Anyone have any experience with the use of the Kelly criterion with investing?
https://en.wikipedia.org/wiki/John_Larry_Kelly,_Jr
The article references Jim Simons:
http://www.insidermonkey.com/hedge-fund ... ologies/5/
Kelly criterion and investing
Moderator: Global Moderator
Kelly criterion and investing
I am not a broker, dealer, investment advisor, or physician. My posts are not advice of any type and should not be construed as such. My posts are used at the sole risk of the reader.
-
MachineGhost
- Executive Member
- Posts: 10054
- Joined: Sat Nov 12, 2011 9:31 am
Re: Kelly criterion and investing
Sure, I've played around with it. It's best viewed as the the upper maximum to ever bet because if the future distribution of returns shifts to the left, it will become non-optimal and over-risky. If you want to learn more about it, look for Ed Thorp's book who used it extensively to make millions with his hedge fund.BP wrote: Anyone have any experience with the use of the Kelly criterion with investing?
https://en.wikipedia.org/wiki/John_Larry_Kelly,_Jr
The article references Jim Simons:
http://www.insidermonkey.com/hedge-fund ... ologies/5/
Edit: This is the book: http://www.amazon.com/Fortunes-Formula- ... 809045990/
Last edited by MachineGhost on Sun Mar 24, 2013 5:21 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Kelly criterion and investing
Thanks MG. Based on your response, I assume that your results did not lead you to believe that you had found the "magic" money making machine like RenTech?
I am not a broker, dealer, investment advisor, or physician. My posts are not advice of any type and should not be construed as such. My posts are used at the sole risk of the reader.
Re: Kelly criterion and investing
Search YouTube for "The Trillion Dollar Bet", a 48-minute BBC documentary that aired on Nova. It's a sobering account of what can happen if you rely too heavily on "proven" mathematical formulas when investing. Whenever you encounter an investment "system" that's designed to beat the market, just remember what happened to these guys.
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.
- H. L. Mencken
- H. L. Mencken
-
MachineGhost
- Executive Member
- Posts: 10054
- Joined: Sat Nov 12, 2011 9:31 am
Re: Kelly criterion and investing
Kelly doesn't lend itself very well to a portfolio, only one at a time trades. RenTech makes money because they use quantitative analysis, not because of Kelly. No form of money management will make a mountain out of a molehill.BP wrote: Thanks MG. Based on your response, I assume that your results did not lead you to believe that you had found the "magic" money making machine like RenTech?
That being said, Kelly is on my to do list to see if it can work at the portfolio level. The problem at the portfolio level is diversification is better done by equal-weighting or similarly to achieve more simultaneous trades. One at a time trades usually suffer from limited statistical significance, even though they can span a long period of time. Kelly assumes the probability of winning will not change which is not true in reality, trades will swing above and below the win percentage mean. It's far better to focus on risk by "risk targeting" and let the wins take care of themselves.
Last edited by MachineGhost on Tue Mar 26, 2013 3:44 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!