The Kelly Optimization Model (from Robert Hagstrom, The Essential Buffett, p. 143)

The Kelly Optimization Model, often called the optimal growth strategy, is based on the concept that if you know the probability of success, you bet the fraction of your bankroll that maximizes the growth rate.  It is expressed as a formula:

                        2p – 1 = x

where 2 times the probability of winning (p) minus 1 equals the percentage of the total that should be bet (x).  For example, if the probability of beating the house is 55 percent, you should bet 10 percent of your bankroll to achieve the maximum growth of your winnings.

The Warren Buffett Way by Robert G. Hagstrom

Business Tenets

1.      Is the business simple and understandable from your perspective as an investor?

2.      Does the business have a consistent operating history?

3.      Does the business have favorable long-term prospects?

Management Tenets

1.      Is management rational?

2.      Is management candid with its shareholders?

3.      Does management resist the institutional imperative?

Financial Tenets

1.      Focus on return on equity, not earnings per share.

2.      Calculate “Owner Earnings”.

3.      Search for companies with high profit margins.

4.      For every dollar of retained earnings, has the company created at least one dollar’s extra market value?

Value Tenets

1.      What is the value of the business?

2.      Can the business currently be purchased at a significant discount to its value?

(Notice how this follows what was stated by Warren Buffett on CNBC)