The Kelly Equation and AIM are largely incompatible, I think. The reason I think so, is a standard piece of investment advice, that IMO also applies to AIM: cut your losses and let your winners run. Standard investment advice has two things to say about gambling and investing:
- investing is part gambling, because you risk money for a greater return
- investing is not gambling, because in gambling the players are fleeced.
Just look it up on the net. According to the first take, whatever you do, how well you pick your stocks, you will always pick some bad ones. Don't hesitate to get rid of them, and try again. If you never ever pick any winners (or not enough to offset your losses), you are doing something wrong. Now letting winners run makes it very difficult to come up with a value of E, I would say. So no Kelly equation for B&H and B&H like schemes like AIM and Reverse Scale Investing.
The KE becomes applicable when you use both stop loss and stop gain schemes (and/or time limited holdings, say a month or a year or whatever). Formulate a stock picking strategy, and backtest (or forward test) your holding scheme. As soon as you find a strategy with a net gain, you look at the losers and the gainers, calculate p and E, and drop them in the KE for optimum investment. This style of investing is very uncommon, AFAIK, and the combination with the Kelly equation even more. But I might be wrong here, because both seem to occur more often in futures trading and commodities trading, where I am rather ignorant.
Now when you combine AIM with selling out at the first sell point, or Synchrovest with selling out at a fixed point, you might get a bit closer to the KE. But I think it really only applies to the stock and contract churners. You need huge numbers to make probabilities work.
Regards,
Karel
