It's OK to put in 1% as a learning experience.

A professional investor would typically put in a somewhat larger amount if there is a real edge.

One approach is the Kelly criterion, which says that if you want to maximize the growth rate of your portfolio over the long run, the amount to invest is edge/odds. In other words, if you have a big edge you invest more, if the risk/volatility around that edge is high you invest less.

However, even assuming you actually know the edge and odds accurately, the Kelly criterion position size takes a LOT of risk and volatility to maximize your growth rate. In general you would have an x% chance of losing 1-x% of your entire stack at some point in the future, ie a 50% chance of losing 50%, a 10% chance of losing 90%. Nevertheless, if you lived forever, that's the risk you would want to take to maximize your growth rate.

On the one hand, the Kelly Criterion, the long run persistence of an edge in equities in the form of the equity risk premium, and an understanding of human psychology all suggest that people don't really take enough risk.

There are 2 very good and a few not-so-good reasons to take less than the Kelly-optimal risk.

The first is you don't live forever, and it's perfectly rational to give up a big chunk of the growth rate for a MUCH lower risk of blowing up and impacting your lifestyle and opportunities of your loved ones.

The second, which is most important, is that you never really know the edge and the odds, best you have is a guesstimate. And if you take even a little more risk than Kelly-optimal, you will fall prey to the gambler's curse. Consider what happens if I give you a coin-flip where I give you 5x on your money when you win. If you bet all your money on each flip, you are guaranteed to go broke. Bet even a little too much, and you magically turn a huge edge into a guaranteed big money-loser.

But most people never even approach Kelly-optimal betting. They are risk-averse, and extremely loss-averse. Pro money managers could never tolerate the swings involved.

Warren Buffett put something like 40% of his portfolio into American Express in 1963. His view of value investing is to invest as if you have a lifetime 20-hole punch card. Every decade-ish long market cycle, you will have a few really great opportunities. Invest so at the end of your lifetime investing career, you'll have accumulated 20-odd meaningful positions in really great companies.

It's worth pointing out that EVERY time Buffett has underperformed, there has been a litany of articles about how he has lost his touch. Partly it's because it makes interesting copy, and people love to build heroes up and tear them down. But partly it's because the game involves taking risk and sometimes pain in the short run. And non-investors don't get that. You're an idiot if you underperform in the short run. Value investing works in the long run because it's hard and inflicts pain in the short run.

For the apprentice investor, it's even harder. So it's important to keep bets no larger than your personality can comfortably withstand. If 1% is it, that's what it is. Don't look for approval from anywhere else. It's good that you are erring on the low side...a lot of people get overconfident and then blow up, or blow out a good position because they can't stand the pain when they are down.

Over time, you want to get more comfortable trading closer to a Kelly-optimal size, without going over the edge of your personal pain threshold. As a small investor, you have some disadvantages in information flow, resources to apply to investing, but you have a big edge: the only person you need to please is yourself. You don't need to do a goddamn thing if you don't want to, you can be opportunistic and you can take as much or as little risk as you like. Personally, playing poker helped me a lot ... you get an intuitive feel for how often you're going to lose when you have the edge, and get comfortable betting big when you have that edge, because you know in the long run it's going to work out.

Also recommend William Poundstone's Fortune's Formula, which is an awesome read on Bell Labs' Kelly and Shannon, who invented information theory, and applied it to investing along with MIT colleague Ed Thorp, who invented blackjack card-counting and started one of the first, most successful hedge funds, and the occasional mafioso and degenerate gambler.

And you won't go wrong reading all of Buffett's essays and letters.

http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/

http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf

http://www.amazon.com/The-Essays-Warren-Buffett-Corporate/dp/0966446119

[TL; DR] Bet small while you're learning. Get comfortable with taking risk when you really know what you're doing and have an edge. Learn the Kelly Criterion. Read Warren Buffett. Play some poker.

I'll give you some books to use as a starting point. You want to start out as generally as possible and then follow what interests you. Someone can give you a list of top books, but if they don't fascinate you enough to really dig in deep and reflect on them to sate your own curiosity, you'll just be scratching the surface. I don't care what it is, you can make money anywhere in the markets. So starting generally will help you find out what direction to go.

So, that said, these are the ones I'd recommend starting out with
https://www.amazon.com/Market-Wizards-Updated-Interviews-Traders/dp/1118273052
https://www.amazon.com/Reminiscences-Stock-Operator-Edwin-Lef%C3%A8vre/dp/0471770884
https://www.amazon.com/gp/product/1400063515/
https://www.amazon.com/gp/product/0684840073/
https://www.amazon.com/gp/product/0809045990/

Some less conventional ones I really liked
https://www.amazon.com/gp/product/1578645018/
https://www.amazon.com/gp/product/1422121038/

Chaos theory describes some properties that pop up again and again in markets. I really liked this one.
https://www.amazon.com/Deep-Simplicity-Bringing-Order-Complexity/dp/140006256X

I also highly recommend finding a few good books on behavioral investing, just to get acquainted with the common mistakes investors make (how you can avoid them, and how you can exploit them). I don't have a lot here because the books I read are outdated and you can find better. So one example:
https://www.amazon.com/gp/product/0470067373/

But in general reading about psychology will help you understand the world better, and that's always a good thing.
https://www.amazon.com/Flow-Psychology-Experience-Perennial-Classics/dp/0061339202

Hi I'm not sure if these are the books you would enjoy, but I do have a couple of them in my pocket list:


Personally in recent years I'm interested in topics about algorithms/cryptology and economics, so The Code Book by Simon Singh, Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone, The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall, these are the ones of my all time favorite "history" books about math and science and their applications. : )


I can still come up with another (popular) book, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, but I didn't really enjoy the book, guess I didn't agree some of the conclusions in that book. But maybe you would find it interesting. :)


Hope this helps! ☺️

>Kelly criterion, interesting formula but it doesn't apply to bitcoin, because p is highly disputed. It's a one time event - there's just no way to even estimate it.

You can do scenario analysis to apply it:

• If bitcoin goes 20x with probability 10% (and to zero otherwise), invest 5% of your money.
  
• If bitcoin goes 100x with probability 10% (and to zero otherwise), invest 9% of your money.
  
• If bitcoin goes 50x with probability 50% (and to zero otherwise), invest 49% of your money.
  
• etc.
  
  The range of values for p and b that you find believable, will give you a range for the fraction of your money you should be investing. Many traders only invest a fraction (eg half) of what Kelly dictates, because Kelly feels pretty bold to most. "The Kelly Criterion marks the boundary between audaciousness and madness."
  
  Even if you only make one single (long term) bet on bitcoin, Kelly still applies, as long as you keep making other bets with your investments later. However, it only applies to lump sum investments. It does not apply if you have a continuous income stream from which you invest $x every month, say.
  
  When professional traders give advice on position sizing, it is almost always based on some (fractional) Kelly argument. The book 'Fortune's Formula' by William Poundstone about this is fantastic.

I can think of two that I've read that are good stories in addition to being informative.

Fortune's Formula by William Poundstone

This is a good book that talks about a system (a money-management method called the Kelly Criterion) that has roots in information theory and applications to stock market investing as well.

Here's a snippet of a review:
"Fortune's Formula is a fascinating study of the connections between such seemingly unrelated topics as gambling, information theory, stock investing, and applied mathematics. The story involves the stunning brainpower of men such as MIT professor Claude Shannon, who single-handedly invented information theory, the science behind the Internet and all digital media; Ed Thorpe; and John Kelly of Bell Laboratories, who developed the "Kelly criterion," a now-legendary investment strategy for maximizing growth while controlling risk. Initially, Shannon and Thorpe took Kelly's theory to Las Vegas and applied it to roulette and blackjack. Later, they took it to Wall Street and cleaned up--Shannon made a personal fortune while Thorpe created the highly successful hedge firm Princeton-Newport Partners. They both discovered that Kelly's system was particularly effective when applied to arbitrage (minute price differences that result from market inefficiencies). As Poundstone ably demonstrates, the merits of Kelly's criterion are still hotly debated today."

http://www.amazon.co.uk/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/

I also second the recommendation of /u/AndrewRichmo of "21" (originally published under the title "Bringing Down the House")

Hope this helps.

The Poundstone book fortunes formula has a lot on Shannon. And it is great

You need to know some programming to develop a model, if you learn web scraping that will be enough to gather data for a model. You should be able to learn how to do this online.

For books, I'd highly recommend reading these:

Fortune's Forumula - A great book about the Kelly Criterion but touches on a whole range of subjects, a fantastic read.

The Signal and the Noise - Very famous book about prediction in general.

Conquering Risk - Very good book about sports betting (relatively unknown)

Calculated Bets - About creating a model and automated betting system for a relatively unknown sport.

Who's #1? - A book about rankings systems, aimed at ranking sports teams but the authors previously wrote a book on ranking websites (like google search algorithm type stuff). The basis for my dota model came from this book.


I'd recommend everyone to read Fortune's Formula and The Signal and the Noise, even people not interested in modelling. They're both awesome reads.

Calculated bets is a pretty cool read if you're interested in modelling, the author has a really quirky writing style that's entertaining.

Conquering risk is basically about exploiting bookmakers, picking off mistakes. Not really about modelling but still pretty cool.

Who's #1 is a really good intro to making a model for predicting sports imo, there's some very simple ones that will get you started.

I apologise if I'm going to be direct here, but I think I can see you have the ability to come up with great insights but you're just shy of getting it right.

You establish the call to look for value bets here:

> So generally in the first round the top ranked players would play someone who is unseeded in the tournament. Even in the second round the chances of the top two or three players playing unseeded players is extremely high.

> Of course the betting lines tend to correspond to the mismatch but there are in-play betting lines which have not quite caught up with the trends.

This is good. I like the fact that you've spotted a solid bet but that you recognise that bookmakers often offer poor value on those and you need to look further afield for value. And then…

> For example if the number one seed player is playing against an un-seeded player in the first round, generally their odds will be as low as 1/40 or even 1/100. However, the odds for them to win their own service game will likely be closer to 1/12.

Oh dear. The reason why those odds are 1/12 is because the true odds are more like 1/10, and there might be no value there. You need to show that in fact the true odds are more like 1/15 by grabbing some historical data, and doing some analysis, and showing it if you can.

You then develop a system where you assume that games where the favourite serves to open the set or to win the set they are more likely to lose them, without showing any actual numbers. Why are the odds still 1/12 if the true odds change in these games? This could be a great understanding of value if you had stats to back you up.

Then this sentence:

> If you roll your bet, a $10 bet would see approximately a $30 return. So from an initial 1/40 bet, you have increased your odds to 2/1

No. No, no, no, no, no.

No.

Please, read up on Kelly criterion. If you can identify true odds, and you can identify the odds being given to you, you can identify edge/value and you can therefore identify the optimal staking plan between games that is mathematically proven to increase your bankroll optimally.

It's not a "system". It's not a guess. It is mathematic proof that given true odds and odds being offered it is trivial to work out what percentage of your bankroll you should bet.

Just rolling like this is guaranteed to kill you off almost every time.

This is a great book on the subject if you don't like the idea of reading academic papers: http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990

And then this:

> If you are brave enough to follow this system through both rounds letting the bet roll, your $10 initial stake would grow up to as much as $2,500.

No, because you're betting 100% of the bank roll on it - you have a huge odds-on chance of losing your bank roll. This sentence suggests you have paper-traded the system but not actually done it, otherwise you would know this.

And you'd think "well, what if I bet half the bank roll? Or 75%? Or 25%?" and then suddenly you'd plot these things on a graph using historical results, and you'd spot the apex and then you would think - ah, there is a sweet spot here which increases my bank optimally.

From that you can work out through the kelly criterion your edge by rearranging the formula.

Please stop giving anecdotes, use data, show what is going on. If you don't want to give it all away to bookmakers so the edge disappears, either don't write about it, or conceal pieces of data.