Week 3: Concentration

Go and read the first answer you gave in week 1. You have already made this week's decision, and this lecture is one multiplication.

8 March 2027committableyours to commit, and assessable

Open your opening record and read question 1. Not the instrument — the percentage.

Most of you wrote a number at or near 100. Nobody told you not to. Two weeks ago you were asked how much of the account was going in, the question carried no warning, and confidence is a perfectly ordinary reason to answer 100. This is what the form was for.

The multiplication#

Your position is some percentage p of the account. The thing you bought falls 40%. Your account falls

0.40 × p

At p = 100 the account falls 40%. At p = 25 it falls 10%. At p = 10 it falls 4% and you will find out about it from the log rather than from your own stomach.

That is the entire calculation and it took one line. The reason it is a lecture is what it does to week 1.

What concentration actually does#

Week 1 was about a bet with a 1-in-20 chance of taking everything, and about how repeated exposure to such a bet ends. The obvious reading is that the danger lives in the instrument: buy the risky thing and you might lose it all.

That reading is wrong, and this is the week to fix it. The instrument’s chance of total loss is not your chance of total loss. Your position size is the exchange rate between them.

Take that same 1-in-20 instrument. At 100% of the account, its total loss is your total loss: one exposure, one chance in twenty of ruin, and week 1’s arithmetic applies to you directly. At 10% of the account, its total loss costs you 10% and you are still trading next week. The instrument did not change. The number of things that can end your sequence changed from one to none.

So concentration is not “a risky position”. It is the mechanism by which you promote an instrument’s failure into your own. You can buy the safest thing on the exchange and still hold it at a size where being wrong once is terminal.

Why this one is on the assignment#

Nobody handed you this loss. There was no event. You chose a number in week 1 and the number was available to be any other number, which puts concentration in a small group of failure modes you can commit deliberately, at will, with no cooperation from the market at all.

That is why it is one of the three things Assignment 1 will accept, and why the honest version of that assignment is harder than it looks: you have to show the size you chose, the fall that happened, and the account movement the multiplication predicted. If those three do not agree, one of your numbers is wrong.

This week#

Do not change your position because of this lecture. Record the percentage you are actually holding, today, in the log, next to the number you wrote in week 1. If they differ, note when you changed it and why — you will want that entry in week 10, for a reason that is not yet obvious.