Kelly Criterion, Long-term value investing results, and some interesting lessons
I recently calculated my [Kelly Criterion %](https://www.investopedia.com/articles/trading/04/091504.asp), going through all 122 buys or sells of non-employer stock transactions in all of my accounts, all the way back to Aug 11th, 2011... which was the first day I decided to start applying what I learned from studying Joel Greenblatt's "The Little Book That Beats The Market".
I also took the opportunity to see if my value-investing approach yielded [alpha](https://www.investopedia.com/terms/a/alpha.asp) vs investing the same amount in the S&P500 as tracked by [SPY](https://www.etf.com/SPY#overview). This was absolutely the most tedious part, since I couldn't simply look at old statements but had to look up the closing prices of SPY on the same days that I bought or sold any other equities.
When calculating my Kelly %, I took into account dividends, and I likewise took into account dividends for SPY. Dividends were not re-invested, but were considered part of the overall returns.
Here's the results since Aug 11th, 2011:
* I had 55 gains vs 6 losses.
* My average gain was 47.75%
* My average loss was -15.52%
* My Kelly # is 85.83%.
* My overall portfolio return in that time period is 33.55%
This seems pretty good, but the S&P500 went on a record-breaking run during that same period. So I calculated what my performance would have been if I had invested equivalent dollar amounts in SPY for the same holding periods of each stock, again accounting for dividends.
When I calculated the SPY Kelly %, it returned an astounding 96.22%! I can see why many advocate for not thinking about it, and just buying and holding SPY.
But did I find alpha?
If I exclude my current holdings, I found that my stock picks beat SPY by 12.8%. Now that's pretty nice.
*However* I have some stocks that I fell in love with and held on for a long time, waiting for them to recover, and told myself that I could collect the dividends until they did so.
If I include all of my current holdings, which include some very recent purchases (ABBV, CSCO, RTX) and the companies I have held on to for far too long (GILD, MO) breaking Greenblatt's rule to sell stocks that are in the red just before the 1-yr holding period... what do my numbers look like?
I performed 0.13% *worse* than SPY.
That's a tough pill to swallow.
And it's tough thing to admit in a forum for value investors where I am a moderator!
But I am honest, and I am learning, and I want to help others learn from my mistakes.
So here's my key takeaways:
* Sell losing stocks quicker. Greenblatt advocates for selling right before the 1-yr holding period to take advantage of tax-loss harvesting. (Naturally you cannot tax-loss harvest in IRAs, but the rule should still apply.) Conversely, one can have a trailing stop-loss of perhaps -10%. I'll probably do both, and limit myself to a maximum of -10% on any stock, or will simply sell it if it is anywhere in the red after 364 days of holding.
* If I have idle cash looking for a good value investment, I'll just put it in SPY. When I see a good deal, I'll sell off whatever amount of SPY I need to free up some cash and make the investment.
Note: Greenblatt advocates for selling winning stocks after having held them for over 1-yr to take advantage of the long-term capital gains tax rates. (Again, not applicable to IRAs.) However, I chose to let my winners run and held some for very long terms, some of them for over half-a-decade. And I'm glad I did.
But on the other hand, I am selling GILD and MO first thing on Monday morning. Dammit.