Hey {{first_name|Investor}} -
I've gotten the thesis right and still lost money — twice. Both times, the business played out the way I expected. The problem was that I bought too much, too fast, at the wrong price.
After the second time, I built a checklist I now run before every hot stock entry. This issue walks you through the two most important parts: the pre-entry rules and the position sizing rules. The full version — including when to add, when to exit, and a decision framework — is in a downloadable PDF. You can grab it HERE.
This isn’t about avoiding hot stocks, but your conviction shouldn’t quietly override price discipline or sizing in the moment you hit buy.
Part 1: The Pre-Entry Questions
Here are five questions I ask myself before I spend a dollar. If any one fails, I'm not ready.
Can I explain the thesis in one paragraph, without notes? If I can't articulate why this company wins over the next three to five years without looking anything up, I don't know it well enough to own it through a drawdown.
Do I know what's already priced in? A stock at 40x forward earnings is already assuming aggressive growth, margin expansion, or flawless execution — maybe all three. The question isn't whether the company is good. It's whether the current price already reflects how good it is.
Do I know the 2–3 things I need to track? Revenue growth, margin trajectory, customer wins, backlog, pricing power, estimate revisions — pick two or three and write them down. These become your scorecard, not the stock price.
Do I know what would prove me wrong? I write down what would break my thesis like “management not backing action with what they say” or “challenging regulatory environment”. Not "the stock drops 30%." That's price, not evidence.
Am I buying on conviction, or fear of missing it? If this stock dropped 25% next week, would I still know exactly why I own it — or would I panic? If the answer is panic, the entry is emotional.
Part 2: The Position Sizing
This is where the real damage control lives. Getting the thesis right doesn't help you if the position size is wrong.
Rule 1: Starter only if it's extended.
If the stock is trading well above prior support or key moving averages, I enter with 25% of my intended full position size, capped at no more than 1% of my total conviction holdings. Your numbers may vary based on your risk profile — the principle is the same: start small.
How I define "extended": I watch three exponential moving averages (EMA) — the 21-day, 50-day, and 200-day. An EMA is similar to a simple moving average, but it gives more weight to recent prices, so it reacts faster to new moves. Most free charting tools (Yahoo Finance, TradingView, your brokerage app) let you overlay them with a couple clicks.
Each one tells you something different:
The 21-day EMA tracks the short-term trend — this is where I generally take my starter position. If the stock has pulled back to or near its 21-day EMA after a run, that's often a reasonable entry point for initial exposure.
When the stock is extended above the EMA lines, it will come back down to the EMA lines eventually. Hot stocks tend to stay above the EMA 9-day or 21-day, so you want to create your starter position here in short term periods.
The 50-day EMA shows the intermediate trend. A stock holding above its 50-day is in a healthy uptrend. A pullback to this level after a big move can be a second opportunity to add.
The 200-day EMA is the long-term trend line. When a stock is trading far above all three, it's extended — it's moved fast relative to its own recent history, and a pullback toward one of these averages is normal and healthy.
200-day EMA (the dark blue line) is considered for new long positions. At the peak of the Iran conflict earlier this year, you can see Alphabet/Google touched this line. Good companies can revisit these levels due to macro environment.
If the stock keeps running after your starter, you own some. If it pulls back toward the 50- or 200-day, you can add at a lower average cost with better risk/reward.
My rule: 25% of my max position size, never more than 1% of total conviction holdings.
Rule 2: Max size is set before I buy.
I decide, in writing, the maximum percentage of my portfolio this position will ever reach — before I place the first order. This number doesn't change unless I do a full written review of the thesis, the valuation, and the risk.
Rule 3: I can hold through a real drawdown.
Can I hold this position through a 30%, 40%, maybe 50% drawdown — both financially and emotionally — as long as the thesis remains intact?
If the answer is no at the size I'm about to buy, the size is too big. A position that's too large turns a temporary drawdown into a permanent exit — you sell not when the thesis breaks, but when the pain breaks you.
Rule 4: Single-name risk is controlled.
Does this position double-stack me on a theme, factor, customer, or macro bet I already have exposure to?
If I already own three AI infrastructure names and I'm adding a fourth, my "diversified" portfolio might be one spending slowdown away from a correlated drawdown across all of them. This check isn't about the individual stock — it's about the portfolio as a whole.
What I walked through above covers the two most critical sections. The full checklist also includes rules for when to add (better price, better evidence, or better setup), when to exit or review (thesis break, valuation overshoot, position creep), and a decision framework that forces you to classify every entry as pass, watch, starter, or high-conviction buy.
I've packaged it into a printable PDF you can run the next time you're tempted to break one of your own rules — especially when FOMO is high and the stock has already moved.
As always: I won't tell you what to buy. I'll sharpen the lens you use to look.
I’m releasing my e-book about my investing strategy, frameworks, research process, and the lessons I learned in my investing journey. If you want to be notified on the launch, sign up through this link.
Stay disciplined friends 🙂