fraction of capital to bet in a single bet is p - q/W
where p stands for probability of success, q for failure (1-q) and W is the ratio of amount you win when you win to amount you lose when you lose.
i.e. W = w/l ; where w stands for win amount when you win and l stands for loss amount when you lose - simply put it is the odds
or edge/Odds i.e. (pW-q)/W, which can be rewritten as (pw-ql)/w
applications to stock market:
Yes bank - Aug 2013
CMP - 240
(all this after doing fundamental analysis on the bank, this is the most important edge that sits atop Kelly's edge:))
Assume peak P/ABV multiple is 2.5 and prevailing multiple is 1.2 x; bottom most multiple is 1.0 x
then W can be computed as 2.5 x - 1.2 x divided by 1.2 x - 1.0 x i.e. 1.3:0.2 or 13:2
One way to establish ps and qs is to look at the frequency table of historical pricing multiples
Assume that only 15% of the time, the stock has traded at a P/B less than 1.2 x => p = 1 - 0.15% = 0.85%
Now applying Kelly's f = 0.85% - 0.15%/6.5 = 0.82 % i.e. odds are favorable bet heavily (Charlie Munger)
However, not every man has steel balls and hence it could be morphed to 0.82/2 i.e. 40% of one's investable wealth should have been invested in a single stock.
where p stands for probability of success, q for failure (1-q) and W is the ratio of amount you win when you win to amount you lose when you lose.
i.e. W = w/l ; where w stands for win amount when you win and l stands for loss amount when you lose - simply put it is the odds
or edge/Odds i.e. (pW-q)/W, which can be rewritten as (pw-ql)/w
applications to stock market:
Yes bank - Aug 2013
CMP - 240
(all this after doing fundamental analysis on the bank, this is the most important edge that sits atop Kelly's edge:))
Assume peak P/ABV multiple is 2.5 and prevailing multiple is 1.2 x; bottom most multiple is 1.0 x
then W can be computed as 2.5 x - 1.2 x divided by 1.2 x - 1.0 x i.e. 1.3:0.2 or 13:2
One way to establish ps and qs is to look at the frequency table of historical pricing multiples
Assume that only 15% of the time, the stock has traded at a P/B less than 1.2 x => p = 1 - 0.15% = 0.85%
Now applying Kelly's f = 0.85% - 0.15%/6.5 = 0.82 % i.e. odds are favorable bet heavily (Charlie Munger)
However, not every man has steel balls and hence it could be morphed to 0.82/2 i.e. 40% of one's investable wealth should have been invested in a single stock.
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