Nithin Kamath’s Warning to Traders: Why Bad Position Sizing Can Wipe You Out

Zerodha founder Nithin Kamath has warned traders about one of the most common but overlooked reasons for heavy losses in the markets – poor position sizing – arguing that even being right usually can’t protect investors from a single oversized bet.In a post on “You can be right 60% of the time and still lose everything if you misjudge your positions,” he wrote, adding that one large position can erase months of steady gains.

Kamath emphasized that position size is a core pillar of risk management, not a secondary consideration. He pointed to a recent conversation between Sebi-registered research analyst Sandeep Rao and veteran trader Tom Basso, one of the original “Market Wizards,” as a useful illustration of how risk thinking evolves over time.According to Kamath, Basso initially followed a simple rule inspired by legendary trader Larry Hite: he risked the same percentage of equity on each trade, so that each bet carried an equal potential loss. But that approach changed after Basso encountered a highly volatile silver trade, with sharp price swings causing concern among customers even though risk limits were technically intact.

That episode led Basso to realize that risk is not just about how much money can be lost, but also about how quickly prices move. High volatility, Kamath noted, creates psychological pressure that can force traders to make bad decisions.

As a result, Basso added volatility as a second filter, calculating both risk as a percentage of equity and volatility as a percentage of equity, and then using the smaller of the two to determine the positions.

A third layer arose from margin considerations. Some markets appear to have low risk and low volatility, but require high margins due to the risk of sudden jumps. By taking into account the ratio of margin to equity, Basso ensured that his portfolio never became unintentionally overexposed. Also read: Meesho short-selling shares under auction: Nithin Kamath explains how investors can participate and make profits

Kamath said the combined framework automatically helped reduce exposure during volatile phases, guard against margin stress and control overall portfolio risk. The conclusion, he said, is simple but often ignored: Surviving the markets depends as much on how much you bet as it does on executing the trade correctly.

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