Episode 11 - The Kelly Investor: Maximising Your Long-Term Wealth

In this episode, we discuss how we use the Kelly criterion in our own investing strategy. Investing is not a one-time event, and markets are not always efficient, as claimed by Harry Markowitz and his followers. Investing is instead a series of repeated similar bets, and markets are frequently inefficient. We can regularly find stock markets and sectors which have become cheaper than their long-run mean valuations. Given the above, why wouldn’t you look to place bets on high-probability events rather than risk losing your capital in expensive markets? Kelly developed a formula that showed how to invest fractionally and understand your edge. Kelly investing should lead you to the question: ‘What is your informational edge?’ In this episode Stephen tells us about one informational edge he uses - the CAPE ratio - and how it can be yours too, given its high correlation with expected returns. We discuss why understanding the Kelly criterion, capital growth theory, and position sizing are crucial to maximising your long term wealth. There will always be great opportunities in the future, so you must make sure you are around to capitalise on them by waiting for the fat pitch. Some of the key points we discuss in this episode include: -What is the Kelly Criterion? -A proven system for maximising your long-term wealth -THIS is what your information edge can be -It’s a big world out there, and there are many markets to choose from. Why limit yourself? -When the odds are in your favour, bet more (and when they’re not, bet less...or not at all). Download a free chapter of our book: https://www.lowrateshighreturns.com/book These are the books we mentioned in the episode. Check them out! Fooled by Randomness by Nassim Taleb: https://www.goodreads.com/book/show/38315.Fooled_by_Randomness The Warren Buffett Way by Robert G. Hagstrom https://www.goodreads.com/book/show/18613679-the-warren-buffett-way-workbook