Thoughts On The Kelly Criterion For Optimal Asset Allocation

I don't personally use the Kelly Criterion, but that is something that you can try if you feel that it is a good match for you.

Of course, with stocks using the Kelly Criterion would be a subjective process, since you can't accurately specify the probability of success or failure.

Whatever method you use, it needs to be something that works for you. This will depend on what your personality is like, how much effort the plan takes to implement, and how much time you have to dedicate to the method. For example, I looked at an allocation method used by Benjamin Graham that required investing in 30 different stocks. After some time, I realized that this method does not work well for me, because it took too much time to implement, it was hard to find 30 suitable stocks according to my strict standards, and it was hard to keep an eye on so many different stocks.

So instead, I've found that a simple method worked best for me that allowed me to concentrate my focus on a smaller number of stocks that I could more easily keep track of.

I basically grew my wealth from starting with $5,000 investing the same way that I do now. However, with the lower amount I just invested in less stocks with the money more focused. And I had to wait for a higher return.

It might seem crazy to some people to invest so much of one's capital in one stock when starting out. But I understood that by focusing my money in the beginning, I could have lost it all, but it wouldn't have been that difficult to earn back $5000 of starting capital to start over. So by doing this, I was giving myself more opportunity to grow my wealth faster, but also more risk of losing my capital if not invested in a very good company. 

But later, when my balance climbed to $20,000, and more, it would have been much more devastating if I lost it all on one stock and it would have been much harder to make back $20,000 of starting capital, so as my account balance grew, I diversified more

This is what I did. You'll have to decide what is right for you though.

I invested about 80% of that $5,000 in one stock and always kept 20% in my account as a cash reserve for safe keeping.

As my money grew, I kept a similar percentage in cash reserve.

Since I was only investing in one company, I had to make sure that it was a great company that was very safe.

I also made sure that I bought it at a very low price (around its 52-week low price).

I would set a limit order to sell when it reached at least 5% gain.

I kept doing this until I doubled my money.

Now I had $10,000.

I did the same process while investing in 2 companies this time. Soon I reached $15,000 and I started investing in 3 companies. I just kept progressing this way with investing in more companies and gradually increasing the amount that I invest in each company as well.

Keep in mind that I also kept about a 20% amount of cash in my account. So this safe cash reserve amount kept increasing too.

If you stick to a common sense strategy and don't let your emotions control you, then you can do very well with stock investing. In addition, invest in what you know and what is right for you. Don't let others sway you. Make your own plan and stay the route as you see fit.

I hope this info is helpful for you.