Risk Management & Position Sizing

William O’Neil Said This Decades Ago.

One of my favorite distinctions from William O’Neil in Market Wizards:

“So you treat a fund very differently from an individual stock account?” “Very, very differently. With an individual stock, you absolutely have to have a stop-loss point, because you never know how far down the stock is going.” - William O’Neil, Market Wizards

This is an important difference.

An individual stock and a diversified fund should not always be managed the same way.

An individual company can permanently deteriorate.

Earnings can collapse. Management can fail. A competitive advantage can disappear. In extreme cases, the stock can eventually become nearly worthless.

That is why O’Neil was so aggressive about cutting losses in individual stocks.

But a broadly diversified fund is different.

O’Neil went on to say:

“When you buy a fund, you want to be in it for 15 years or more. That is how you will make the really big money. But in order to do that, you need the courage to sit through three, four, or five bear markets. The typical diversified growth stock fund will go up 75 to 100 percent in a bull market, but it will decline by only 20 to 30 percent in a bear market.”

- William O’Neil, Market Wizards

That gets to the heart of his argument.

A diversified fund owns many companies across the economy. Individual companies can fail while the fund survives, changes its holdings, and participates when the broader market eventually recovers.

And I think this principle translates directly to many ETFs today.

A broad-market ETF tracking something like the Nasdaq-100 (QQQ), S&P 500 (SPY) or total U.S. stock market (VTI) is much closer to the diversified mutual funds O’Neil was describing than it is to owning one individual company.

But….

Not every ETF should be treated this way.

Leveraged ETFs, inverse ETFs, single-stock ETFs, highly concentrated sector ETFs, and narrow thematic ETFs can carry very different risks.

And if you are trading an ETF tactically rather than holding it as a long-term diversified investment, a predefined stop should be used.

Don’t treat a broken individual stock like a diversified index fund.

And don’t treat a normal bear-market drawdown in a broadly diversified long-term fund like one company whose thesis has completely failed.

Ironically, O’Neil pointed out that many investors do the exact opposite.

They hold individual-stock losers hoping they come back, then panic and sell diversified funds during bear markets.

Individual stocks require protection from permanent loss.

Broad diversified funds require the patience to survive normal market cycles.

Two different vehicles.

Two different jobs.

Two different timeframes.

Two different approaches to risk.

Calling Yourself an Investor Does Not Remove the Risk

A lot of people believe investing is automatically safer than trading.

That is not necessarily true.

What often happens is someone fails at trading, pushes out their timeframe, stops using stops, and starts calling themselves an investor.

Now instead of taking a small loss, they are “holding for the long term.”

Instead of admitting the trade failed, they convince themselves they own a great company.

Instead of following a process, they hide behind a label.

There is nothing wrong with passive investing.

If someone does not want to trade, I completely understand buying broad market ETFs like SPY or QQQ and passively investing into the major indexes over time.

That is very different from buying individual stocks with no rules.

Individual stocks are not the same as owning the market.

• A single company can break down.

• A former leader can lose institutional support.

• A growth story can slow.

• A stock can go sideways for years.

• A stock can decline 50%, 70%, or 90% and never come back.

So if you are going to buy individual stocks, even on a longer timeframe, you still need a system.

• You need to know when you are wrong.

• You need rules for cutting losses.

• You need rules for letting winners run.

You need a process for separating normal volatility from real deterioration.

That is why so many “investors” underperform the market.

They are not really investing with a disciplined strategy.

They are just holding stocks and hoping time fixes bad decisions.

When you read Market Wizards, you see traders and investors with different styles, different timeframes, and different methods.

But almost none of them are simply buying individual stocks, holding them for years, ignoring losses, and operating with no exit plan.

• They have rules.

• They manage risk.

• They protect capital.

They understand that being on a longer timeframe does not eliminate the need for discipline.

Calling yourself an investor does not make individual stock risk disappear.

If you do not have a plan to cut losses and let winners run, you do not have a safer strategy.

You just have a slower-moving mistake.

The 4 Rules That Separate Average Investors From Superperformers

Most people are taught the wrong things about the stock market.

Turn on financial TV and you will hear the same advice repeated over and over:

You cannot time the market. Diversify widely. Buy and hold. Trade less.

But traders who achieve true superperformance do something very different.

Mark Minervini laid out four key principles that helped him turn a small account into millions and win the U.S. Investing Championship.

Here they are.

1. Yes, You Can Time the Market

Most experts say market timing is impossible.

Yet every great trader times the market.

Not by predicting the future.

By waiting for specific conditions and precise setups.

When the odds are in your favor, you act.

When they are not, you stay out.

Timing is everything because asymmetric opportunities require precision.

2. Overdiversification Kills Performance

Owning too many stocks dilutes your results.

If you want broad diversification, you might as well just buy an index ETF like SPY or QQQ.

Great traders focus on a small number of high-conviction opportunities.

Concentration is what allows a big winner to actually move your portfolio.

3. Turnover Is an Advantage

Wall Street funds often hold positions for long periods.

Not because it is optimal.

Because they have billions to manage.

Individual traders have a massive advantage.

You can enter quickly. You can exit quickly. You can move capital to the best opportunities.

Flexibility is one of your greatest edges.

4. Always Demand Asymmetric Risk vs Reward

Superperformance comes from repeatedly taking trades where the potential reward greatly outweighs the risk.

Small losses are part of the process.

The goal is simple.

Lose small. Win big.

A trading system built around low risk entries and large upside potential allows a few big winners to drive your results.

Most investors try to be right most of the time.

Great traders focus on making sure their winners are much bigger than their losers.

That is how superperformance is built.