“Book Descriptions: There's a natural tendency in investing to focus on the question of what to buy or sell. Nearly 100% of the financial press is dedicated to this question, so it's reasonable to suppose that it's the most important thing we should be thinking about. Investing Sizing will convince you that it's not. Haghani and White explain that the most important decisions to make accurately relate instead to questions of investment sizing--how much risk to take, and how to spread it out. They leave you with a simple framework for making risk and sizing decisions consistently and rationally. Of course, you do need to decide what you want to invest in, and for many investors today the potential investment universe is huge: index funds, active funds, individual stocks and bonds, real estate, hedge funds, private equity, venture capital, the list goes on and on. There are plenty of books out there to help you evaluate each of these types of investments, so they won't be saying much about it. Instead, they will help you translate your evaluation of individual investments into an evaluation of how much risk to take, on each investment and in total.
Why do we think sizing is so important? Consider this: if you pick bad investments but you did a good job sizing them, you should expect to lose money but your losses won't be ruinous. You'll be able to regroup and invest another day. However, if you correctly pick great investments but own way too much of them, you can easily go broke from normal ups and downs while waiting for things to pan out.
Haghani and White know from experience. Their personal experience backs up the proposition that the sizing decision, often an afterthought in the investment process, is actually the most critical part. Both of them havevvexperienced first-hand the impact of getting the sizing decision wrong, losing the majority of ourvpersonal wealth in the process. Victor was a founding partner at the hedge fund Long Term Capital Management (LTCM), and in 1998 at age 36 he took a nine figure hit when LTCM was undone by that decade's financial crisis. The financial loss was compounded by the psychological blow of the business' failure and its impact on the 153 employees who worked for Victor and his partners, as well as the impact on the reputations of all involved. A decade later James at 28 lost a smaller sum but a material fraction of his wealth, through his investments in the hedge fund where he worked.
In both cases, we could argue that we had selected solid investments with an attractive risk/reward profile, and which were highly likely to pay off in the long run. The trades that took LTCM down in 1998 were money-makers over the ensuing years, and the hedge fund which employed James also bounced back to generate strong returns following its precarious swoon in 2008. Unfortunately, the short run must always come before the long run, and it nearly wiped both of them out. Good investments plus bad sizing can result in catastrophic losses.” DRIVE
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