Comments on: Kelly Criterion for stock trading size http://www.1stMillionAt33.com/2006/04/kelly-criterion-for-stock-trading-size/ A site to share my tips, tools, and humble thoughts on the journey to wealth Sun, 02 Oct 2011 19:26:45 +0000 hourly 1 http://wordpress.org/?v=abc By: frugal http://www.1stMillionAt33.com/2006/04/kelly-criterion-for-stock-trading-size/comment-page-1/#comment-10 frugal Tue, 18 Apr 2006 04:06:36 +0000 http://www.1stmillionat33.com/2006/04/kelly-criterion-for-stock-trading-size/#comment-10 Hi, ML, Thanks for commenting on my article. I agree that Kelly Criterion is hard to apply to investing. I try to capture the spirit of it. If I'm investing in an entire market index, I think of it as like a contrarian investing philosophy. If I'm investing in individual stocks, I size my bets according to the market cap of the stock in attempt to bet properly to control total volatility from this particular stock. But I think the principle is always the same, more the edge you have, the more you should invest; the bigger the odd is (or the less likely the winning event happens such as individual <strong>small cap</strong> stocks), the less you should invest. The most difficult thing is to have this edge (positive expected return). Obviously, in close to all gambling games or lotteries, this "edge" is either 0 or negative, which also means that one should not gamble or buy lottery ticket. Hi, ML,
Thanks for commenting on my article. I agree that Kelly Criterion is hard to apply to investing. I try to capture the spirit of it. If I’m investing in an entire market index, I think of it as like a contrarian investing philosophy. If I’m investing in individual stocks, I size my bets according to the market cap of the stock in attempt to bet properly to control total volatility from this particular stock. But I think the principle is always the same, more the edge you have, the more you should invest; the bigger the odd is (or the less likely the winning event happens such as individual small cap stocks), the less you should invest. The most difficult thing is to have this edge (positive expected return). Obviously, in close to all gambling games or lotteries, this “edge” is either 0 or negative, which also means that one should not gamble or buy lottery ticket.

]]> By: » Carnival of Investing on Blueprint for Financial Prosperity http://www.1stMillionAt33.com/2006/04/kelly-criterion-for-stock-trading-size/comment-page-1/#comment-9 » Carnival of Investing on Blueprint for Financial Prosperity Tue, 18 Apr 2006 03:10:05 +0000 http://www.1stmillionat33.com/2006/04/kelly-criterion-for-stock-trading-size/#comment-9 [...] My 1st Million at 33 discusses a less well known (at least less publicly appreciated) investing calculation known as the Kelly Criterion. Using the formula, you can discern a mathematically correct amount you should be investing in a particular stock. This of course, depends very heavily on your ability to accurately determine the probabilities used by the equation. [...] [...] My 1st Million at 33 discusses a less well known (at least less publicly appreciated) investing calculation known as the Kelly Criterion. Using the formula, you can discern a mathematically correct amount you should be investing in a particular stock. This of course, depends very heavily on your ability to accurately determine the probabilities used by the equation. [...]

]]> By: ML http://www.1stMillionAt33.com/2006/04/kelly-criterion-for-stock-trading-size/comment-page-1/#comment-8 ML Mon, 17 Apr 2006 20:08:03 +0000 http://www.1stmillionat33.com/2006/04/kelly-criterion-for-stock-trading-size/#comment-8 Hi, Frugal, Nice site and a thought provoking article. I checked out Kelly's original paper and agree Weideman's derivation is a lot more intuitive. I was exposed to Kelly's criterion as a blackjack player but have no background in communication theory otherwise. The original formula refers to a sequence of bets. In blackjack, you can play more than one hand and calculate the covariance between them. In investing however, you're simultaneously placing a large number of interdependent bets. In my opinion, it makes the Kelly criterion much less useful even as a conceptual tool. Just as the key to sucess in gambling is to find the right game. The key to successful investing is not to find the appropriate bet size but to find the appropriate bet. Cheers, ML Hi, Frugal,

Nice site and a thought provoking article.

I checked out Kelly’s original paper and agree Weideman’s derivation is a lot more intuitive. I was exposed to Kelly’s criterion as a blackjack player but have no background in communication theory otherwise.

The original formula refers to a sequence of bets. In blackjack, you can play more than one hand and calculate the covariance between them. In investing however, you’re simultaneously placing a large number of interdependent bets. In my opinion, it makes the Kelly criterion much less useful even as a conceptual tool. Just as the key to sucess in gambling is to find the right game. The key to successful investing is not to find the appropriate bet size but to find the appropriate bet.

Cheers, ML

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