Position Sizing in Value Investing

Benjamin Graham — Warren Buffett's mentor — gave very specific instructions on capital distribution across grades of stocks within a portfolio.

Optimum Diversification

Both Warren Buffett and his mentor Benjamin Graham — the founder of Value Investing — have described the pros and cons of Diversification in great detail.

Graham therefore gave some very specific instructions on the subject of Position Sizing across various grades of stocks.

Graham Grades

a. Defensive

Graham recommended a minimum portfolio size of 10 for Defensive grade stocks; or in other words, not more than 10% of one's portfolio per Defensive grade stock.

"A minimum of ten different issues and a maximum of about thirty."
Chapter 5: The Defensive Investor and Common Stocks, The Intelligent Investor

b. Enterprising

In keeping with the same principle, Serenity recommends a portfolio size of 20 for Enterprising grade stocks; or in other words, not more than 5% of one's portfolio per Enterprising grade stock.

This is due to the fact that Enterprising grade stocks have fewer qualitative requirements than Defensive grade stocks, but more than NCAV (Net-Net) grade stocks.

Here's what Graham himself wrote for this category:

"If our winnowing approach had been applied to all 4,500 companies in the Stock Guide, and if the ratio for the first tenth had held good throughout, we would end up with about 150 companies meeting all six of our criteria of selection. The enterprising investor would then be able to follow his judgment—or his partialities and prejudices—in making a third selection of, say, one out of five in this ample list."
Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor
Advanced Graham Screener

Customized Value Investing

c. NCAV (Net-Net)

Graham also recommended a portfolio size of 30 for NCAV (Net-Net) grade stocks; or in other words, not more than 3.3% of one's portfolio per NCAV (Net-Net) grade stock.

"30 issues at a price less than their net-current-asset value."
Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

An Example

As an example, one could distribute 100% of one's capital across:

  • Five Defensive grade stocks (5 x 10% = 50%), plus
  • Six Enterprising grade stocks (6 x 5% = 30%), plus
  • Six NCAV (Net-Net) grade stocks (6 x 3.3% = 20%)

Graham also gave detailed instructions on capital distribution across equity and debt.

Graham Resources