I've got a lot of time for this @Raseekingalpha and I'm going to have to spend some time pondering it over the next little while. My portfolio construction is quite concentrated, so I can't afford many loosers and limiting downside is a huge focus (not suggesting that's the right way to do it, just my way so far). So I really like the framing but it's got my internal confirmation bias amber light flashing.

A couple of quibbles, I'd be careful within the mental model "proving" that downside is protected, that's too much false certainty for me. Also, even great companies will have earnings slumps, so when the P/E compresses you potentially also have earnings slump too. Those two minor quibbles aside it's a great way of thinking about portfolio construction and allocation.

I love a sports analogy, some coaches will try to build a team of individual superstars, some coaches will focus on fundamentals, teamwork and defense. Both can work really well, but it pays to know what your strategy is and it's shortfalls. Great food for thought, thanks.

100% agree with your thoughts, that great companies also have downside, recent examples are our local csl, cochlear & international examples are msft amazon &google. I i did an analysis of msft using ai & assumed that ai doesn’t generate revenue for them, still the value of the company was 350 odd & price at time was 355, so sometimes market provide these opportunities. Today it’s at 420 ( still a good deal I believe). What this framework will help us for me is that it will help me sleep at night at the same time time I can claim a 100 bagger but it will not take portfolio to the moon because sizing was small, I will have bragging rights because it was technically 100 bagger.

Yeah, the number that matters is total portfolio return, hopefully over many decades.

I guess to highlight your point, the best way to get 100 baggers is buy a whole of market index and wait. You're bound to pick up 10-baggers and 100- baggers in there, but the allocation will be a fraction of a percent and it will hardly move the needle. The ones that do move the needle are offset by all the stuff not doing so well. To your original point, allocation size matters, but it's a very personal thing.

@Raseekingalpha, this was very interesting and resulted in reflection as to how I manage my portfolio! I haven't followed any specific methodology over the years, but in thinking through what I do, there appears to be some method to my madness, summarised below:

1. I have set a max limit of 20 companies and max 2 ETF's for my portfolio. From various readings and my own experience, 20 companies is as much as I can manage, in terms of in-depth understanding, staying on top of it etc. And it appears that ~20-25 is good enough for diversification. So if I want to add something new, I have to cut something out.

2. Every holding needs to earn its spot by meeting my basic entry-level "high conviction" investment criteria - moat of the offering, quality of earnings, future revenue growth, capital light, no/low debt, reasonable price from historical trends etc. I am still learning how to do "proper" valuations, so while valuation is in the mix for sure, the other factors are greater drivers to my decisions, rather than valuation per se.

3. Not all companies are equal, so I weight my holdings of each company based on the following conviction tiers, which is on top of the basic entry level high conviction, and relative to the rest of the holdings in the portfolio, above:

• Lower Conviction, Active building of Position - 0.5% to 3.0% (3 presently)
• Medium Conviction - 3.0% to 6.0% (14 presently)
• High Conviction - 6% to 10% (3 presently)
• Super High Conviction - 10% to max ~12.5% - have discovered through painful discovery that this is my "sleep well at night number" (1 presently)

4. I have no set limits as to how many I hold within each tier and I let the price drive the drifiting into and out of higher conviction tiers. Implicitly, I think I am sort of working to a bell curve portfolio structure, but I don't actively work towards that bell curve.

5. Where things get overly heated causing the allocation of a holding to get out of control, I now actively trim into price strength. I have gone from having a "hold forever" approach to a "trim when it gets too big" approach as I lost out on a lot of profits by this hold forever thinking eg. AD8. My EOS position has gone as high as 15%, way, way too high for my comfort, and so I have been trimming each time the price rises to take the profit and bring the allocation closer to 12.5%

6. I top up on weakness when prices get to my chart buy ranges, but the extent and aggression of the top up is driven by how much conviction I have based on the tier percentages above.

While I understand the methodologies you flagged, I think the challenge for me will be to work out where each holding is, on a continued basis, against the valuation criteria each methodology has, and then acting on that.

The way I approach it, the allocations sort themselves out while I focus on staying completely on top of the business itself, then allowing changes the state of the business drive the portfolio allocation course corrections. I use valuations as a validator rather than a driver of the allocation %.

The part of this that resonates with me is the focus on downside, although I think the whole conversation becomes clearer when you strip away the formulas and look at the real problem: we never actually know our edge. Kelly only works when probabilities are known in advance, and markets never give you that luxury. The biggest risk in position sizing isn’t being too conservative, it’s overestimating what you think you know.

Where this framework does add value is in forcing you to confront the range of outcomes rather than the best case. Crushing the exit multiple is a good start, although I’d argue the tougher test is asking what happens when the business itself stumbles. Multiples compress for a reason. Earnings can slump at the same time. That’s where most models fall apart.

For me, position sizing comes down to one question: how wrong can I be and still survive the position? If the answer is “quite wrong”, it earns the right to be a larger weight. If the answer is “not very”, it stays small no matter how exciting the upside looks.

Everything else is just technique layered on top of that principle.