Position Sizing — How Conviction Sets the Size
Welcome to The Barakah Investor — a weekly newsletter on patient, halal investing taught the right way.
Last week we talked about margin of safety — how to know the right price for a stock. This week, the second half of that decision: position sizing — how much of your capital to put into each idea, and what to do when conviction changes.
The two ways most halal investors get this wrong
I see two patterns repeatedly. Both end badly, in different ways.
The first is under-sizing on conviction. You research a halal business carefully. You understand it. You wait for the price to come into your margin of safety. Then you put 2% of your portfolio in, because you are cautious — and the stock doubles. Your "great idea" moved your portfolio by 2%. The fear of being wrong protected you from being meaningfully right.
The second is over-sizing without confirmation. You see one halal screener mark it green, one valuation method says cheap, one tweet says it is the next NVDA. You put 25% in. When the thesis breaks — and theses break — a quarter of your capital is now in something you do not really understand.
Position sizing is the discipline that sits between those two failure modes. It is not a static rule. It is a function of how confident you are, how durable the business is, and how much you can lose without your patience breaking.
The principle
Sizing is not "how much do I want to make". Sizing is how much I am willing to lose if I am wrong.
That single reframe changes the math. Once you decide your maximum acceptable loss on any single position, the size follows automatically from the volatility and the margin of safety.
A practical framework — three tiers
Here is the structure I use myself, refined from the building blocks in issue #05. It is not the only framework, but it is one that compounds patiently and is forgiving of mistakes.
Tier 1 — Core conviction (5% to 8% per position)
You understand the business deeply. The halal screen is clean — not "needs review", actually clean after your manual check on Musaffa or Zoya. The quality score is high (≥80 on the Barakah verdict). The price is at or below the conservative end of your fair-value band. You can articulate, in one paragraph, why the next ten years should be better than the consensus assumes.
For ideas that pass all four filters, a 5% to 8% initial position is appropriate. Across a concentrated halal portfolio, 6–10 core positions cover roughly 40% to 60% of your capital. Few enough to know each one. Large enough to matter.
Tier 2 — Building conviction (2% to 4% per position)
You like the idea but you do not yet understand the business at the level of a core position. Or the halal screen says "needs review" and you have not finished your Musaffa cross-check. Or the price is fair but not yet a deep discount.
Start at 2% to 4%. Treat the position as a paid education — you now have skin in the game, which forces you to actually read the annual report. If your conviction grows over the next 6 to 12 months, you can upsize toward Tier 1. If it does not, you exit at a small loss with lessons attached.
Tier 3 — Watchlist with cash (no position)
The single most under-used sizing decision in halal investing is zero. If a stock is overvalued, or the halal status is genuinely ambiguous, or you do not understand the business — the right size is no position at all. Cash is itself a position, and the most patient one available to you.
A 15% to 25% cash buffer at all times is what lets you act when something halal, of high quality, finally appears at a fair price. Without it, you spend the dip cycle wishing instead of buying.
The hard part — sizing up as conviction grows
Most investors freeze when a Tier 2 position runs higher. They are torn: their original thesis is being validated, but the price is no longer as cheap. So they hold the small size and watch it become an irrelevant part of their portfolio.
The discipline: conviction earned through observation deserves real capital. If a Tier 2 position has compounded for 12 months and its fundamentals continue to confirm the thesis — and the price is still within a reasonable margin of safety — adding to it to bring it to Tier 1 is the right move, even at a higher price than you bought initially.
Conversely, if a core position deteriorates — earnings stall, the moat narrows, the halal income mix drifts — sizing it back down to Tier 2 (or out entirely) is also the right move. Sunk cost is not a sizing input.
A worked example
You hold three halal positions, each currently 5% of your portfolio. A fourth name appears — clean halal, quality score 85, trading 30% below your conservative fair value.
- Initial position: 4%. Tier 2 entry — you like it but you are still building the picture.
- Six months in: business is executing, your understanding is deeper, price has only moved modestly. Upsize to 7%. The thesis is now Tier 1.
- Twelve months later: one of your original three core names cuts guidance and you can no longer explain the next ten years. Trim from 5% to 2%. Conviction lost, position size down.
Your portfolio now has 2 strong core positions, 1 trimmed Tier 2, the new winner, and freed cash. You did not panic-sell. You did not over-anchor. You let conviction lead.
This week's action
- Write down each of your current positions and the percentage of your portfolio each represents.
- Next to each, mark whether it is Tier 1 (core), Tier 2 (building), or Tier 3 (should be out).
- If your sizes do not match your tier judgments — your portfolio is telling you that your past conviction does not match your present understanding.
- Adjust over the next month, not in one trade. Position sizing is a process, not an event.
What's next
Next week — the question that has been quietly underneath the last three editions: how do you actually build conviction in a halal business? What to read, what to skip, and how to know when you are done. The work that turns a Tier 3 watchlist name into a Tier 1 holding.
Until then — be patient, be honest about what you actually understand, and let conviction set the size.
Rizal M
Founder, Barakah Profits
The Barakah Investor is educational only and not financial advice. Always do your own research and consult a qualified professional where needed.
