Picture a hedge fund with everything going for it.
Long-Term Capital Management had two future Nobel Prize-winning economists on its leadership team. In 1994, 1995 and 1996, it returned about 20%, 43% and 41%.
So what did they do at the end of 1997? They gave some money back to outside investors. But they didn’t shrink the positions. Same size bets, less capital underneath.
In the first nine months of 1998, it lost more than 90% of that capital.
Nobody there was short on brains. What they had was a record that made a bigger bet feel safe.
Why a good record is risky
I see a version of this with people holding on to too much company stock. That stock is how they built considerable retirement wealth, so selling any of it feels like walking away from what worked. I understand why. It’s hard to let go of the thing that got you here.
When a position keeps working, nobody wants to be the one to trim it. Not your advisor, not your spouse, and usually not you.
But it isn’t just company stock. It shows up on every path:
· Owner: The business has carried you for twenty years. Why would you need anything outside it?
· Executive: The stock has beaten everything else you could have owned. Why would you sell any of it?
· Professional: The last fund or private deal paid off, so the next check gets bigger.
The trouble is that a good record only tells you what has happened. It can’t tell you what the position can survive, and that matters more with every month closer to your exit date.
This week’s tool: The Size Limit
Here’s a simple way to put a number on it. Two lines.
Line one: What’s the most you could lose on one position without pushing back your exit date? Write it as a dollar amount.
Line two: What’s your largest single position today?
Be honest on line one, and answer it from your plan, not from your track record. A limit built on how well something has done will keep rising right along with it. A limit built on what your exit date can absorb won’t.
If you can’t write line one yet, that’s fine. It’s the right place to start.
A good record tells you what has happened. Line one tells you what you can afford if it doesn’t repeat.
The Next Step
If line two came in bigger than line one, or you couldn’t write line one, that’s worth knowing while there’s still time to act.
A Freedom Audit is a focused 30-minute conversation that sets the limit and the schedule across all three numbers. Schedule yours this quarter.