The Mathematician Who Bet Less Than His Own Formula - How much of your portfolio is measured
Updated: Sep 17
Samso Insights · The Investor's Playbook · Part 2
Part 2, Foundations
In 1969 a mathematician used the Kelly criterion, a formula for working out how much of a portfolio a single position should take, to size the bets in his own fund. Then he deliberately bet less than it told him to, giving up a quarter of his growth rate to do it. Samso Research House went back to his written account of why.
Noel Ong · Samso Research House · Investor Education
Samso Insights | Investor Education | Investor's Playbook | Samso Investing Series |
W H A T T H I S P I E C E C O V E R S 1.00 Where this sits in the series The Playbook so far, and a note on the vocabulary 2.00 A formula, and a decision to disobey it The opening scene, 3 November 1969 3.00 What the Kelly fraction asks for The two inputs the formula needs, and why they are hard to know 4.00 The case for betting less, and what it costs Thorp's half-Kelly reasoning, in his words 5.00 What twenty-eight years of it produced Thorp's track record, and what it does and does not prove 6.00 Seven events have to go right, in order, on an ASX resources project Why a cap beats a calculation when the odds cannot be known 7.00 The case for betting the full fraction The standing counterargument, in its strongest form Noel's own account 9.00 Samso's own reading of it The closing view 10.00 The vocabulary, in plain English Terms collected in one place Every source, numbered |
1.00 — W H E R E T H I S S I T S I N T H E S E R I E S
Part 1 introduced the formula, this one goes to the mechanics - how much of your portfolio is measured.
S E R I E S C O N T E X T This is the second article in Samso's Investor's Playbook, an open-ended series reporting the working methods of accomplished investors, researchers and risk managers from primary sources. Part 1 introduced the Kelly criterion, a formula for deciding what fraction of capital to risk on a single position, as one of several independent arrivals at the same conclusion, that a position's size should be decided deliberately and in advance. It stopped short of the mechanics. This article picks the formula back up through one professional who used it to manage real money for nearly three decades, and who wrote down why he chose not to use it exactly as written. The series continues from here with an article on compound growth over decades, using Warren Buffett's own long run of results as its primary document. |
A note on the vocabulary. Every technical term in this piece is explained in plain English where it first appears. All of them are collected again, for reference, in a box near the end of the article, immediately before the references. |
2.00 — A F O R M U L A , A N D A D E C I S I O N T O D I S O B E Y I T
