Mastering the Kelly Formula

In today’s episode, Shawn O’Malley (@Shawn_OMalley_) discusses the formula used by some of history’s best investors to systematically beat the market averages. It’s not a secret formula for winning if you don’t have any investing edge, but it is a system for maximizing wealth over time by properly sizing bets based on your conviction in terms of how favorable bets are for you ( your “edge.”)

You’ll learn about the great minds of Bell Labs behind the Kelly formula, how Ed Thorpe used the Kelly formula to beat the dealers in Las Vegas, which investors have used the Kelly formula and found success with it, how to define having an “edge” in investing and what that can mean for you, the controversies surrounding the Kelly formula, and why the Kelly formula isn’t better known, plus so much more!

Prefer to watch? Click here to watch this episode on YouTube.

IN THIS EPISODE, YOU’LL LEARN

00:00 - Intro

01:57 - The origins of the esteemed Bell Labs and how its research led to the Kelly formula’s creation

02:27 -How to define and use the Kelly formula

18:22 - Why the Kelly formula is helpful

23:40 - Why there are limits to the Kelly formula

25:17 - How Ed Thorpe beat the dealer and the markets with the Kelly formula

28:22 - How Claude Shannon’s approach to beating the markets with the Kelly formula differed from Thorpe’s

36:38 - What it means to have an edge in markets 

38:52 - Why the Kelly formula is controversial

41:02 - How to think about your own edge in markets

41:44 - Why the Kelly formula isn’t better known

And much, much more!

*Disclaimer: Slight timestamp discrepancies may occur due to podcast platform differences.

BOOKS AND RESOURCES

• Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Kyle and the other community members.
• Check out Fortune’s Formula by William Poundstone.
• Check out Beat the Dealer by Ed Thorpe.
• Read Beat the Market (free PDF) by Ed Thorpe.
• Bell Labs’ history.
• Read about the Information theory.
• The Kelly Formula, explained.
• William Thorndike's book The Outsiders.
• Check out the books mentioned in the podcast here.
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