- Is the amount suggested by Kelly appropriate?
- The Kelly Criterion suggests the fraction of capital to bet (F) is given by the expression:
**F = PW – (PL/W)**where- W = Bet return (win size over loss size)
- PW = Win Probability
- PL = Loss Probability

- Volatility of capital in my example was relatively high – in particular, peak-to-trough was c. $70
- Fractions of Kelly are often recommended (for example, half Kelly reduces the return expectation by about three-quarters with half the volatility)
- Also, the capital base to which the Kelly Criterion is applied should be your maximum tolerable drawdown, and not your total bankroll)

- The Kelly Criterion suggests the fraction of capital to bet (F) is given by the expression:

- How long to keep playing?
- From my example, there were two distinct occasions when returns were approximately 200% of starting capital
- These occurred after runs of approximately 10 coin flips, where the majority (80 – 90%) were favorable
- The expected number of coin tosses to get a run of only 5 consecutive heads is 62, which points to the number of rounds required to get a positive return from this game
- The advice “You’ve got to know… when to walk away” is worth heeding, although this may be easier said than done
- Another option is to consider ways in which you can improve your odds of winning from any given round

My results:

Sources and additional links for reference:

http://coinflipbet.herokuapp.com

https://www.ft.com/content/7cd9b6c8-9cd7-11e6-8324-be63473ce146

Ed Thorp interview post from Fundseeder

]]>- Win/Loss Ratio = magnitude of the profit from winners divided by the loss from the losers (greater than 1.5 as a reference value)
- Asymmetric outcomes – similarly, understanding the potential downside vs. upside of a position and looking for option-like payoffs
- Margin of safety – from a value investing perspective, this will come looking at assets or cash flows that are undervalued by the market; there is also a probabilistic approach, where margin is achieved through high expected value.
- Mispricings – following on from the last bullet, look for high probability events (based on your conviction, developed through fundamental analysis) priced assuming a low probability.
- Loss aversion – Consider Jesse Livermore’s advice to “always sell what shows you a loss and keep what shows you a profit” or similarly the Wall Street adage to “cut your losses short and let your winners run.”

Sources and additional links for reference:

https://www.ft.com/content/72a116f2-b3d3-11e1-a3db-00144feabdc0

https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operator

http://www.investopedia.com/articles/stocks/08/capital-losses.asp

]]>- TED Spread = 3 month Libor (interbank lending) less
- Indicative of credit risk and perceived health of the banking system
- Values consistently above 50bps are relatively high (reached 4.5% after Lehman)
- The spread has trended gradually higher throughout 2016 (now above 50bps)
- WSJ article cites impact of new money market fund regulations as a factor
- The spread still remains a relevant indicator of interbank liquidity and risk

Sources and links for reference:

http://lexicon.ft.com/Term?term=Ted-spread

https://fred.stlouisfed.org/series/TEDRATE

http://www.wsj.com/articles/the-ted-spread-is-dead-baby-the-ted-spread-is-dead-1474571091

http://www.telegraph.co.uk/business/2016/10/30/economic-stress-as-world-runs-out-of-dollars/

]]>1 **US currency** – historically an inverse relationship (priced in USD)

2 **US inflation rates and money supply** – positively correlated (inflation hedge)

3 **Risk, politics and monetary system** – positively correlated (safe haven status)

4 **Demand** – c. 70% for jewelry, this is seasonal

5 **Supply** – from mines (c. 60%) and sales of existing gold (Central banks, c. 25%)

6 **Other commodities, global growth **– indicative of increased demand

7 **Real interest rates** – inverse relationship (non-interest bearing asset)

Sources and additional links for reference:

https://www.etfsecurities.com/Documents/Research-what-really-drives-gold-prices.pdf

https://www.pimco.com/insights/viewpoints/viewpoints/demystifying-gold-prices

http://www.sunshineprofits.com/gold-silver/dictionary/gold-real-interest-rates/

]]>