Position Sizing Like Bill Ackman: The Power of Concentrated Bets

All In: The High-Stakes World of Bill Ackman’s Position Sizing

Bill Ackman is not a fan of diversification. He believes that it leads to mediocre returns. Instead, he advocates for a concentrated portfolio of his best ideas. This approach is not for the faint of heart, but it is the cornerstone of his investment philosophy. By making large, concentrated bets, Ackman can maximize the impact of his successful investments.

The 8-12 Stock Rule

A typical Pershing Square portfolio consists of just 8 to 12 stocks. This is a far cry from the dozens or even hundreds of stocks held by many mutual funds. This concentration forces Ackman to be highly selective. He only invests in companies that he has thoroughly researched and in which he has a high degree of conviction.

The Risk of Concentration

The downside of a concentrated portfolio is that a single bad investment can have a devastating impact on performance. Ackman’s investment in Valeant Pharmaceuticals is a stark reminder of this risk. Pershing Square had a massive position in the company, and when the stock collapsed, it wiped out billions of dollars of investor capital. This experience has led Ackman to place a greater emphasis on risk management.

Position Sizing and Risk Management

While Ackman is known for his large, concentrated bets, he also employs a disciplined approach to risk management. He avoids using leverage, and he invests in companies with strong balance sheets. He also hedges his portfolio against market risk. For example, his successful bet against the market in 2020 was a hedge that protected his portfolio from the initial shock of the COVID-19 pandemic.

Lessons for the Individual Trader

What can individual traders learn from Bill Ackman’s approach to position sizing? First, it’s a reminder that you don’t need to own a lot of stocks to be a successful investor. A small number of well-researched ideas can be enough. Second, it highlights the importance of conviction. If you’re going to make a concentrated bet, you need to have a high degree of confidence in your investment thesis. Finally, it underscores the importance of risk management. A concentrated portfolio can be a effective tool for wealth creation, but it must be managed with care.