Introduction

There was a very interesting exchange in a chat group about trade ideas such as DXN, MANULFE, etc.  And the discussion inevitably moves to the topic of concentration vs diversification.  Those who believe in it naturally recommend concentration.  But what if you are less sure about the ideas?  E.g. when we scour the Internet, we inevitably see thousands of people with different trade ideas, many with very convictions, but if we track them over time, many didn’t turn out so well?   

If the chat group encourages honest, civil, intellectual exchanges in a supportive manner, then, enquire with an open mind.  Ask questions constructively and be open.  And hopefully, that will lead you to form your own opinion more intelligently.  If not, walk away if you still have doubts.

But if you think it has merits, how much should we invest/trade/buy into these ideas?  

How do we think intelligently about this topic?  Let me share my perspective and my journey on today’s public holiday.

DXN, MANULFE and other trade ideas

Firstly, DXN and MANULFE are not my area of expertise, I am not an expert in everything.  I focus on my specialized area of trading, but if you are interested in both trades, the first thing I recommend you to think about these ideas is to see if the ideas fits into your trading/investing system.   Look at it from your own system lens, rather than change your systems continually. 

If I am assessing both, I will consider both fundamental and technical perspective.  Then, based on my past experience of tens of thousands of trades in various markets and less in Bursa, I will try to “categorize” or “grade” the trades.  The reason to categorize them is to vary your trade size depending on the grades of the trades.   

Categorize your trades

This advise is more suitable to experienced traders wishing to improve their trading results even better.   If you have been trading/investing for many years but not consistently profitable, this may be a step that you are missing.

There is a fine line between always betting large all the time (=  gambling) vs betting large on 20 tickers over your lifetime (I.e. almost never make any trades, limiting one’s trades to only very few over a bull-bear market cycle lasting many years) like Buffett.  

Buffett has already said many times, that good ideas only comes very few times in one’s lifetime.  However, when they come, you have to size big and meaningful.  And most of the time, you should pass the trades.

However, most people are not Buffett.  

I am certainly not Buffett.

One of my personal traits is I like to take many trades, much much more than Buffett.  I can’t do 20 trades in a lifetime.  So, know thyself.

I like to think that wanting to do many trades is not necessary a “weakness” per se - it’s just who I am, and it’s important to know the type of trader you are as you gain a lot more trade experience.

And because I like to take many trades, most of these trades will not be the same quality as Buffett’s, or “A+ grade”.  For profitable traders, the majority of their trades will be C-grade, where they should only risk 1%-2% capital in order to get a consistent trading results that is not marked by huge negative drawdowns.   Like Buffett, you only lean big, when you encounter these A+ grade trades.

Varying trade size is complicated for new traders

If you feel that varying your bet size is too complicated, you are right.  That’s why vast majority of traders do not have a consistent result when measured over many years and after 100 trades.

If you are a novice, or a beginning trader, you should not even start with this, because you have many other things to learn first.

Novice and new traders should learn from something simpler, like how to trade an average profitable system with an edge, and size your bets consistently such as 1% or 2% capital and keep making these trades to gain experience.  The goal for novices should be focused on gaining experience.

There is no short cut to gain 10,000 trade experience.  Everyone starts from zero.  Only those who persistently put trade after trade chalks up the number of trade experience and in time, you will start to notice some patterns that works for you and then, you lean on those patterns.  Inevitably, you have just implicitly / subconsciously “grade your trades”.

Errors of commissions vs errors of omission

When it comes to sizing trades, there are really just 2 types of errors.

The first error is what I call errors of commission, in which there are several sub-types.

The most typical error of commission amongst traders who have inconsistent trading results / go bust is when they always bet big like 10% or 20% capital or more in every single trade that they get into.   This is a commission error, because it is something you consciously choose to do like betting big.  Experienced traders know about winning and losing streaks. In the long run, we will never be able to find more than 1 Grade A trade idea a month.  The more likely outcome, if you make say 12 or more trades in a year, is you will encounter more lower quality trades that are more likely to cause big losses eventually (at least over 10 year timeframes).  Over the short term like a few years, you may be lucky to encounter winning streaks to lead you to think you are better than Buffett - many traders beat Buffett in the short to medium term like 5-10 years.   But eventually, these traders will encounter losing streaks and their cumulative results falls behind Buffett.   In this game, it is the tortoise that beats the hare.

Errors of omission is the opposite.   The trader only bets 1%-2% of capital all the time in all trades, no matter whether it is a Grade C, Grade B, Grade A or Grade A+.   Super traders have commented many times - when you encounter that A+ grade trades, you have to lean and bet meaningful size, because they don’t come often.  Not betting, or betting small, in Grade A+ trades is a HUGE ERROR - this is error of omission.

Where do I learn about categorizing Trades?

Try / start with this YouTube video by SMB Capital head coach first.  

SMB Capital have good traders that makes 7 digits profits per year consistently over a decade - more recently 8 digit yearly profit traders.  The video is 
here.  Head to 4:44 under Step 2 “Trade Categories”.  If you do just one thing from this article, click on the video and watch the YouTube.

For background, SMB Capital is a highly discipline prop firm.   In summary, they think that a very good trader (who can earn 7-8 digit profits per year) may come across an A+ grade trades perhaps once a month.  And these includes Day Traders.   And their recommended trade size for the very rare A+ grade is 20% capital.   Most of the time, Grade C only risks 1%-2% capital. These are their results, based on their experience with their 7-8 digit profits traders (they may modify for retailers, I don’t know for sure).

If you have been trading for a long time, and still not consistently profitable after 5, 10 years, then, consider to categorize your trades to get a more consistent trading result. Categorizing and Sizing appropriately is key.

Other Resources to think about Sizing 

Another good resource I recommend is a book I bought physically over a decade ago called the “Definitive Guide to Position Sizing Strategies”.  It is written by one of the 16 original Market Wizards called Van Tharp.   It’s a physically big and heavy book, over 400 pages.   You can buy it from Van Tharp Institute, Amazon, or maybe even google for free PDF these days.  That book opened my eyes over a decade ago to the possibilities out there.  If you are an experienced but struggling trader, and not consistently profitable yet, I recommend this book to you to further your journey as a trader/investor.  By itself it won’t be enough of course (else the best readers will be the most profitable traders, which is not the case), but hopefully the content there will help you to reflect better on your journey as a trader and bring you closer to consistent profitability.  

Sharing my journey 

My journey is a slow one as I am a professional working in an MNC with a good income and was not as hungry as other traders.  Since 1999, I was stubborn as I also did well academically in school and uni, the sort of things that also makes you tend to do well in a professional career.   I thought I knew everything that I’ve learned, and in markets, that attitude actually delayed my progress for a very long time.  Amazing that my investment journey has been over 25 years now … Actually longer if you count the few rare stocks I bought in early 1990s.

If you want to benchmark, here are my own years of experience where I was “consistently profitable” over these periods:

• 1999 to late 2001 - doubled my portfolio in 2 years.
• 2005-2007 - Nearly doubled my portfolio at the peak before crashing.
• 2011-2013 - High double digit CAGR before returning the profits in 2014.
• 2015-2017 - Very high double digit CAGR before returning profits.
• Early 2018 to early 2020 - 2 consecutive years of +100% returns! 

But was I consistent over that 2 decades?

Did these results beat Buffett?

Honestly, no.  

Why? 

After 2001, I moved countries to pursue my professional career and had to stop what I was doing. Back then, there was no Internet, all my trades are direct phone call to my broker during office hours.  I had to stop. Buffett keeps piling on profits.

I returned in 2005. After 2007, the strategies that led me to win big from investing perspective also led me to lose big eventually during the Global Financial Crisis of 2008-2009 - I lost one-third of my Net Worth during GFC.  I had to stop and focus on my career.  Buffett keeps piling profits.

In 2014, my Buy Options strategies went through a draw down period where I returned the profits back in 2014.  Buffett keeps piling profits.

In 2018, my Futures Options trading caused such a high drawdown, because of over-confidence - I was so sure of my trades, all it took is just 1 trade of average down in futures that killed me and caused me to return all past profits and I closed when I knew I didn’t know where the bottom is and my bottom line is my starting capital.  Nothing to show for after 3 years.  It was the most frustrating period in my life from a trading and investing perspective.  Thankfully, I still have my professional career to support me financially.  Buffett keeps piling profits.

So, I already knew how to find profitable trades very well since 1999.  But I wasn’t consistently profitable even over 2 decades and I definitely lost if compared to Buffett over the 20 year period by a mile.

What’s the moral of the story?

1. Know first the sizing theories.
   1. Really understand why it works.
   2. Know what really works long term, if your goal is to trade for a living.
      
   3. Sizing is more important than entry and exit.  
   4. The question is what happens when you are wrong?  How much will you lose?  
   5. If you are a seasoned trader/investor but is still not consistently profitable even after a decade, consider the points made by SMB Capital YouTube and what I shared above.
2. Knowing and doing are 2 different things.
   1. Even back in 1999, I knew I wanted to trade for a living eventually.
   2. Early on, I vaguely knew the theory of sizing and only really cemented this knowledge after I read Van Tharp in 2014.
   3. Yet, it took me another 6+ years to be really consistently profitable.
3. Teaching and doing are 2 different things.
   1. I also shared the theories in the past when I was still in my journey back in 2000s, 2010s.  
   2. I even helped other traders (I.e. “teaching”).  However, later, the market humbled me as I deviated.
4. To be consistent, I needed Manager oversight but didn’t have one.
   1. As an individual trader with no manager oversight, I was not as disciplined as SMB Capital traders or a trader who has worked in a hedge fund or in a professional setting where your account balances and trades are constantly monitored by a Manager and any deviations will lead to either a voluntary adjustment or a force close of position by the manager or the manager sacking you.   
      
   2. No one was overseeing me.
5. To substitute for a Manager, I journaled, blogged, share my account transparently after losses and commissions, and later I found a mutually supportive group that supports this further
   
   1. Trading in Bursa, I have yet to find a mutually supportive group, especially a group that trades the same style as I do and are transparent enough to show both trades and account balances for that Manager oversight.
      
   2. Haven’t yet found a chat group where the “sifu” transparently show his/her account.
   3. Thankfully, after I moved to the US, I found a group that does the same strategies as I do (selling options, doing the wheel, covered strangles, and open to other strategies) and the group is transparent in showing account balances and trades that serves as a strong check on sizing trades, entry timing, exit timing.  This is the next best thing to a Manager.  The rule in this group is nobody criticizes and everyone is encouraging and supportive and respect different views - they all have one single goal which is to grow their accounts to new highs.  They don’t hide when they lost monies.  And if we have nothing good to say, we keep quiet.  If we don’t understand or disagree, enquire with a curious mind.  We listen to understand. 
6. To summarize my own experience, sizing is critical, and the process to keep my profits over the past 2 decades has not been easy and extremely volatile.  This is where Buffett is so much more superior than me when it comes to cumulative results spanning 25 years.   When he sized meaningfully it’s on trades that he has carefully filtered where despite reading 14 hours daily and having access to so many resources that normal people don’t, he can only find a very small handful of ideas over his long career of 8 decades - it’s roughly 1 idea per year for him, as he has less than 80 different stocks.  Anyone else who thinks they are better than Buffett may be right short term (like 4 years) but cumulatively over 2-3 decade is more likely to under-perform Buffett when they size as big as him.

Summary and Conclusion

I know some of you may already have 5, 10 years of trading experience, some even longer.

However, consider why you are trading and investing and ask yourself what is your objective - is it to gamble short term (ie. Just a win in one trade is enough), or is it to acquire a lifetime skill that one day, will let you retire and be able to replace your active income?  

I still consider myself as travelling in my own journey to financial independence.  I am still giving my strategies another 2.5 years before I finally retire and have my system prove to me over 3 years that it replaces my active income (not an easy thing to do as I am a highly paid professional).  

Even when I was investing in Bursa with a 7 digit RM capital, to be honest, in 2023, despite being profitable, I was still not able to replace my active income. 

It was only after I moved to the US, that I started to see the light.  

I changed a lot on my views on sizing after seeing SMB Capital YouTube.  There was no new content there, but watching it suddenly sparked a realization and I can see today that it is changing my life!

Despite making so many small trades, by categorizing my trades (I already have tens of thousands of trade experience), I finally realized why it is so important to trade small most of the time.   I finally realized I have it within me to identify the really good trades - trades that are so rare, they come once in a blue moon, and then, I lean on them when the odds are clearly favoring me.   And I suddenly found myself making far larger profits cumulatively, larger than my current active income!  

And yes, each of the many Grade C trades - the profits doesn’t even come close to covering 20% of my active daily earnings.  But I keep stacking them (yesterday, I stacked another dozen or so) and in a month, they match / exceed my monthly active income so far.  However, I think I am leaning too large and plan to reduce this.

My advice for myself and to you is to consider erring on the side of omission, than commission.  Especially when you still don’t know how to categorize trades accurately.

At least, errors of omission don’t stop your account from making new highs.  If in doubt, better to win small than the opposite which is lose big.

PostScript - how big should you size DXN and MANULFE?

That depends on how you categorize both trades - it depends on your trading system and your trading objectives.   When you plan to enter, when you plan to exit, what is your risk tolerance to drawdowns.  All these affects your trade grades.  All I am saying is after you grade them, size them appropriately.  Make sure your grading is accurate.  If wrong, you will have to just accept the consequences, and learn again .. and again .. and again … I have over 10,000 trade experiences and I am still learning.

Disclaimer:  Not financial advice, just a random guy on the Internet.  As usual, you are an adult, you are solely responsible for your own trading and investing decisions.