'Fortune's Formula' money management

[HWWProject]

I've begun using the Kelly Formula (aka 'Fortune's Formula') for money management. This formula results in the maximum expected rate of bankroll growth, and is mathematically the optimal strategy for money management in betting games (from poker to value stocks). Major investors such as Warren Buffet and PIMCO's Bill Gross are said to employ this formula. The idea is simple: Bet more when the odds are increasingly in your favor. The Kelly Formula tells you exactly how much.

I am more confident now in my money management. I wonder what others here use to tell them how much of your portfolio to place in each stock?

I created a spreadsheet and wrote a full-length article here if you're interested in this subject:

The Kelly Formula for Stock Investing: Growth-Optimized Money Management

More info on the Kelly Formula here: 'Fortune's Formula'

Thought I'd share the article with the group and would love to hear from anyone else who has used this in real time.

[FFNow]

Interesting. Your website is very informative as well. Are u based in Singapore?

[wj888]

Be careful of employing Kelly's formula. It is only for the most astute and learned practitioner of them all.

Google up "Monish Prabrai Kelly formula". He is acknowledged by many to be a "Buffett disciple and He probably thought he has the same capability as Buffett or Bill Gross.

In the end, he found out in 2008 he was none... and he has since re-examined his usage of Kelly's formula.

[HWWProject]

Interesting. Your website is very informative as well. Are u based in Singapore?

Thanks much for your comment. I enjoyed your article today on your website, look forward to exploring it more.

I'm in the U.S. It is surprisingly hard to find a good Value Investors discussion forum. Even Motley Fool value boards don't seem to be very active.

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Be careful of employing Kelly's formula. It is only for the most astute and learned practitioner of them all.

Google up "Monish Prabrai Kelly formula". He is acknowledged by many to be a "Buffett disciple and He probably thought he has the same capability as Buffett or Bill Gross.

In the end, he found out in 2008 he was none... and he has since re-examined his usage of Kelly's formula.

Very good point. Standard Kelly results could have you investing a large % of your portfolio in one stock. I'm adjusting Standard Kelly by a diversification formula I found in an Ed Thorp paper. (Ed Thorp popularized the Kelly formula in his book "Beat the Dealer"). The formula ends up close to the % difference between your winning % - losing % based on your historical trades. Using my standard inputs this results in a maximum of 10% in each stock. But a stock would have to be trading at 80% discount to fair value to get 10%.

I've read Pabrai's books and much about him and I will go back and learn more of his experience with Kelly. I'm no Pabrai (or Buffet or Gross) but I will comment on my analysis of Pabrai's picks. I used to try to analyze his stock picks but couldn't understand what he saw. He seemed to be buying "cigar butt" stocks (ie. Ben Graham type) that I guess mostly ended up being just 'butts'. I'm looking for stocks with at least 10 years of growing free cash flow, and good profit and ROIC margins.

I've read that Bill Gross paid his way thru college making Kelly bets at the blackjack table. Everyone needs some kind of money management system I will continue to study this one - carefully.