Position Sizing in Value Investing

Benjamin Graham — Warren Buffett's mentor — gave very specific instructions on capital distribution across grades of stocks within a portfolio.

Optimum Diversification

Benjamin Graham — the founder of Value Investing — gave some very specific instructions on the subject of Position Sizing across various grades of stocks for optimum diversification.

Graham Grades

a. Defensive

Graham recommended a minimum portfolio size of 10 for Defensive grade stocks; or in other words, not more than 10% of one's portfolio per Defensive grade stock.

"Adequate though not excessive diversification... a minimum of ten different issues and a maximum of about thirty."

Chapter 5: The Defensive Investor and Common Stocks, The Intelligent Investor.

b. Enterprising

In keeping with the same principle, GrahamValue recommends a portfolio size of 20 for Enterprising grade stocks; or in other words, not more than 5% of one's portfolio per Enterprising grade stock.

This is due to the fact that Enterprising grade stocks have fewer qualitative requirements than Defensive grade stocks, but more than NCAV grade stocks.

Please note that Graham's own recommendation for this category was closer to 30 stocks, or not more than 3.3% per stock; but he leaves it to the Enterprising investor's judgment.

"If our winnowing approach had been applied to all 4,500 companies in the Stock Guide, and if the ratio for the first tenth had held good throughout, we would end up with about 150 companies meeting all six of our criteria of selection. The enterprising investor would then be able to follow his judgment—or his partialities and prejudices—in making a third selection of, say, one out of five in this ample list."

Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor.

c. NCAV (Net-Net)

Graham also recommended a portfolio size of 30 for NCAV grade stocks; or in other words, not more than 3.3% of one's portfolio per NCAV grade stock.

"30 issues at a price less than their net-current-asset value."

Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor.

An Example

As an example, one could distribute 100% of one's capital across:

  • Five Defensive grade stocks (5 x 10% = 50%), plus
  • Six Enterprising grade stocks (6 x 5% = 30%), plus
  • Six NCAV grade stocks (6 x 3.3% = 20%)

Warren Buffett too has described the pros and cons of Diversification in great detail.

Graham also gave detailed instructions on capital distribution across Equity and Debt.

Buffett on Diversification

At the 1996 Berkshire Hathaway Annual Shareholders Meeting, Buffett gave the following explanation of how owning fewer stocks can be less risky if one knows what one's doing.

"There is less risk in owning three easy-to-identify, wonderful businesses than there is in owning 50 well-known, big businesses."

Warren Buffett, Berkshire Hathaway: Annual Shareholders Meeting (1996).

Buffett In 1962

Warren Buffett talks about market corrections, forecasts, upsides and downsides; in an interview for KMTV Omaha, in early June 1962.

Buffett is 32 years old here, and this is the first known recording of him.

Facebook Likes and Comments


I think graham doesn't recommended mixing strategies.
However i read he does not recommend investing more than x% in high risk capital.

Dear pipo2152,

Thank you for your comment!

While Graham does draw clear distinctions between Defensive and Enterprising investors, he does not restrict Enterprising investors from also investing in Defensive grade stocks. In fact, NCAV grade stocks are specifically recommended for Enterprising investors.

The statistical work of finding Enterprising and NCAV grade stocks is also possibly much easier for the average investor today, than it was in Graham's day; because of services such as Serenity. But yes, it should be understood that anyone investing in Enterprising or NCAV grade stocks is an Enterprising investor; by definition.

Keeping the above in mind, it seems only logical to interpret "a minimum of ten Defensive grade stocks" to "a maximum of 10% of funds per Defensive grade stock"; and so on. Graham does not advise against doing so, and doing so does not violate the principles of diversification that such recommendations are based on.

Regarding speculation, Graham does say that if one must do so, one should put aside a portion (preferably small) of one's fund for it.

Thank you again for your comment!

You are an excellent professional.

Benjamin Graham recommends not investing less than 25% in bonds. But it also talks about index funds and Reit's. We can replace a bond etf with an index fund?

Thank you so much for your answer Serenity. Sometimes, I have difficulty interpreting English.

Dear pipo2152,

Thank you for kind words!

Since the idea is to distribute capital across Equity and Debt, a debt-based Index Fund should work just as well as a Bond ETF. Please note that REITs don't appear to score too well on the Graham framework.

Thank you again for your comment! It's great to have you on Serenity.

I had the same question now. I never understand in bonds, but as an alternative, I invested in the bond fund index 25% of the capital and 75% of the shares, but I have no experience or information about the best bond fund in America. Can it be offered? An example of the best boxes

Dear Omar_H,

Unfortunately, GrahamValue cannot offer any specific information on Bonds apart from the general guidelines already discussed above.

Thank you for your comment!