The Dangerous Secret of Big Position Sizes

The Dangerous Secret of Big Position Sizes
By Brian Hunt, editor in chief, Stansberry Research
October 12, 2009

When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. – Stanley Druckenmiller

This quote is the financial equivalent of nuclear energy: a source of tremendous power that can be used to drive progress... or to cause complete destruction.

It's so dangerous, I debated not publishing this piece.

But I'd be doing you a disservice leaving it out of the informal "best trading quotes" series I've been writing each Monday. You see, this idea is one of the keys to making a fortune in the stock market... the idea of being a "pig."

Stanley Druckenmiller is one of the most successful money managers of all time. He earned an estimated $150 million in 2008. He learned much of what he knows from legendary speculator George Soros. That's where he learned to be a pig.

There's an old Wall Street adage that says, "Bears make money, bulls make money, but pigs get slaughtered." The idea is that you can make money when stocks go down (the bear side) or when they go up (the bull side)... but anyone who behaves like a pig – who gets too greedy – is destined to lose.

Soros and Druckenmiller don't agree with this line of thinking. They know that to make tremendous returns, you have to back your best ideas with large positions. You have to get greedy when you find an amazing risk-reward situation. Hitting a big trade with a tiny position size just doesn't generate big returns. You have to be a pig.

But here's where this idea gets dangerous...

The No. 1 cause of catastrophic losses – the kind of financial blow that will bankrupt someone – is losing a big percentage of a big position.

So why would I encourage you to learn about this weapon of mass financial destruction?

Because used correctly, a large position size in a great idea can make you rich. Because being a pig can make your year, doubling or tripling your account. It can be the difference between making $20,000 or $200,000 on a big trend, like the monster 500% move many gold stocks enjoyed from 2003 to 2008.

Normally, a trader should avoid putting more than 5% of his money into one idea. If you use a stop loss of 20% on 5% position, you will only lose 1% of your total portfolio if you are wrong.

But occasionally, when trade is close to "slam dunk" territory – when the reward-to-risk ratio is 6, 8, or 10 to 1 – a large position size of 10% or 20% of your portfolio allows you to make huge gains. The way to build superior long-term returns is through your "home run" trades... which must be backed by real money... not a 3% position.

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Someone who isn't comfortable taking losses and minding their sell discipline should never take large positions sizes. If you can't cut losers short, you're playing Russian roulette when you take big positions. It's only a matter of time before you're toast. And if you're not good at recognizing great high-reward/low-risk trades, then please keep your position sizes small.

Only after years of successful trading and mastering stop losses should you even consider a position size greater than 5%.

But if you have extensive experience under your belt, you need to brush off the old Wall Street wisdom and pay attention to filthy rich traders like George Soros and Stanley Druckenmiller. You must make big money on your best high-reward/low-risk trades. You must be a pig.

Good trading,

Brian Hunt

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	Last	Change	52-Wk
S&P 500	1062.98	+1.78%	-12.37%
Oil (USO)	34.51	+1.50%	-59.97%
Gold (GLD)	97.05	+0.05%	+12.02%
Silver (SLV)	15.91	+1.08%	+20.99%
U.S. Dollar	77.11	+0.26%	-0.52%
Euro	1.46	-0.40%	+0.97%
VIX	24.88	-2.85%	-28.38%
HUI	398.09	+0.10%	+20.93%
10-Year Yield	3.30%	-0.03	-0.46

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Company	Sym	Industry
Petroleo Brasileiro	PBR	oil & gas drilling
IBM	IBM	computers
Cisco	CSCO	network equip
Philip Morris	PM	cigarettes
Unilever	UN	packaged goods
StatoilHydro	STO	oil & gas drilling
Occidental	OXY	oil & gas drilling
CNOOC	CEO	oil & gas drilling
Ecopetrol	EC	oil & gas drilling
Schering-Plough	SGP	Big Pharma
EnCana	ECA	oil & gas drilling
Target	TGT	dept stores
EMC	EMC	data storage
Apache	APA	oil & gas drilling
Anadarko	APC	oil & gas drilling
Southern Copper	PCU	copper mining
Siderurgica Nacl	SID	steel
Franklin Res	BEN	asset mgmt
EOG Resources	EOG	oil & gas drilling
Natl Bank of Greece	NBG	bank
TransCanada	TRP	gas utilities
Tenaris	TS	steel
Gerdau	GGB	steel
Natl Oilwell Varco	NOV	oil & gas svcs
Talisman Energy	TLM	oil & gas drilling
Teck Resources	TCK	mining
KB Financial	KB	bank
Shinhan Financial	SHG	bank
Turkcell	TKC	wireless telecom
McKesson	MCK	medical supplies
Enbridge	ENB	pipelines
Baidu	BIDU	online search
Baker Hughes	BHI	oil & gas svcs
Reynolds American	RAI	cigarettes
Spectra Energy	SE	pipelines
Noble Energy	NBL	oil & gas drilling
TD Ameritrade	AMTD	broker
Coach	COH	luxury goods
NetApp	NTAP	data storage
CPFL Energia	CPL	utilities
Hellenic Telecom	OTE	telecom
Range Resources	RRC	oil & gas drilling
Mechel OAO	MTL	steel
Citrix Systems	CTXS	systems software
Dr Pepper Snapple	DPS	soft drinks
Liberty Media	LINTA	mail order
FMC Tech	FTI	oil & gas svcs
Cerner	CERN	health IT
Owens-Illinois	OI	packaging
Cooper Industries	CBE	conglomerate
KLA-Tencor	KLAC	semiconductors
BJ Services	BJS	oil & gas svcs
Brookfield	BPO	property mgmt
Amdocs	DOX	business software
ONEOK Partners	OKS	pipelines
CareFusion	CFN	medical supplies
CNX Gas	CXG	oil & gas drilling
R.R. Donnelley	RRD	printing
NET Servicos	NETC	TV systems

Company	Sym	Industry
First Bancorp	FBP	bank

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