any method to translate conviction into a tangible % number, and any method on how to actually use Kelly formula. Thank you Sir.
Disc: not holding Titan or Geometric