Adebowale Oluwafenmi: The Stock Was Not the Biggest Risk — The Position Was
Investors often tell the story this way:
“I chose the wrong stock.”
But sometimes the company was only part of the problem. The larger mistake was allowing one idea to become too important to the entire portfolio.
A stock does not need to fall to zero to cause serious damage. It only needs to be large enough that an ordinary decline becomes a portfolio crisis.
That is why I believe position size matters more than the confidence of the prediction.
Confidence Can Become Expensive
Research naturally creates confidence.
You study the annual report. You compare several years of earnings. You examine cash flow, debt and management decisions. You build a valuation range and identify what appears to be a reasonable opportunity.
At that point, increasing the position can feel logical.
But research does not remove uncertainty.
A company can execute well while its operating environment becomes more difficult. A business can report higher profit while cash flow weakens. An attractive valuation can become less attractive when borrowing costs rise or investors demand a larger risk premium.
There are also events that no spreadsheet captures perfectly: regulation, currency disruption, operational failure, governance problems and sudden changes in market liquidity.
The purpose of research is to improve the probability of a good decision.
It is not to create certainty where certainty does not exist.
One Investment Should Not Control the Future of the Portfolio
Imagine two investors studying the same Nigerian company.
Both believe it has a sound business model. Both consider the valuation reasonable. Both understand the major risks.
The first investor places a measured amount of capital into the position.
The second investor commits an amount so large that the portfolio’s success now depends on this one company.
The research may be identical. The risk is not.
The first investor has room to learn. New information can be reviewed without immediate pressure.
The second investor may become emotionally attached to the thesis. Every price decline feels personal. Every negative headline must be explained away. Selling becomes psychologically difficult because admitting uncertainty now feels like admitting failure.
Position size can quietly change the way an investor thinks.
A manageable position supports analysis.
An oversized position encourages defence, denial and emotional decision-making.
Diversification Is About Risks, Not Ticker Symbols
A portfolio may contain many stocks and still be concentrated.
Consider an investor who owns several banks. On paper, there are multiple companies. In practice, those holdings may all respond to similar variables:
Foreign-exchange conditions;
The same pattern appears in other sectors.
Several consumer companies may depend on imported raw materials. Several industrial companies may face similar energy and financing costs. Several energy businesses may be affected by the same commodity cycle.
Counting company names is not enough.
Ask how many independent economic assumptions support the portfolio.
When many holdings depend on the same outcome, the portfolio may be more concentrated than it appears.
Start With the Loss, Not the Dream
Investors are usually introduced to an opportunity through the potential reward.
The company may be expanding. Margins may be improving. A new product may increase demand. The valuation may appear lower than historical averages.
Those details deserve attention.
But before deciding the position size, reverse the analysis.
Ask what happens if revenue disappoints.
What happens if profit margins contract?
What happens if the naira cost of imported inputs rises?
What happens if customers take longer to pay?
What happens if the company needs additional financing?
The purpose is not to become pessimistic.
It is to estimate what the portfolio may experience when conditions are less favourable than expected.
A position that appears comfortable under an optimistic forecast may look very different under a difficult but reasonable scenario.
Liquidity Deserves More Respect
Liquidity is often ignored while markets are calm.
When trading activity is healthy, investors assume they can reduce a position whenever necessary.
But liquidity is not constant.
A stock that trades easily during positive conditions may become difficult to sell during a period of uncertainty. Buyers may become less active, price gaps may widen and a large order may move the market.
This matters especially when the position is large relative to normal trading volume.
An investor should not only ask whether a company is attractive.
The investor should also ask whether the position can be managed without depending on ideal market conditions.
A long-term investment horizon does not make liquidity irrelevant. It simply changes when liquidity risk may become visible.
There Is Nothing Weak About Starting Small
Some investors believe a small initial position shows a lack of conviction.
Starting small can be a disciplined response to incomplete information.
The first investment creates a reason to follow the company closely. Future financial results can confirm or challenge the original thesis. Management can demonstrate whether its plans are producing real cash flow. The investor can observe how the business responds to difficult conditions.
Capital can then be added when the evidence becomes stronger.
This approach is different from buying more simply because the share price has declined.
A lower price alone does not improve the business.
Additional investment should be supported by a stronger relationship between price, value and evidence.
Write Down What Would Make You Change Your Mind
Every meaningful position should have a written thesis.
It does not need to be complicated.
The thesis should explain:
Why the company creates value;
Which financial measures matter most;
What assumptions support the valuation;
Which risks deserve monitoring;
What evidence would prove the original analysis wrong.
This document becomes especially important when the position is under pressure.
Without written conditions, the investor may move the standard each time the evidence changes.
A temporary problem may be mistaken for permanent damage. More dangerously, permanent damage may be dismissed as temporary because the investor does not want to recognise a mistake.
Position sizing and thesis writing work together.
The thesis explains why the investment exists.
The position size determines how much damage can occur if that explanation is wrong.
Risk Management Is Not a Lack of Ambition
There is a mistaken belief that careful risk management prevents strong returns.
In reality, capital must survive before it can compound.
A portfolio repeatedly damaged by oversized positions has less capital available when better opportunities appear.
Risk discipline keeps the investor in the market. It preserves flexibility. It allows patience to remain a choice rather than becoming a desperate hope for recovery.
The objective is not to avoid every loss.
Losses are part of investing.
The objective is to prevent one position from deciding the financial outcome of the entire portfolio.
Before buying a stock, investors often ask:
Before deciding position size, ask a more useful question:
“What would happen to my portfolio if I were wrong?”
That question does not require fear.
A strong company, attractive valuation and thoughtful investment thesis can support a position. None of them makes the future certain.
Good portfolio management leaves room for uncertainty, new information and human error.
The stock may be a good idea.
The position must still be the right size.
https://www.adebowaleoluwafenmi.com
