Why Starting Small Works: How a 1% Starter Position Can Build Big Gains Over Time

Human emotions are powerful, and you have to work with them or they will get the best of you, particularly when it comes to investing. For example, the fear of missing out leads to buying overpriced stocks. The fear of loss leads investors to dump those same stocks when they go down.

However, if you recognize your emotions, you can set yourself up for long-term success. And starter positions of as little as 1% could be the powerful tool you need. Here's why.

I start small on purpose

Investing doesn't have to be an all-or-nothing activity. In fact, I don't jump into a stock with both feet very often. I usually begin with a starter position. And over time, I build my stake until it becomes a full commitment. That can take months, and sometimes years, to achieve.

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The big goal is to give myself time to really know a company before I take on a bigger risk. There's nothing like putting money on the line to help sharpen the senses.

Sometimes a stock never grows beyond a starter position, as what happened with Dominion Energy (NYSE: D). I've since sold Dominion because management repeatedly failed to deliver on the promises it made. Sometimes an investment can move to a full position quickly, as what happened with Texas Instruments (NASDAQ: TXN). Texas Instruments has a no-nonsense management approach that resonates with me.

There's another starter position that can be even more powerful

Often, I see an investment that I think has long-term promise, but it is too expensive. That's not shocking, given that Wall Street tends to reward success over the long term. Sometimes I'll take a small position, which in theory could be as little as one share, or perhaps just 1% of whatever you consider a full position. That gets me in the door and gets me to pay more attention to the stock.

It also primes me emotionally for the time when an expensive stock sells off and starts to look cheap. If you are like me, a starter position will leave you waiting for the opportunity to build up your stake.

The key is that when that stock is finally attractively valued, it will likely be when most investors are selling it. If you didn't own that starter position, you would probably be too worried to go against the crowd. Buying when others are selling is, basically, leaning into risk, which you probably won't do unless you prepare yourself for it in advance with that starter position.

Starter positions can help make you a contrarian

If you buy when most of Wall Street is selling, you are normally called a contrarian. It is emotionally difficult to be a contrarian, but that's usually what is needed if you want to purchase good companies at attractive prices. Using starter positions to work with your emotions can help you unlock your inner contrarian, which may be a new investment approach for you, and all it takes is a single share of stock.

Reuben Gregg Brewer has positions in Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.