Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
Shannon was actually a very good investor. He never invested other people's money, but the percentage in return of his personal account was at par with Warren Buffett's. And so was Ed Thorp, who ran hedge funds for many years.
One other thing I want to point out is that the Kelly formula alone does not create the "edge"; it is basically an optimization solution if you have an edge. If you don't have an edge, the Kelly formula won't help.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
Not really. One could figure it out if you keep a good and honest trading record of your strategy. For example, if I have a method that I think it has an edge, I will trade the same setup numerous times (>100 at least), at the end I will have good b, p and q estimates. Applying Kelly becomes very relevant.
Confirmation Bias, Your Investments, And The Seeking Alpha Counterpunch [View article]
Tom,
I have been reading some of your articles and comments, and shared your thoughts that DGI is a viable investing method. You present a balanced tone in approaching DGI, which I think will serve you well.
The biggest issue I see with DGI today is that most investors are fully invested. There is no strategy to cushion when the tide "sink" all the boats. DGI investors have a tendency to say that the price does not matter, as long as the dividend remains the same. It is going to be a lengthy and painful process to go through a bear market.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
Exellent article.
The essence of the Kelly formula is to balance the potential for gain with the reserve for loss, which is very applicable to both active and passive investing methods. This is an essential tool for any investors.
Totally agree with all you said, Artful, Go, and Pendragon.
IMHO, most people lose money because they hold their hands too long, either holding the winning hand too long (and lost the opportunity premium), or the losing hand too long, or simply for the thrill of playing. I wrote down on my desk: if the expected odds is not to your favor, get out! You can always find another stock around the corner.
Explanations For The Low-Volatility Anomaly [View article]
Jeff,
A fine article pointing readers to where to seek alpha. I have one question, which is probably similar to what varan have just raised. My question is: It seems that there are quite bit overlapping (high correlation) in stock selection between low beta, dividend growth, low P/E, low P/S, etc. By picking low beta, are you really selecting the stocks with low P/E instead? It would be interesting to see the cross correlation analysis between different selection criteria.
Dividend Investing: To Diversify Or Not To Diversify [View article]
IMHO, I think there are two levels of diversification. First, you will need to diversify on your strategy. Don't bet everything on one strategy, because no strategy can give you 100% certainty. If you have two strategies that are not correlated, God bless you, you are a genius investor. If you have only one (for example, Dividend Growth strategy), keep the rest in cash because cash has zero correlation with any asset.
Once you figure out that, you can further diversify within the strategy. Now you can choose somewhere between 10-20 stocks that within that strategy, and you will be adequately diversified.
Building A Simple Trading System To Diversify Your Portfolio: Part 1 [View article]
Maik,
Thanks for writing up a detailed explanation and performance metrics for your system. Very helpful.
The "trick", however, is that the cost of trading commission and slippage is omitted. By estimate, those two add to approximately 0.3%, which will render your system not-profitable.
A Portfolio For A Young, Aggressive Investor [View article]
Chris,
This may not directly toward you specifically but for all young investors.
Your first priority is to "invest in yourself". That does not mean you have to play in the stock market. Investing requires a lot of time. If at this stage of your life, your time commitment of developing a career is competing with investing, please develop your career first. Passive indexing is the best way to go.
If you are passionate about investing and willing to commit time, and you have a talent with numbers, you investment goal is to SYSTEMATICALLY make every investment mistakes ever possible. If you can learn from all the mistakes in the next ten years, you still have thirty more years to go and you will be very rich at the end.
A Major Shift In The Market Just Happened. Did You Catch It? [View article]
This is a good observation, but there are maybe more to it.
Usually, vol reduction precedes price recovery. You could wait until vol get below 50 before committing to the investment. This way, you may miss a short initial reversal, but capture most of the long leg with a safer entry point.
Confirmation Bias, Your Investments, And The Seeking Alpha Counterpunch [View article]
Yes, totally agree. This was the exact point I try to make.
As for how much cash allocation is needed, it depends on how good DGI win/loss characteristics is. My preference is a bit higher than 10%, but 10% is definitely far superior than 0.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
satan2liberals,
I think Chris is gracious on his answers to your questions. In my experience, it is to my advantage to understand and practice using the Kelly formula. There are a lot of opinions in the web; it is up to you to figure which is the truth and which is the voodoo science.
(1) "The formula is particularly unsuited to markets where probabilities are unknown." If the probability is unknown, why do you trade it? Trading unknown is really "gambling" (in a bad sense).
(2) "Too many traders try that silly trade a bunch of stocks thinking they are diversified." This has to do with diversification. In fact, the right way is that Kelly should be applied to a strategy, not to a stock. Overtrading highly correlated stocks is a violation to Kelly to start with.
(3) "Everybody and their grandma thinks they have an exploitable "edge" which leads to inappropriate use of the formula in the first place" Yes, Kelly specifically tells you that if you don't have an edge, don't trade it.
(4) "There's plenty of information out there on the web that demonstrates the Kelly formula is the sure way to lose all your money even in games that ARE appropriate for it." My experience is just the opposite. It is a sure way to lose money if a trader doesn't understand the danger of overtrading. The Kelly formula helps on that aspect.
Just a bit of my background. I trade part time and mostly options. I am grateful to the Kelly formula as a wonderful tool for saving me from "blowing" up my account.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
One other thing I want to point out is that the Kelly formula alone does not create the "edge"; it is basically an optimization solution if you have an edge. If you don't have an edge, the Kelly formula won't help.
Confirmation Bias, Your Investments, And The Seeking Alpha Counterpunch [View article]
I don't think I can change many DGI investors' mind. But, I merely point out you probably left some money on the table.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
Netflix Remains The Best Short On The Board [View article]
'Sell In May And Go Away' Might Come Early This Year [View article]
Confirmation Bias, Your Investments, And The Seeking Alpha Counterpunch [View article]
I have been reading some of your articles and comments, and shared your thoughts that DGI is a viable investing method. You present a balanced tone in approaching DGI, which I think will serve you well.
The biggest issue I see with DGI today is that most investors are fully invested. There is no strategy to cushion when the tide "sink" all the boats. DGI investors have a tendency to say that the price does not matter, as long as the dividend remains the same. It is going to be a lengthy and painful process to go through a bear market.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
The essence of the Kelly formula is to balance the potential for gain with the reserve for loss, which is very applicable to both active and passive investing methods. This is an essential tool for any investors.
All In: Texas Buy And Hold'em [View article]
IMHO, most people lose money because they hold their hands too long, either holding the winning hand too long (and lost the opportunity premium), or the losing hand too long, or simply for the thrill of playing. I wrote down on my desk: if the expected odds is not to your favor, get out! You can always find another stock around the corner.
Explanations For The Low-Volatility Anomaly [View article]
A fine article pointing readers to where to seek alpha. I have one question, which is probably similar to what varan have just raised. My question is: It seems that there are quite bit overlapping (high correlation) in stock selection between low beta, dividend growth, low P/E, low P/S, etc. By picking low beta, are you really selecting the stocks with low P/E instead? It would be interesting to see the cross correlation analysis between different selection criteria.
Dividend Investing: To Diversify Or Not To Diversify [View article]
Once you figure out that, you can further diversify within the strategy. Now you can choose somewhere between 10-20 stocks that within that strategy, and you will be adequately diversified.
Building A Simple Trading System To Diversify Your Portfolio: Part 1 [View article]
Thanks for writing up a detailed explanation and performance metrics for your system. Very helpful.
The "trick", however, is that the cost of trading commission and slippage is omitted. By estimate, those two add to approximately 0.3%, which will render your system not-profitable.
A Portfolio For A Young, Aggressive Investor [View article]
This may not directly toward you specifically but for all young investors.
Your first priority is to "invest in yourself". That does not mean you have to play in the stock market. Investing requires a lot of time. If at this stage of your life, your time commitment of developing a career is competing with investing, please develop your career first. Passive indexing is the best way to go.
If you are passionate about investing and willing to commit time, and you have a talent with numbers, you investment goal is to SYSTEMATICALLY make every investment mistakes ever possible. If you can learn from all the mistakes in the next ten years, you still have thirty more years to go and you will be very rich at the end.
A Major Shift In The Market Just Happened. Did You Catch It? [View article]
Usually, vol reduction precedes price recovery. You could wait until vol get below 50 before committing to the investment. This way, you may miss a short initial reversal, but capture most of the long leg with a safer entry point.
Confirmation Bias, Your Investments, And The Seeking Alpha Counterpunch [View article]
As for how much cash allocation is needed, it depends on how good DGI win/loss characteristics is. My preference is a bit higher than 10%, but 10% is definitely far superior than 0.
Fortune's Formula: The Untold Story Of The Scientific Betting System That Beat The Casinos And Wall Street [View article]
I think Chris is gracious on his answers to your questions. In my experience, it is to my advantage to understand and practice using the Kelly formula. There are a lot of opinions in the web; it is up to you to figure which is the truth and which is the voodoo science.
(1) "The formula is particularly unsuited to markets where probabilities are unknown."
If the probability is unknown, why do you trade it? Trading unknown is really "gambling" (in a bad sense).
(2) "Too many traders try that silly trade a bunch of stocks thinking they are diversified."
This has to do with diversification. In fact, the right way is that Kelly should be applied to a strategy, not to a stock. Overtrading highly correlated stocks is a violation to Kelly to start with.
(3) "Everybody and their grandma thinks they have an exploitable "edge" which leads to inappropriate use of the formula in the first place"
Yes, Kelly specifically tells you that if you don't have an edge, don't trade it.
(4) "There's plenty of information out there on the web that demonstrates the Kelly formula is the sure way to lose all your money even in games that ARE appropriate for it."
My experience is just the opposite. It is a sure way to lose money if a trader doesn't understand the danger of overtrading. The Kelly formula helps on that aspect.
Just a bit of my background. I trade part time and mostly options. I am grateful to the Kelly formula as a wonderful tool for saving me from "blowing" up my account.