Fortune's Formula by William Poundstone

Fortune’s Formula by William Poundstone

I just finished reading the book Fortune’s Formula by William Poundstone.  It is an entertaining book that provides the history behind the “Kelly Criterion”.  While I would not put this in the required reading category, the subject matter may be added to that list and I would still recommend reading the book.  For a younger investor, like me, it provided some historical knowledge and background that I was not aware of.  More importantly, the reason why I bought the book was to see if I wanted to further investigate the Kelly Criterion.  It was a great primer on the Kelly System and after reading this book I have decided that I will learn more about the subject matter as I think it may be quite useful. 

According to Wikipedia the Kelly Criterion is “a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any essentially different strategy in the long run.”  For my purposes I was looking to improve how I weight investments to create a higher absolute long-term return.  The Kelly Criterion is a way to do this.  It is not perfect because my assumptions (inputs) into the formulas will not be perfect and the only risk it takes into consideration is the risk of complete ruin.  Different weighting systems look at volatility as risk and for many people this is a real risk as they do not have the willingness to handle volatility.  However, I think of volatility as an opportunity and am looking for maximum long-term returns, which goes hand-in-hand with the Kelly system.  So, at least for my personal account the Kelly system would appear to be a perfect match.

For those looking to get a primer on the Kelly Criterion, learn about optimal position sizing, and get a history lesson this is an good book to read.  Plus it is an easy read and entertaining.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street