Understanding how this interpretation of kelly criterion helps the trader
Three important things worth remembering about Kelly when applied to real world edges: 1) Full Kelly staking is gut wrenchingly volatile. While it maximises the growth of the bankroll, it does so in a way that still leaves you very likely to experience massive (50%+) reductions in capital. Most long terms users of Kelly tend to stick in the 1/4 to 1/2 Kelly unit range to try and stay sane and retain a margin of error. See below for how large the typical swings can be with full Kelly:  2) Garbage in, garbage out. If you are making errors in pricing your actual edge, Kelly becomes very wrong very fast, easily leading you to a high chance of ruin if you are over estimating your true edge. As most people do massively over estimate their edges, Kelly simply pushes them far into territory where risk of ruin is high. 3) A Kelly user prefers to back likely outcomes over non likely ones, even to the point where they prefer a smaller % edge if the chances of winning are better. Compare the below comparison of growth between two betting scenarios (decimal odds, so for the percantage chances do 1/odds):  In this case, despite the percentage edge on the red bet being higher than that of the green, in terms of bankroll growth it ends up only being roughly as good to a kelly gambler as the smaller edge on the more likely event. This has an obvious effect on the types of edges you should be seeking out if given choices between liklihoods. The goal of the kelly criterion strategy is to find a balance between preservation of starting capital and returns. One of extreme you could bet the entirety of your account on one trade, which would maximize your returns if you win, but leave you unable to further invest if you lose. On the other extreme, you could bet the smallest amount of capital possible over the course of several trades to increase the probability that you'll even out to 70% accuracy over time. But this method would be extremely slow.  So for your case, investing 40% each time is one way to find an optimal balance between these two extremes. Use this as a rule of thumb though, because your own situation and investing goals may differ from the goal of  optimal growth. I don't know too much about the kelly criterion, but going by the other answers it sounds like it could be quite risky depending how you use it. I have been taught the first thing you do in trading is protect your existing capital and any profits you have made, and for this reason I prefer and use Position Sizing (PS). The concept with PS is that you only risk a small % of your capital on every trade, usually not more than 1%, however if you want to be very aggressive then not more than 2%. I use 1% of my capital for every trade. So if you are trading with an account of $40,000 and your risk R on every trade is 1%, then R = $400. As an example, say you decide to buy a stock at $10 and you work out your initial stop to be at $9.50, then our maximum risk R of $400 is divided by the stop distance of $0.50 to get your PS = $400/$0.50 = 800 shares. If the price then drops after your purchase, your maximum loss (subject to no slippage) would be $400.  If the price moves up you would raise your stop until your potential loss becomes smaller and smaller and then becomes a gain once your stop moves above your initial purchase price. The aim is to make your gains be larger than your losses. So if your average loss is kept to 1R or less then you should aim to get your average gains to 2R, 3R or more. This would be considered a good trading system where you will make regular profits even with a win ratio of 50%.
"Been a long while since I've read it but if I remember correctly with quotational loss Graham refers to an unjustified decline in stock price because of Mr. Market's fear and loathing where the business prospects of the company are actually still sound.  This is opposed to ""actual"" loss of capital which he would consider to be a company going bankrupt or just more generally turning out to have way worse business prospects than expected with the justified decline in stock price that entails." Your understanding of the stock market is absolutely correct theoretically. However there is a lot more to it. A stock on a given day is effected by a lot of factors. These factors could really be anything. For example, if you are buying a stock in an agricultural company and there was no rainfall this year, there is a big chance that your stock will lose value. There is also a chance that a war breaks out tomorrow and due to all the government spending on the war, the economy collapses and effects the prices of stocks. Why does this happen? This happens because bad rainfall or war can get people to lose confidence in a stock market. On the other hand GDP growth and low unemployment rates can make people think positive and increase the demand in a stock driving the prices up. The main factor in the stock market is sentiment(How people perceive certain news). This causes a stock to rise or fall even before the event actually happens. (For example:- Weather pundits predicted good rainfall for next year. That news is already known to people, so if the weather pundit was correct, it might not drive the prices up. However, if the rainfall was way better than people expected it to be it would drive the price up and vice versa.   These are just examples at a basic level. There are a lot of other factors which determine the price of the stock. The best way to look at it(In my personal opinion) is the way Warren Buffet puts it, i.e. look at the stock as a business and see the potential growth over a long period of time.  There will be unexpected events, but in the long run, the business must be profitable. There are various ways to value a company such as Price to earnings ratios, PEG ratios, discounted cash flows and you can also create your own. See what works best for you and record your success/failure ratio before you actually put money in.  Good Luck, well well, good question, worth a discussion, the more filters you add to your strategy (volatility in this case), the lower its predictive power. i mean, one could further filter it by day of the week, whether prices are above or below a 200 day moving average...etc. Because someone smarter than you by 50 IQ points (a quant) will depart their larger position long before you have a chance to see it coming. Your stop losses are useless as the market will open with the issue below your sell price. Your trade even if place at the same mine would settle after theirs. don't piss in the tall grass with the big dogs. If they are wrong or right does not matter you will be haircut or whipsawed. "By their agreements with the central counterparty - in the US, the exchange or the Options Clearing Corporation, which interposes itself between the counterparties of each trade and guarantees that they settle. From the CCP article: A clearing house stands between two clearing firms (also known as member firms or participants). Its purpose is to reduce the risk a member firm failing to honor its trade settlement obligations. A CCP reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (also called ""margin deposits""), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the member firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting member's collateral on deposit. Exercisers on most contracts are matched against random writers during the assignment process, and if the writer doesn't deliver/buy the stock, the OCC does so using its funds and goes after the defaulting party." Thank you for replying. I'm not sure I totally follow though, aren't you totally at mercy of the liquidity in the stock? I guess I'm havinga hard time visualizing the value a human can add as opposed to say vwapping it or something. I can accept that you're right, just having a difficult time picturing it "Well said. And I get it, really I do. Rational means something very specific in the theoretical model of EMH, and it's not the same way that ""rational"" is usually used.  When a person actually gets to the point where he can trade on the stock market, you expect they would have information like ""know which stock you're trading"". Maybe these people didn't.  And even if we assume people have perfect information, they still make mistakes. Regularly. Repeatedly. Sometimes predictably. And those mistakes can overwhelm the right-price-finding effect of EMH." "I'm not sure the term actually has a clear meaning. We can think of ""what does this mean"" in two ways: its broad semantic/metaphorical meaning, and its mechanical ""what actual variables in the market represent this quantity"". Net buying/selling have a clear meaning in the former sense by analogy to the basic concept of supply and demand in equilibrium markets. It's not as clear what their meaning should be in the latter sense. Roughly, as the top comment notes, you could say that a price decrease is because of net selling at the previous price level, while a price rise is driven by net buying at the previous price level. But in terms of actual market mechanics, the only way prices move is by matching of a buyer and a seller, so every market transaction inherently represents an instantaneous balance across the bid/ask spread. So then we could think about the notion of orders. Actual transactions only occur in balance, but there is a whole book of standing orders at various prices. So maybe we could use some measure of the volume at various price levels in each of the bid/ask books to decide some notion of net buying/selling. But again, actual transactions occur only when matched across the spread. If a significant order volume is added on one side or the other, but at a price far away from the bid/offer - far enough that an actual trade at that price is unlikely to occur - should that be included in the notion of net buying/selling? Presumably there is some price distance from the bid/offer where the orders don't matter for net buying/selling. I'm sure you'd find a lot of buyers for BRK.A at $1, but that's completely irrelevant to the notion of net buying/selling in BRK.A. Maybe the closest thing I can think of in terms of actual market mechanics is the comparative total volumes during the period that would still have been executed if forced to execute at the end of period price. Assuming that traders' valuations are fixed through the period in question, and trading occurs on the basis of fundamentals (which I know isn't a good assumption in practice, but the impact of price history upon future price is too complex for this analysis), we have two cases. If price falls, we can assume all buyers who executed above the last price in the period would have happily bought at the last price (saving money), while all sellers who executed below the last price in the period would also be happy to sell for more. The former will be larger than the latter. If the price rises, the reverse is true." I wouldn't put too much stock in the guidance generically... it's more a measure of confidence in the company. When you listen to the earnings calls and start following a particular analyst, you'll understand where they come from when they kick out a number. "I am guessing that when you say ""FRENCH40"" and ""GERMAN30"" you are referring to the main French and German stock market indices.  The main French index is the CAC-40 with its 40 constituent companies. The main German index is the DAX, which has 30 constituents.  The US30 is presumably the Dow Jones Index which also has 30 constituents. These are stock market indices that are used to measure the value of a basket of shares (the index constituents).  As the value of the constituents change, so does the value of the index. There are various financial instruments that allow investors to profit from movements in these indices.  It is those people who invest in these instruments that profit from price movements.  The constituent companies receive no direct benefit or profit from investor trading in these instruments, nor does the government." "You are probably going to hate my answer, but... If there was an easy way to ID stocks like FB that were going to do what FB did, then those stocks wouldn't exist and do that because they would be priced higher at the IPO. The fact is there is always some doubt, no one knows the future, and sometimes value only becomes clear with time. Everyone wants to buy a stock before it rises right? It will only be worth a rise if it makes more profit though, and once it is established as making more profit the price will be already up, because why wouldn't it be? That means to buy a real winner you have to buy before it is completely obvious to everyone that it is going to make more profit in the future, and that means stock prices trade at speculative prices, based on expected future performance, not current or past performance. Now I'm not saying past and future performance has nothing in common, but there is a reason that a thousand financially oriented websites quote a disclaimer like ""past performance is not necessarily a guide to future performance"". Now maybe this is sort of obvious, but looking at your image, excluding things like market capital that you've not restricted, the PE ratio is based on CURRENT price and PAST earnings, the dividend yield is based on PAST publications of what the dividend will be and CURRENT price, the price to book is based on PAST publication of the company balance sheet and CURRENT price, the EPS is based on PAST earnings and the published number of shares, and the ROI and net profit margin in based on published PAST profits and earnings and costs and number of shares. So it must be understood that every criteria chosen is PAST data that analysts have been looking at for a lot longer than you have with a lot more additional information and experience with it. The only information that is even CURRENT is the price. Thus, my ultimate conclusive point is, you can't based your stock picks on criteria like this because it's based on past information and current stock price, and the current stock price is based on the markets opinion of relative future performance. The only way to make a good stock pick is understand the business, understand its market, and possibly understand world economics as it pertains to that market and business. You can use various criteria as an initial filter to find companies and investigate them, but which criteria you use is entirely your preference. You might invest only in profitable companies (ones that make money and probably pay regular dividends), thus excluding something like an oil exploration company, which will just lose money, and lose it, and lose some more, forever... unless it hits the jackpot, in which case you might suddenly find yourself sitting on a huge profit. It's a question of risk and preference. Regarding your concern for false data. Google defines the Return on investment (TTM) (%) as: Trailing twelve month Income after taxes divided by the average (Total Long-Term Debt + Long-Term Liabilities + Shareholders Equity), expressed as a percentage. If you really think they have it wrong you could contact them, but it's probably correct for whatever past data or last annual financial results it's based on." "I would change that statement to ""very few people can CONSISTENTLY beat the market "". Successful strategies will get piled into and reduce returns. Markets will pick up inefficiencies, but at the same time they do exists. Tons of interesting reading especially in regards to value. Is there a risk premium that we don't know for value? Or is it a market behavior thing?" It is not so useful because you are applying it to large capital. Think about Theory of Investment Value. It says that you must find undervalued stocks with whatever ratios and metrics. Now think about the reality of a company. For example, if you are waiting KO (The Coca-Cola Company) to be undervalued for buying it, it might be a bad idea because KO is already an international well known company and KO sells its product almost everywhere...so there are not too many opportunities for growth. Even if KO ratios and metrics says it's a good time to buy because it's undervalued, people might not invest on it because KO doesn't have the same potential to grow as 10 years ago. The best chance to grow is demographics. You are better off either buying ETFs monthly for many years (10 minimum) OR find small-cap and mid-cap companies that have the potential to grow plus their ratios indicate they might be undervalued. If you want your investment to work remember this: stock price growth is nothing more than You might ask yourself. What is your investment profile? Agressive? Speculative? Income? Dividends? Capital preservation? If you want something not too risky: ETFs. And not waste too much time. If you want to get more returns, you have to take more risks: find small-cap and mid-companies that are worth. I hope I helped you! Mostly, when an equity's price rises, its statistical and implied volatilities fall and vice versa. The reason why is a mathematical phenomenon mixed with the reality that a unceasingly falling asset price will soon not exist, skewing the results with survivorship bias.   Since volatility is standard deviation of price indexes, a security that changes in price by the same amount every day will have lower volatility, so a rising price will have lower implied volatility because its mostly experiencing positive daily price change while a recently falling price will have higher volatility because factored together with the positive price changes, the negative price changes will widen the standard deviation of the securities price index. Quantitatively, any change, in or out of one's favor, is a risk because change is uncertain, and any uncertainty is a risk. This quantitative interpretation while valid runs almost totally counter to the value opinion, that a lower price relative to value is a lower risk than a higher price relative to value, but both have their place in time. Over long time periods, it's best to use the value interpretation, quantitative for shorter.  Using the opposite has hastily destroyed many a fund manager. I'm honestly not well versed on healthcare ETFs. I have seen a few mentioned here and there on various threads around /r/investing and /r/wallstreetbets. My pro-Vanguard bias would lead me to looking most closely at VHT, but there seem to be [many other great looking picks](http://etfdb.com/type/sector/healthcare/) out there such as IBB, XLV, and IHI, among others. Right now I am generally concerned about valuations in technology and perhaps simply in general, but we'll see what happens.  As I craft my goals for the near and long term, I would favor the defense industry ($ITA), technology (broad definition -- $VGT, $V, $AAPL, $BABA, various video games companies short term), healthcare (above), some specific international exposure (such as $EWGS), and boring stuff ($VOO, $VTI).