“First, to calculate the expected value of an investment don’t use the average (also called the arithmetic mean); use the geometric mean. The difference is simple, but powerful.

Imagine you have three investment options, each equally likely. They return 100%, 50% and 0%. The arithmetic mean/average/expected value is 50%: (100+50+0)/3. The geometric mean is 0%: cubic root of (100500). The Kelly criterion says don’t invest. Quite a different result.

Second, size your investment properly. Invest too much and bankruptcy looms. Bet too little, and your returns won’t amount to a pile of beans.

How do you calculate how much to bet? Kelly criterion says to bet more the greater your edge and the likelihood of success.

KC = W - (1-W)/R

KC = kelly criterion (the percentage of your balance sheet to invest) W = probability of winning R = win/loss ratio…”

Tom Tonguz

Professional venture capitalists use it…

Until next year,

You Man,

Max Cantor

The author makes the point that Goldman 2007 RSU were underwater until November 2016. Ok, what did you expect from that market?

“One reason Bastiat escaped the carnage in the financial sector in 2008 (caused by imprudent risk-taking) was because we avoided companies with large stock option overhangs.” -A.M.
Wells Fargo, it seems, survived it quite resolutely.

“We believe that the expectations of cashing in on significant stock gains might well have encouraged the improper sales practices which lead to the forfeiture and elimination of $91.3 million in incentive awards granted to these two individuals [Wells Fargo executives]”. The Wells Fargo case seems to have been a bottom-up as much as top-down exercise in reckless risk behavior.

Quote of the Day: “Privacy and secrecy: the true treasures of nobility.” -Christopher Ruocchio, Empire of Silence

“Insider buying that flows from option exercises provides far less confirmation of employee commitment than actual open-market purchases with after-tax income.” Well, yes, I guess it was not the employee who initiated.

“An estimated 90% of employees – sell their stock immediately after exercise.” Ok, Luis Vuitton doesn’t take options for payment. How do you know now how many will buy the stock with the after-tax income? You don’t. You surmise they’ll be more that do it.

Let’s step away for a moment from the banking industry, and let’s look at the pay structure of public investment firms. If we ignore profit-sharing arrangements specific to these funds (carry-interest), most of the wealth of top executives comes from dividends. Dividends come from ownership.

Bloomberg Law:” [Leon Black of Apollo] elects to take a $100,000 salary, no bonus, and no cut of any deal profits, but derives most of his wealth from the company’s dividends—the same per-share amount given to public shareholders. In total, he received $191.3 million last year from his base compensation and dividends, up 45 percent from 2016, Apollo reported.”

No matter what, wealth comes from ownership. But for millennials, I guess ownership needs some guarantees. Guarantees that don’t exist.

CONCLUSION


“When the market is doing great, I want it [the stock]. When it is not doing doing so well, I don’t want it! If Luis Vuitton was taking my options for payment, I’m good.”

Signed: Millennial Stud  Bum