The tools, independent of anything based on val/fundamentals, are:

Position size limits are for trimming into strength i.e. playing offense

Trailing stops to manage risk into weakness i.e. playing defence

@jcmleng I am hardly one to emulate, based on my track record, but here is how I think about it.

1. Every day is a new day, the past is the past, and past prices are irrelevant. In my mind it is as if I sell and rebuy my portolio each week. Of course, I never do that!

2. For every stock I hold or have on my watchlist, I have an expected valuation, and a notional 80% (p10% to p90% min - max) range around that

3. With 2. in mind, I constantly ask the following:

a. What is the likely return from this point forward?

b. Are there better opportunities either already within my portfolio or on my watch list?

c. Given that I am often wrong and that things change quickly, how muuch am I prepared to put at stake on any single position?

d. What systemic risks exist across my poftolio?

There is an endowment bias, in that shares in businesses I have held for a long time. I tend to know a lot more about them than new watchlist entries. But I have been very happy to sell these when I have judged them to be over-valued.

This framework has meant that I have often sold down positions, paid the tax, only to buy again at a future time. Big winners there for me have been $XRO, $WTC, $PNV, $TNE, $ALU ... and I think $CAT is going to be the next one. And yes, sometimes I make mistakes and miss one that runs away, but even these can come back to earth, as $PME has shown after over 4 years of watching!

What I have found in practice, is that as a result of these questions, I rarely get to a point these days where I will have more than 12% my ASX portfolio in any one holding. At the moment it is <10>

Equally, when considering systemic risk (exposure to one market; one industry vertical; one theme) I won't have more than 50% exposure. Here, my SaaS-exposure got right up to close to 50% (47%) and hence I have been smashed in the last 6 months. But, hey, at least it wasn't 100%.

Some of my "themes" are:

• pharma/medtech development risk (e.g., major change in FDA approval approach or US reimbursement) - not more than 30%
• SaaS/IT - technology disruption risk / security disruption/ regulation etc.
• exposure to US economy ... or any other single economy - but for me the US is the biggie

I think it is a good idea for every investor to have their own rules for building / operating their portolios. Mine work for me. But I doubt they are appropriate for anyone else. And that is partly because my ASX portfolio is only a small part (6%) of my total assets. My holdings as viewed on SM are much, much riskier than my overall, wider portfolio.

Regarding my Strawman portfolio, until quite recently it was quite different to my ASX RL portfolio. However, in October last year, I got tired explaining the differences and so now, I try as much as possible so that all my holdings on SM, I hold in RL. That said, the weightings are often significantly different. For example, as of today, my biggest SM position is SPZ 12.3% (RL 9%), whereas my biggest position RMD is showing 5.1% on SM (whereas it is 10% in RL).

Of course, as a result of the October change, the cost base of SM positions like $WTC, $XRO and $TNE is a LOT higher than is the case in RL!!

@jcmleng - I also read DG’s Rule Breaker book when it came out, and then started to listen to David’s Rule Breaker podcast. He does mailbags, I think once a month, and soon after the book had come out, one question David answered was to do with the seeming contradiction of “Let your winners run. High” and “Establish your sleep number.” (in the portfolio habits section).

I believe David said there was (now) a post on the Rule Breaker website that addressed this, but basically, your Sleep Number is the maximum weighting to one stock that allows you to sleep well at night. So yes, you trim if the weighting of the stock gets too high for whatever rule you have.

But that’s Trim. You hold the rest and let it continue running.

I think this question was also recently raised on the MF Money podcast mailbag. @Strawman?

Yeah, that's right @Clio. David is definitely all about letting your winners run, and it's definitely worked for him.

The key thing with this approach is that it best applies to those companies that have very large and growing addressable markets, and in largely 'winner take most' sectors.

He talks about it a bit in this podcast with Scott Phillips (click here)

It's a lot harder than it sounds, given all the inevitable drawdowns along the way.

@Clio, I definitely read both, and the other rules. I thought I understood my sleep number, but clearly, I didn't/no longer, when the drawdowns hit ... By bringing the sleep number down though, there is clearly a smaller limit to "letting winners run", because if they run, they will hit that sleep number which brings in the trimming. It is a contradiction as you say. Think David takes it further by advocating to trade up, not down ... which is something I totally struggle with.

I haven't adopted each rule blindly or in isolation ... But it is that ongoing judgement call that has to be made that is hard - the rules, the portfolio movement, the market sentiment, the results and the gut feel that ebbs and flows with it.

@Strawman, agree, it is bloody hard!

+1 !

I never had the fortitude for Rule breaker approach after a selection of big swings. And big misses. Perhaps I’ve learnt enough now to identify the correct companies a bit better. But probably not. And also my personal circumstances have changed and I need a lower risk approach.

If I can get 10-15% pa compounding with a bit (a lot!) less volatility - I would be delighted.

Get rich slowly and all that. If I had my time again ie 30 years of investing, I would have done a lot better if I had adopted this approach. I got lucky timing the market in 2007 and sold out almost completely. I got lucky again with MF Pro. But the parts of my portfolio where I was left to my own devices were a train wreck for many years.

@Solvetheriddle explains it better than I ever can in his interview and broad forum posts.

Not trying to dis the small cap approach we talk about here but have definitely believe that I’m better off only allowing myself to have a small %age of net wealth in this part of the investosphere.

That and the courage/confidence not to sell in downturns, another lesson learnt the hard way. Having said that, not all downturns are the same. V shaped recoveries are the near history. Go back to the Dotcom crash and the 70s and it took a decade or more to recover to previous levels. So there is that to consider.

it’s all so hard!

Im going to walk the dog and listen to the birds