The rallying cries of the boldest meme stock and crypto traders are YOLO and BTFD – you only live once and buy the f*cking dip.
Sure, fine, but here’s an old school Wall Street concept that traders who feel like they are reinventing the wheel should consider. Actually it’s originally an idea applied to gambling, the Kelly Criterion. I wrote about it yesterday. There’s a great book all about Kelly’s idea by William Poundstone, “Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.”
Two of the smartest guys I know, Victor Haghani and James White from Elm Wealth, wrote a paper on how traders who really think their stocks or coins are going to the moon should approach their bets. Basically there are two things that can happen in a simplified world: You can be right and make a fortune or you can be wrong and lose everything – a distinct possibility with money-losing companies and new, unregulated financial instruments. Those with extremely high expectations. like Bitcoin going to millions of dollars or AMC’s stock going to $500,000 (yeah, really), should bet LESS, not MORE.
Once your payoff is gigantic, you’re taking an unnecessary risk by using a meaningful share of your savings to own something. Yet this is what lots of retail “apes” claim they are doing. They compound it by buying the dip every time it goes down. It’s also what Michael Saylor, CEO of software company Microstrategy, has done. He sees gigantic upside for bitcoin and has had his company borrow heavily to buy it. He owns a lot himself too. If he bet just half as much and turned out to be right then he would have more money than he could spend (he already does in fact), but if he’s wrong he’ll lose almost everything. Kelly allows you to make an optimal bet based on what you think will happen and maximize your payoff while avoiding ruin.