Position Sizing in CANSLIM investing
If I am going to run a model portfolio I should establish some postion sizing rules.
There is a science of position sizing that CANSLIM investing mostly rejects.
It is the intention of a CANSLIM investor to concentrate his or her portfolio into no more than 8 positions depending on portfolio purchasing power (includes the effect of margin).
The following table is a recommended number of positions to own:
Portfolio Size__ Maximum # of Stocks
<$5K_________ 2 stocks
$5K-$20K_____ 3 stocks
$20K-$100K___ 4-5 stocks
$100K-$1M____ 5-6 stocks
$1M-$5M______ 6-7 stocks
>$5M________ 7-8 stocks
It is the intention to buy equal dollar amounts of each position at the start. At a proper buypoint you do not have to purchase the full amount, this is an option however. The recommended way to enter is to take half of the position at the proper buypoint and once the position advances 2% take and additional 30% and once the position advances another 2% take the remaining 20%. The advantage here is that you are protecting from an immediated failure with less than a full position.
You will quickly figure out that if you are a margin investor that the above table will have you on margin quickly, by the time you purchase more than half of the number of stocks in the table above. So a $99K portfolio would be on margin by the time the 3rd stock was entered.
You are not finished when you have your portfolio maxed out. You keep track of which positions are working better than the others and find opportunities to add to the top performing position. This means you will be selling your bottom performing position to raise cash. It is feasible to end up at the end of a rally with 2 or 3 of the best leaders even when you might have started with 7 or 8. Bill O'Neil in the 1990's once had 100% of his multiple corporations available cash invested on full margin in one stock (AMGN). When he finds THE LEADER he piles in. He has a stomach that allows this level of risk, yours and mine may not. There have been many great traders in history like Jessie Livermore. What sets Bill O'Neil apart is that Jessie went broke multiple times and Bill never has. CANSLIM has a set of trading rules that we live by.
