How does the crypto industry handle position holdings and holding periods?

Today I want to answer a question from a netizen. This question is actually a very common issue we often encounter when holding stocks. During our stock holding process or when buying stocks, how should we manage our positions? What is the appropriate position size? Another question is, how long should we hold a stock? This is a very practical operational question.

So today I will give everyone an answer through this program. As we have mentioned in other programs, as a value investor, if we choose a company and think it is very good, then when buying, if it drops further, we should buy more because during the decline, it is a process of risk release. Ultimately, value will return, so the more it drops, the more we should buy. But how much to buy in the end? You can’t put all your funds into it because you have limited understanding of this company, your circle of competence is limited, and your knowledge of this company and industry is not 100% accurate.

You might have misconceptions, limitations, or blind spots in your understanding. You do not have complete information symmetry; there are many things you do not know. For example, corporate fraud—you think you’ve seen everything and believe it won’t cheat, but what if their level of fraud is higher than you think? So you believe you have 100% certainty, but humans always have things they don’t know. Therefore, a judgment is needed here.

In other programs, I also mentioned how to determine this position size calculation.

I have a dedicated episode explaining the so-called secret formula for position sizing, which is actually proposed by Kelly and Mr. Lu Chenguang. If you’re interested, you can go back and review the content of that program, which is about calculating the overall proportion of your position. Simply put, it is determined by four parameters: 1. The probability of success, 2. The odds of making money (stock appreciation), 3. The probability of failure, 4. The odds of losing money. Basically, these four aspects—success and failure probabilities, and the odds associated with each.

The probabilities here refer to your judgment of this matter, your assessment of this company’s prospects—this is one aspect, which is within your capability circle. Your circle of competence also includes another aspect: not just your understanding of the company. What is another important factor? It is your confidence level and your self-assessment.

For example, you believe there is a 90% chance this company will develop according to your expectations, but you also need to consider how high the success probability of this judgment itself is. This is subjective. For instance, if you think there is an 80% chance, then your confidence in this judgment is quite high. If you believe this company has a 90% chance of success, then the overall success probability is 80% * 90% = 72%.

I am just providing a way of thinking. The circle of competence involves two things: one is your judgment of the company’s prospects—if you think it has a 90% chance of rising and profit, what will happen? The other is how certain you are about this judgment itself. I understand this company and believe my cognitive ability might only have an 80% chance of being correct. So I think this company’s success rate is 90%. The two should be multiplied, which is 72%. This is the probability of success in your calculation.

Therefore, the opposite of 72% is 28%, which is your failure probability. That’s it. If it succeeds, how much can you earn? If it fails, how much will you lose? The loss is the permanent loss—how much you lose when you fail. What is the downside risk? Once you calculate this, you can basically determine your position size.

So in stock holding, I answered your question earlier in the program: what is your position size? For example, if your calculated position is 25%, then you can only allocate up to 25% of your funds to this stock. Even if during the decline you buy more as it drops, you are increasing your distance from the maximum. I mentioned in other programs that you should divide your buying into tranches, generally three times.

If your total position is 25% of your funds—for example, you have a total asset of 1 million yuan—then based on the position calculation, you get 25%. If you want to buy this company in three installments, each time the same, then each time you might use about 8% of your total funds to buy. If it drops further, you cannot buy more because you cannot exceed 25%. This is a risk control principle. Because humans cannot know what they do not know, you cannot lower your price just to average down, making the price as low as possible. Your funds are limited.

Therefore, in risk investing, risk always comes first. I am not talking about stop-loss here; I do not support stop-loss. But risk control is necessary. You need to set an upper limit for your position size. Why? Because your circle of competence is limited. The research ability I mentioned earlier depends on your self-awareness of your capabilities. This circle of competence is limited. In the investment market, our funds are limited, but the opportunities and risks are infinite.

When you use limited funds in an infinite risk and opportunity market, risk must be controlled. That’s why risk control and position management are very important. I provide this answer: use the position sizing formula to calculate your total position. Then, buy in stages. If the stock drops further, you stop buying once you reach your limit. If it exceeds your 25%, you cannot buy more. At this point, you must overcome greed and arrogance. Sometimes, when the market declines, just let it be; it will adjust itself.

In the future, you should also consider that your total investment amount is 25%. Don’t be afraid of this amount in the stock market. Unless the key logical condition you initially bought based on changes. Did the key factors of your original decision change in a way that no longer meets your expectations? If so, then no. For example, Coca-Cola—everyone thinks it tastes good, but if now people think the sugar content is too high and stop drinking it, then in this case, you need to sell your stock because changes in people’s perceptions are a long-term factor.

But Moutai might be different. It had a plasticizer scandal—everyone uses plasticizers, right? Anti-corruption efforts are temporary; they do not affect its core logic in the long run. It’s just a short-term fluctuation. In this case, you cannot sell it just because the stock price drops and the news says so. So I have already addressed the position control issue earlier.

However, there is a concept of effectiveness in the market. I said that in the short term, stock fluctuations are ineffective—that is, they often fluctuate due to emotions and have little to do with the company’s value. Whether in a bull or bear market, right? But in the long term, it is effective. If a stock continues to decline over the long term, because there are always many value investors, if the company’s value diverges from its price, that gap will not exist forever. If the divergence persists forever, value investors will eventually realize that the company should revert to its intrinsic value. Reversion means the price returns to its fundamental value, which means someone keeps buying.

So in the market, you are not the only value investor. The smartest value investors also have others. So generally, don’t be arrogant. There is a contradiction to resolve here: in the short term, the market’s irrationality allows you to buy more as it drops. Because in the short term, the market is ineffective. But in the long term, the market is effective because value will eventually be recognized. So you might think this way, but the small probability event might happen—you might really not understand this company, or you underestimate yourself. This company might be a junk company and could keep falling until bankruptcy.

Everyone has these concerns, especially during a stock price decline. These irrational thoughts will surface, and fear will appear. So when stocks fall, you must control two things: one is to trust your judgment; the other is to be conservative—use position sizing to control, not to exceed your capacity. Don’t invest 100% and buy more as it drops just to lower your cost—that’s very taboo. So this position limit restricts your risk.

Also, you cannot hold it forever; there is always a chance it could become zero if your judgment is wrong. That’s why you should not hold a full position. The second is time—time is also a risk, a risk of the position and a risk of time. Because if you invest 1 million yuan and end up not making money, and you spend 10 or 20 years, that is opportunity cost—you haven’t bought many good stocks, and you face the risk of missing out.

Therefore, I previously mentioned that a good company has a high chance of rebounding early and will be discovered quickly. I have mentioned this in other exchanges because the better the company, the more value investors will be attracted. Once they invest, the stock price will rise. So after a good company declines, it will rebound quickly. I have also discussed this in other programs. So if you look carefully at the bottom of a good company, in hindsight, you will find that its bottom is very sharp or uneven.

Why uneven? Because someone is buying. There are more than just you who are smart. If no one is buying, it’s due to emotion. If no one buys for a long time, then you should be cautious. Because there are so many stocks and funds in the market, every stone has been turned over. If it’s real gold, even if mixed with sand, it will be found because so many people are looking for real gold.

Now, here’s a practical question: how long should you hold a stock?

Our capability is limited; we might be wrong in our judgment. So I give everyone a practical method. Based on my experience—this is an empirical value, not a strict rule—you need to be practical. When a stock really declines, generally, it will reverse within three to four years. This is an empirical value I mentioned in other programs. It’s not that you must hold for three or four years, because when you buy, it might have already declined for two years.

According to experience, if you hold for no more than two years, it’s better. If the stock keeps falling for four years, then the company might really be bad. Because I mentioned before, every stone has been turned over—unless there are special circumstances, and the entire market is making a logical error. That’s another topic I won’t expand on. But from a probability perspective, a stock is unlikely to decline for four consecutive years. If it does, it’s probably your judgment that’s wrong, not the market.

I’ve said before that the market is effective in the long run and ineffective in the short run. Short-term fluctuations are due to emotions; long-term, value will revert. I give an empirical value of three to four years. If a stock has already fallen for two and a half years and seems very low, you might consider buying, but the holding period should not exceed two years, even one and a half years. This gives everyone a sense of the timeline and some numbers in mind.

It also includes position size—earlier I mentioned you can calculate it with the formula. Even if I give an empirical value, Buffett, who has invested for 60 years, did not hold only one stock. For example, he once held American Express, which accounted for about 40% of his portfolio for a short period, and the holding time was not very long. So we are not as capable as Buffett, right? Therefore, we should not be so arrogant and set a limit for ourselves.

I suggest you not hold more than one stock, regardless of how much you understand about the company or how confident you are in your ability. I think you should not hold more than 30% in a single stock. That’s also why I advocate holding at least four stocks. To summarize today’s topic: it’s right to buy more as it drops, but there is an upper limit to the position size. This limit is because our ability is limited, our information is asymmetric, and there is a probability of failure. We can calculate this using probability and odds to determine a position size.

After calculating the position size, if the stock drops further and exceeds your limit, you stop buying. Even if you are very confident—say, 100%—you should not exceed 30% of your position. This is an empirical value, with no deep logical basis behind it. We can refer to Buffett: in 60 years of investing, he has encountered countless opportunities, but only one stock exceeded 40%.

Our circle of competence is not as deep as his. He is a stock god and the world’s richest man. We are just ordinary people. Be humble. But your stock holdings should be controlled within 30%. Because I mentioned earlier, the market’s effectiveness is long-term, and short-term is ineffective. Why is it effective in the long term? Because you are not the only investor; many value investors are out there. Every stone has been turned over. If after four years that stone has not been turned, it means all smart value investors think it’s not good, and the stock price will not rise. It’s likely that your judgment is wrong.

In short, you might have misjudged your circle of competence or seriously misjudged this company. This is very possible. In such cases, the holding period generally starts from the decline and lasts until a reversal, usually within three to four years. So looking at the chart, three to four years, if it has already fallen for two years, sometimes you shouldn’t keep holding; after one or two years, you should consider giving up. This is also an empirical value.

This is based on my years of investment experience, especially applicable in the US stock market. China’s bear market is longer and may have some deviations, but I believe that whether in China’s crypto or stock markets, good companies will eventually be discovered. So I think if a company is truly excellent, three years is an accurate timeline. If it’s not a top-tier company, like a cyclical stock or a traditional industry, then four years might be more appropriate.

Because it needs to cross a cycle. If it’s a cyclical stock. Finally, I want to share some logical insights behind these empirical values and provide some empirical guidance so everyone has a grasp in actual operations.