Diversification and Position Sizing - Graham's Guidance

Graham's view

"The risk of paying too high a price for good-quality stocks—while a real one—is not the chief hazard confronting the average buyer of securities." - The Intelligent Investor, Ch. 14
"The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition." - The Intelligent Investor, Ch. 14

Diversification tempers errors; quality plus margin of safety drives survival.

Defensive investor guidelines

• Aim for broad but sensible diversification (e.g., 10-30 names).
• Require strong balance sheets, stable earnings/dividends, and moderate valuation.
• Keep single-name weights modest and avoid leverage.

Enterprising investor guidelines

• Can be more selective but should still hold 10-20 names.
• Demand clear margins of safety (NCAV discounts, low multiples on stable earnings).
• Tilt sizes with conviction and safety, not with excitement.

Position sizing rules of thumb

• Start with equal weights, then adjust for margin of safety and business quality.
• Cap any single position to avoid portfolio impairment from a single mistake.
• Reduce weights in thinner-safety situations; increase only when safety is robust and within your circle.

Quick checklist

• How many independent positions do I hold?
• Does any one position threaten more than a tolerable loss if wrong?
• Is sizing tied to safety and quality, not to hype or recent performance?
• Are defensive holdings truly defensive (records, balance sheets, moderate price)?

Takeaways

• Diversification is a risk-dampener; margin of safety is a risk-absorber.
• Defensive investors stay broad and high-quality; enterprising investors stay selective but still diversified.
• Let safety and competence drive size—not noise or price momentum.