We have a default at Bronte - and the default at Bronte is that we have a maximum percentage for a stock (typically say 9 percent but often as low as 3 percent depending on how we assess the risk of the stock) and as the fund manager I am allowed to spend that whenever I want but I am not allowed to overspend it. If we have a 6 percent position with a 9 percent loss limit and it halves I am allowed to add three percentage points more to the exposure. But that is it. Simon, being the risk manager, isn't particularly fussed if add the extra when the stock is down 30 percent of 50 percent, but I can't add it twice. If it is a position on which we agree we are allowed to risk 9 percent then I am allowed to risk 9 percent.
Very interesting insight - My only addition here would be have these limits for a losing position and for a winning position, be flexible in adding assuming you are already up 1.5 x and the valuations are still reasonable.
i.e. Maruti bought orginally at 15 x Year 1
Earnings grows by 50% and stock runs up 50% by year 2
Implies multiple remaining the same - Add more, assuming you added only 5% in the first place and you still think that it is a multi year compounder
Position sizing should be in broad limits without too much fixation
Whereas for the losing position I agree, get rid of them or average down only once - No point trying to protect the thesis when it has actually fallen apart!
