Einhorn (and Buffett) on Position Size

Here, from page 19 of Fooling Some of the People All the Time, is Einhorn sharing how he sizes both longs and shorts within Greenlight's portfolio--and why:

It is hard to find long ideas that are ones and twos or shorts that are nines and tens, so when we find them, it is important to invest enough to be rewarded.

Based on this concept, we decided that Greenlight would have a concentrated portfolio with up to 20 percent of capital in a single long idea (so it had better be a [good] one!) and generally would have 30 percent to 60 percent of capital in our five largest longs.

We would size the shorts half as long as we would longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment.

Like reading about a company he's invested in, knowing why Einhorn has done something is as (if not more) important than following it without further thought.

Here, he takes big bets on the best ideas he can find. And, as the book from which this quote is taken shows, he knows these companies inside out.

Do you know the companies in your portfolio well enough to write more than a one page introductory statement on them? How about a book? Can you name their top five suppliers, salespeople, or customers with ease?

If not, you may well choose to size your bets differently. And you should. Warren Buffett states both points here better than I, so I'll give him the rest of the post to do so:

We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.

But if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.