Kelly criterion and probability, stock will go down after purchase

• Answer: People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what's called outcome bias, which is they judge things on their outcome, and not on their process.
• Question: What's the Kelly criterion?
  Answer: What it tells you is what fraction of your bank roll you should commit to any particular probabilistic endeavor, if you know the probabilities that pertain to it. And if you know those preconditions, you will either maximize your bankroll at the fastest possible rate, or you'll minimize your loss at the slowest possible rate.
  The rough formula, is:
  2p - 1
  where p is the probability [converted from percentage to decimal form]. So, to make it easy, if you were 100% certain that a particular investment would pay off at your expected rate, then 2 times that p is 2.0, minus 1, yields 1. That means 100% of your bankroll should go into that investment.
  Now if you were only 60% sure, then it would be two times .60, which is 1.20, minus 1, equals .20. So 20% of your bankroll should go into that proposition.
  It also shows that if you have less than a 50/50 proposition, you shouldn't bet at all. Which again, makes perfect sense.
• You have to be confident that you have an edge, And if you can't identify that edge, you probably don't have it. And if you can't identify it, you probably shouldn't commit the capital to it.
• Answer: I would advise them basically to understand, A) people are overconfident, B) that therefore whatever probability you think you have of being right, it's probably less than you think. If you think you have a small edge, you probably don't have any edge at all.
• You know, Bernard Baruch said nobody buys at the bottom and sells at the top except for liars. So what follows from that is, if you're not buying at the bottom and selling at the top, then that stock will go down after you bought it. And it will go up after you sold it.
• Answer: Right. So you need to understand that your stock will go down after you buy it, and it will go up after you sell it. But what you want it to do is go down immediately after you bought it, and be lower then. You don't want it to be lower three years, or five years, or ten years. If you understand this, then the strategy of being willing to lower your average cost [by buying more when a stock drops] is a great strategy.
• Question: I have a theory that great investors are not unemotional, but inversely emotional: They get worried when the market is making most people happy, and they feel good when everyone else is worried about it. Ben Graham had that quality, and so does Warren Buffett. Do you see that in yourself?
• Answer: [veteran trader] Richard Dennis got these 10 people he was going to teach how to trade according to his system. And the system was mechanical. There was no judgment involved. And as it turned out, that after two months of trading, he was the only one of the 10 people that actually followed the system.
• And the reason was, all these behavioral things. Because the system showed you lots of losses. And then it would tend to show you big gains. The losses made people nervous, and so the whole point of the book is that Dennis actually had understood or internalized, that there was a whole plethora of behavioral anomalies that will keep people from behaving optimally in capital markets.
• Can an individual investor do what you've done - beat the market for years ?
  Answer: Oh, sure. I think that individuals [are not hampered by the obstacles] that prevent many professionals from behaving in optimal ways.
  And, more importantly, a thoughtful individual investor doing a moderate amount of homework can easily do better than the S&P 500.
  Because that portfolio which is diversified, is just allowed to evolve. They just let the portfolio evolve over time.