TheSnapper

Current Bank: $546,47
Start Bank: $198,00

Mr. Kelly's Bank: $34,53
Mr.Kelly's Start Bank: $20,00

I only managed two bets yesterday and Mr. Kelly was shut down completely. The markets were very tight with few prices out of line, probably due to the high liquidity. Anyway, the bank continued to grind away a profit to a new all-time high of $546,47.

It still bothers me that Mr.Kelly is right and I should be placing larger bets...but I really must force myself. So, I will reluctantly agree to move up to half-Kelly stakes using half of my bank, currently I am using only a quarter of my bank. Mr. Kelly has been complaining that this over over-conservative and is costing me both time and money. So, OK, fine, I'll go along...although I've got a nervous feeling about this...
-------------------------------------------------------------------------------------------

SHANNON'S DEMON



Claude Shannon was a genius. He really was. He used to have some informal meetings at MIT, basically chat sessions, where he would discuss various ideas he had. They became so popular that they had to be moved to an auditorium.

One such informal lecture dealt with investing and noise in the marketplace. Shannon was very interested in noise, and the difference between noise and signals. The problem with investing in the markets, Shannon believed, was that there was too much noise -- the markets wandered up and down in a random walk most of the time. (And that's true if you think of it...if the stockmarket rises 10% over a year, that's 10% divided by 365 days...0.027% per day...that's almost nothing)Shannon believed it was far better to invest in the noise rather than try in vain to find the signal like most investors.

But how do you invest in noise? Shannon proposed an investment plan that looked like this: Take 50% of your money and invest it in stocks and 50% in cash. When the market rises, your stocks will be worth more than 50% of your total, so you sell them to return to 50%. When the market falls, your stocks will be less than 50%, so you buy more to return to your original 50% level.

What happens over time by always keeping a 50-50 balance is that you are buying "high" and selling "low" most of the time and harvesting the market noise. At the end of the year, the market may not have moved much, but you have gained all the up-and-down noise.

Someone asked Shannon if he used this method himself and he said no. The transaction costs in those days were far too high. That, and the taxes, would have made it unprofitable for Shannon to use.

Nowadays, this portfolio rebalancing is well-known and encouraged. Yet, few investors actually do it.

Times have changed since Claude Shannon's day. With most index and mutual funds today you are sheltered from taxes and transaction fees. And it doesn't have to be stocks. You can set up your own "demons" using gold, foreign currency or other assets. As long as the transaction fees and taxes are low, and you rebalance often and stay in it for the long term, you can profit substantially from Shannon's Demon.

Next time, I will talk about why it works and how it is connected with John Kelly and the Kelly Criterion.

Current Bank: $531,94
Start Bank: $198,00

Mr. Kelly's Bank: $34,53
Mr.Kelly's Start Bank: $20,00

Mr. Kelly extended his winning streak to 12 straight on the one bet he made yesterday. The big guy is approaching his first doubling, which I am sure he will celebrate with celebratory gunfire and a Texan BBQ.

He wants me to use more of my bank, but I am reluctant even though the stats show that he is right --- since the 8.03 I have made $78 profit using half-Kelly stakes and 25% of my bank. I thought this was rather impressive until Mr. Kelly pointed out that if I had used my whole bank and half Kelly Stakes I would have made $312, and if I had grown some balls, closed my eyes and gritted my teeth and followed Mr.Kelly's advice and gone for full bank, full-Kelly stakes, I would have made a whopping $640. (My bank would be over $1000 -- 5 times its original size!)

It shows you how much you can actually be losing by conservative staking.

--------------------------------------------------------------------------------
Remind me to find the time to talk a bit about Shannon's Demon next time. It's really fascinating stuff if you are into investing, gambling and making money  (...for nothing and your chicks for free...as the song goes)!

Current Bank: $534,84
Start Bank: $198,00

Mr. Kelly's Bank: $33,21
Mr.Kelly's Start Bank: $20,00

More bank highs for myself and Mr.Kelly. He has strung together 11 straight winners! (Well-done, big guy!) I briefly hit $550 over the weekend before falling back to $534.

Crazy technical problems and outages on Betfair this weekend. It only highlights why I had to give up trading as a viable strategy. It is just too unstable. You can't place your bank, or most of it, on a bet and then wait and lay it off, because it is becoming a common occurence that the site crashes and stops your lay bet being completed. The result is that you are making a massive overbet and taking insane risk. Mind you, I have gotten lucky a few times and escaped with a massive profit..but I have also been killed a few times, wiped out, by this. It is simple no way to trade (or bet), it is not a sustainable strategy in the long-term. (As many traders found out this weekend, I am sure!)


Now, I have no exposure to a Betfair crash. I place my bets and walk away. In the long run I am sure to be better off than traders getting crushed by these crashes. (Even using an alternative site is not a good enough guarantee for me as a trader...I'd need to keep enough money on both sites at all times. Then what about a power outage (that happened once to me...) or a computer problem(that happened twice...)? Simply...it wasn't worth it for me. Trading had to go.

------------------------------------------------------------------------------------

Current Bank: $517,11
Start Bank: $198,00

Mr.Kelly's Bank: $26,27
Start Bank: $20,00

Both of our banks hit new highs yesterday. I won $29,48 on 5 straight wins. Watch out for Mr. Kelly! He is on a 6-straight winning streak and his bank has climbed to $26,27. He's got that aggressive look in his eye again!

Since I adopted Mr.Kelly's staking advice my stats are quite encouraging:

Bets:18
Stake : $118,57
Profit: $63,37

Only $78,69 to go until the 2nd doubling of the bank is reached ($600). So, I am quite upbeat about things these days, but I have also got to be realistic. Kelly Staking gives...but it also takes away.

Florida here we come!

Current Bank: $487,63
Start Bank: $198,00

Mr.Kelly's Bank: $22,36
Start Bank: $20,00

Yesterday, I made 11 bets using half-Kelly Staking using 25% of my total bank. (Mr. Kelly isn't happy about that, but he will have to get over it...). I got up to over $22,00 in profit after a good run of 6 wins in  a row, then lost the last 2 races to wind up at $2,72 profit. Along the way my bank hit new highs over $500.

Mr. Kelly also had a solid day. He's won 4 straight and has climbed up to $22,36.

This shows you how Kelly Staking is related to the streaks of winners and losers. A good winning streak will pump up the bank fantastically quickly, but  a losing streak will deflate you again almost (but not as)quickly. Since you never know when a streak will start, each new bet could be the start of a very large profitable run. A Kelly gambler is concerned about the long run and in the streaks and slumps of betting far more than the actual bets themselves. All a Kelly gambler needs is an edge and the math will take care of the rest (except, of course, the psychology of the gambler, i.e. handling losing streaks, going on tilt, getting bored, etc..)

The interesting thing mathematically is that a pure-Kelly gambler always has a 50-50 chance of doubling his bank before he loses half of it (but never all of it). A half-Kelly gambler drastically reduces his bank volatility, with only a 25% reduction in potential profit compared to a full-Kelly gambler. This is why half-Kelly staking is often recommended for sports gambling as a good trade off between risk and profit for most gamblers.

Current Bank: $484,91
Mr. Kelly's Bank:$19,18

The bank increased $21,62 yesterday, and Mr. Kelly improved a few bucks to $19,18, even though he has only made 1 bet in the past 3 days (not his fault...)

I have been doing some thinking about why this bank is increasing so slowly compared to my other betting areas (soccer, tennis). I place several bets in the Place market. But in the soccer and tennis markets, I play one match at a time.One bet at a time and re-calculate the stake after each bet -- in effect, Kelly staking (which requires single bets and recalculation of stake after each bet).

To summarize, my tennis and soccer betting is probably more successful than the horse place markets exactly due to this. The profits are being re-invested and growing the bank. So, after some consultation with Mr.Kelly, he came up with the following changes to my staking plan:

John Kelly's Advice to The Snapper:
"Mr. Snapper..y'all need to do the following at once...

1. Make single bets per event, pardner...
2. Recalculate the stake based on yer bank after each bet (up after a win, down after a loss)
3. Betting stake ranges between 2.5% and 9.5% of bank per lay bet depending on the odds. (Half Kelly stake for a 5% edge)
4. Use yer whole bank, since y'all have no risk of losing it all."

--------------------------------------------------------------------------------

Well, it sounds good to me, except for #4. As a conservative punter, I think I would prefer to build up to making the massive bets that Mr. Kelly enjoys. So, I think I will use 25% of my bank as a kelly bank and start today making kelly bets. The idea is that nothing can grow your bank as fast as Kelly Staking, and if I am going to make it to Florida anytime soon I have to get this bank growing. The only trick is being sure of the edge. If the edge is actually greater than 5%, that's ok, but if the edge is less than 5% , or worse, negative, then no staking plan, not even Mr. Kelly's, can help. In fact, Mr. Kelly will turn against me in that case --- hence, I think I will omit point #4 in the advice from Mr.Kelly since in sports betting judging the edge can be a rather hit-or-miss affair.

Current Bank: $463,29
Start Bank: $198,00

Current bank : $490,93
Start Bank: $198,00
Mr. Kelly's Bank: $15,35


After an up and down sort of weekend, I ended $16,04 up. Mr. Kelly went down again, frustratingly!
I am going to let Mr. Kelly do all the back betting on Place Markets for me...I'm going to see if that will help him to get going better, with the only condition that he is not allowed to back a horse which I have laid. It makes the accounting easier and ensures that he will be getting better value backing bets... Meanwhile, I will stick to laying prices which have dropped too low.

What I am doing, for those of you just joining, is laying horses in the win and place markets when the odds have dropped too low before the race and for a few seconds into the race. I base my prices on the bookies prices. Basically, I am contrarian...laying the hot favourites as the steam in price.

Mr. Kelly will be backing in the place markets, he is running accumulator style bets,i.e. 1 bet per race, adjusting his stake upwards or downwards after each bet.

Current bank: $474,89
(Start Bank: $198,00)
Mr. Kelly's Bank: $15,27

Well, a new bank high was reached yesterday. I actually briefly went over $500 for the first time, so I am pleased about that. Thanks to all the comments and encouragement from all the new followers, nice to have you all aboard.

----------------------------------------------------------------------------

The Greatest Investor of All-Time:

Claude Shannon

Claude Elwood Shannon (April 30, 1916 – February 24, 2001) was an American mathematician, electronic engineer, and cryptographer known as "the father of Information Theory".[1]



...Shannon and his wife Betty also used to go on weekends to Las Vegas with M.I.T. mathematician Ed Thorp,[23] and made very successful forays in blackjack using game theory type methods co-developed with fellow Bell Labs associate, physicist John L. Kelly Jr. based on principles of information theory.[24] They made a fortune, as detailed in the book Fortune's Formula by William Poundstone and corroborated by the writings of Elwyn Berlekamp,[25] Kelly's research assistant in 1960 and 1962.[2] Shannon and Thorp also applied the same theory, later known as the Kelly criterion, to the stock market with even better results.[26] Over the decades, Kelly's scientific formula has become a part of mainstream investment theory[27] and the most prominent users, well-known and successful billionaire investors Warren Buffett[28][29], Bill Gross[30] and Jim Simons use Kelly methods.


...IN 1986 BARRON'S ran an article ranking the recent performance of seventy-seven money managers.. Claude Shannon, though not mentioned in the article, had done better than all but three of the pros. The Barron's money managers were mostly firms with up to a hundred people. Shannon worked with his wife and a decrepit Apple II computer.
The August 11, 1986, Barron's reported on the recent performance of 1,026 mutual funds. Shannon achieved a higher return than 1,025 of them.
When Warren Buffett bought Berkshire Hathaway in 1965, it was trading at $18 a share. By 1995 each share was worth $24,000. Over thirty years, that represents a return of 27 percent. From the late 1950s through 1986, Shannon's return on his stock portfolio was about 28 percent.
Shannon had long thought of publishing something on his investment methods. Apparently his ideas, though profitable in practice, never met his standards of originality and precision. Shannon's memory was starting to fail, too, making it unlikely he would ever complete such an article.

-----------------------------------------------------------------------------

So, Claude Shannon for about 30 years returned 28% compounded profit and HE WAS AN AMATEUR INVESTOR! How the hell did he do it? A real genius, to be sure, but he was no "Wizard of Wall Street" or "Oracle of Omaha". He apparently had little interest in money..a slightly off-beat inventor/thinker/dreamer (in the picture he is working on his mechanical mouse which can move through a maze by itself using magnets..one of the first applications of artificial intelligence).

I think I will talk a bit about "Shannon's Demon" next time. Stay tuned!

------------------------------------------------------------------------------

Current bank: $458,99
Mr Kelly's Bank: $15,23

A profit of $32,74 yesterday using a stake of $191,82.
I started trading my bets which were in profit by over 10% before the race yesterday. I'm still using the same strategy, except that I'm going to try and lock in the profits a bit more.

My thinking is that it will help to reduce volatility, reduce commission and boost profits long term. Anyway, we'll see how it goes.

March is off to a better start than all of February! Remember, this is a long-term game...if it was easy, everyone would do it.