Listen to the deep-dive discussion – The Attention Cost of Bookmark Stocks (34:23 min)
“The difference between successful people and very successful people is that very successful people say no to almost everything.”
— Warren Buffett
- The Universal Principle
Every decision has two costs. The first is visible: money, time, effort. The second is invisible: everything else you could have done instead.
A trial lawyer understands this intuitively. A case with $2 million at stake justifies 200 hours of preparation. A case with $15,000 at stake that demands 50 hours is deficient before it begins—the attention it consumes exceeds the value it can produce. Good litigators triage. They allocate their time proportionally to the impact of each file, not proportionally to the number of files on their desk. Cases too small to justify the preparation are settled, referred, or declined.
A surgeon makes the same calculation. An executive makes it. A chess player makes it—every second spent analyzing a marginal line is a second not spent on the critical variation. The principle is universal: attention is finite, and its allocation determines the quality of all outcomes.
Investing is no exception. But investing offers something that most other domains do not: both sides of the equation—the cost of attention and the value of the position—are precisely measurable.
- The Arithmetic of Attention
Consider an investor with a $1 million portfolio who holds a speculative biotech position at 0.2% of the portfolio—$2,000 in market value. The stock spiked from $8 to $22 on a clinical trial result, then settled back to $13. The investor notices. He pulls up the chart. He reads the trial data. He checks the analyst commentary. He weighs whether the stock might return to $22. He discusses it. He decides to hold. The entire process takes 30 minutes.
Thirty minutes does not sound like much. But let us price it.
If this investor’s professional time is worth $300 per hour—a conservative estimate for anyone managing a $1 million portfolio—then 30 minutes of attention costs $150. The position is worth $2,000. The investor just spent 7.5% of the position’s value thinking about it.
But a single 30-minute review is not the true cost. A speculative biotech with clinical catalysts demands ongoing attention. Each trial result, each FDA filing, each conference presentation generates a signal that requires evaluation. Conservatively, this position will consume 4–6 hours of mental energy over the course of a year: reading, checking, worrying, deciding, and deciding again. At $300/hour, that is $1,200 to $1,800 per year in attention cost.
Now consider the expected return. The biotech has no earnings, so valuation is speculative. Assign a generous distribution: 40% chance the pipeline advances and the stock returns to $22 (a 70% gain), 30% chance it stagnates, 30% chance of clinical failure and the stock falls to $4 (a 70% loss). The expected value of the gain is:
(0.40 × $1,400) + (0.30 × $0) + (0.30 × -$1,400) = +$140.
The expected gain is $140 per year. The attention cost is $1,200 to $1,800 per year. The investor is paying eight to twelve times the expected value of the position just to maintain it.
This is not a rounding error. It is a structurally deficient allocation of the scarcest resource an investor possesses.
III. The Hidden Cost: Decisions Not Taken
The arithmetic above understates the real cost, because it prices attention at its hourly rate. The true cost of attention is not its market value. It is its displacement value—the value of the decisions that were not made because the attention was consumed elsewhere.
Consider what the investor could have done with those 30 minutes instead. He could have evaluated whether his index position should be 10% or 15% of the portfolio—a decision involving $50,000 of capital that, at the index’s historical return, represents $5,000 to $7,500 per year in expected value. He could have analyzed whether his best Compounder, currently at 5%, deserves to be averaged up to 8%—a $30,000 deployment into a business compounding at 20% annually, worth $6,000 per year in expected additional return. He could have reassessed the thesis on a Stalwart showing signs of deterioration—a decision that might protect $60,000 of capital from a 20% drawdown.
Each of these decisions has an expected impact measured in thousands of dollars. The biotech at 0.2% has an expected impact measured in tens of dollars. The displacement is not ten-to-one. It is closer to one hundred-to-one.
This is the insidious nature of small positions. They do not announce their cost. They consume attention in small, invisible increments—a glance at the price here, a news alert there, a moment of doubt in the evening. No single increment feels significant. But the cumulative effect is that the investor’s finite attention budget is fragmented across positions that cannot move the needle, while the positions that can move the needle receive less attention than they deserve.
The cost of a small position is not measured by its losses. It is measured by the quality of the decisions it displaces.
- The Attention Threshold
If the cost of attention exceeds the expected value of a position, the position should not exist. This is not a matter of conviction or sentiment. It is arithmetic.
The principle can be formalized:
The minimum position size is the weight below which the cost of monitoring the position exceeds its expected contribution to the portfolio.
This threshold varies by investor and by position type. A passive index ETF demands almost zero attention—it can sit at 1% or 20% and the monitoring cost is effectively nil. A speculative biotech with binary catalysts demands significant attention even at small weights. A Compounder with stable earnings demands moderate attention. The threshold is not a fixed percentage. It is a function of the attention intensity of the position relative to its expected impact.
As a general principle, however, the math is unforgiving for positions below 1% of a portfolio. At 0.5%, a position must double just to contribute 0.5% to the portfolio return. At 0.2%, it must quintuple to contribute 0.8%. The range of plausible outcomes for any single stock, multiplied by a weight below 1%, produces impacts that are indistinguishable from noise. The investor cannot feel the position in their returns. But they can feel it in their attention.
The implication is uncomfortable but precise: most investors hold too many positions, not because they lack conviction, but because they have never calculated the attention cost of their smallest holdings.
- The Implications for Portfolio Construction
The attention cost model has several practical consequences for how a portfolio should be built and maintained.
First, it creates a natural floor for position sizing. If a position is worth initiating, it is worth initiating at a weight that justifies the attention it will require. Buying $2,000 of a speculative stock in a $1 million portfolio is not a “small, low-risk bet.” It is an attention-negative allocation—the monitoring cost exceeds the expected return. Either buy enough for the position to matter, or do not buy at all.
Second, it provides a rigorous criterion for portfolio cleanup. The question is not “do I still like this stock?” The question is: “does this position, at this weight, justify the attention it consumes?” Many positions that survive a conviction test fail the attention test. An investor might still believe in a thesis but hold a position so small that the belief is economically irrelevant. Belief without weight is not investment. It is spectatorship.
Third, it explains why concentrated portfolios outperform fragmented ones. The conventional explanation is that concentration forces better selection—the investor must choose carefully when they can only hold ten positions. This is true but incomplete. The deeper explanation is that concentration preserves attention. An investor with ten positions can devote meaningful time to each. An investor with forty positions cannot. The ten-position investor makes better decisions not because they are smarter, but because their attention is not diluted across positions that do not matter.
Fourth, it reframes the value of cash. Cash has zero attention cost. It requires no monitoring, no analysis, no thesis maintenance. It sits in the portfolio consuming nothing while preserving everything—optionality, liquidity, and the investor’s cognitive bandwidth. When the alternative to holding a 0.3% speculative position is holding that capital in cash, the attention cost model says: the cash is the better position. Not because cash earns more, but because it costs less—and the attention it saves can be redirected toward decisions that actually move the portfolio.
- The General Rule
The attention cost is not specific to investing. It applies everywhere decisions are made under scarcity of time and cognition. The lawyer who keeps fifty open files is a worse lawyer than the one who keeps twenty, not because fifty is inherently unmanageable but because the attention each file receives is inversely proportional to the number of files. The executive who attends twelve meetings a day adds less value per meeting than the one who attends four. The chess player who analyzes every legal move on the board will lose to the one who analyzes only the three moves that matter.
In every domain, the quality of decisions is a function of the attention allocated to each decision. And the attention allocated to each decision is a function of how many decisions compete for the same finite resource.
But investing is the one domain where this truth can be measured with precision. The weight of each position is known. The expected return is estimable. The time spent monitoring is observable. The displacement cost is calculable. The entire equation can be written on a napkin. And when it is, the conclusion is almost always the same: the portfolio holds too many positions that cost more in attention than they can ever return in value.
A position too small to deserve your attention is too small to deserve your capital.
This is not a philosophy. It is arithmetic. And like all arithmetic in investing, it compounds. The investor who eliminates twenty small positions does not just save attention today. They redirect that attention toward their highest-conviction holdings—the ones large enough to matter—where better decisions produce better outcomes that compound over years and decades.
The invisible cost becomes a visible gain. Not because anything was added to the portfolio, but because something was subtracted from it.
The best investors do not have more attention than everyone else. They waste less of it.
VII. The Cognitive 100-Bagger
There is one more dimension to the attention cost, and it is the most consequential. Everything described above—the arithmetic, the displacement, the threshold—treats the cost as a static ratio. The attention wasted on a 0.2% position displaces a decision worth 100 times more. A ratio of 100 to 1.
But it is not a ratio. It is a compounding function.
The concept of the 100-bagger is the most celebrated idea in investing: one dollar becomes one hundred dollars through the relentless compounding of capital over time. What makes a 100-bagger extraordinary is not the size of the return in any single year. It is that the return itself generates future returns, which generate future returns, which generate future returns. The compounding is recursive. It feeds on itself.
Attention works the same way.
When an investor wastes attention on a 0.2% position, the displaced decision is not just a one-time loss. A missed sizing correction on a Compounder—failing to average up from 5% to 8% because the attention was consumed elsewhere—does not cost the investor once. It costs them every year for as long as they would have held the larger position. If that Compounder returns 20% annually, the $30,000 that was not deployed compounds to $186,000 over ten years and $1.15 million over twenty. The attention cost of a 0.2% position is not $140 of expected value forgone. It is $140 compounded over decades of better decisions not made.
The inverse is equally powerful. When an investor eliminates twenty small positions and redirects that attention toward their highest-conviction holdings, the benefit is not a one-time improvement. It is a permanent upgrade to the quality of every future decision. Better attention this year produces a better portfolio next year, which generates more capital the year after, which enables better allocation the year after that. The gain compounds. Not at 10% or 20%, but at the rate of the investor’s own improvement—which, in the early stages of building discipline, can be the highest return available.
This is the cognitive 100-bagger. It is the compounding of decision quality over time, driven by the disciplined allocation of attention to where it produces the highest return.
Professor Bessembinder demonstrated that 4% of stocks generate all net market wealth. It is likely that the same power law governs decisions. A small fraction of an investor’s decisions—the moments where they sized correctly, averaged up at the right time, harvested at the right time, or simply did nothing when doing nothing was the right move—generate nearly all of their lifetime returns. Everything else is noise. And noise has a cost: it dilutes the attention available for the 4% of decisions that will define the portfolio.
The 100-bagger of capital requires patience—holding a great business for decades while the market tempts you to sell. The cognitive 100-bagger requires a different kind of discipline: the willingness to subtract. To remove the positions, the alerts, the noise, and the marginal decisions that consume attention without producing value. Each subtraction is small. But the compounding of better decisions, applied over a lifetime of investing, is not small at all.
Capital compounds in the portfolio. Attention compounds in the investor. Protect both.
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This post is a companion to “Position Sizing: The Primary Decision,” which describes the architecture of sizing and the corrective mechanism of harvesting and averaging up. The Attention Cost explains why proper sizing matters beyond the mathematics of weighted returns: it is the discipline that protects the scarcest resource in the portfolio—not capital, but cognition.
Both posts are part of the framework described in The Infinite Investor, available at averagingup.com.