The Kelly Formula, and its application to investing has been discussed by Charlie Munger, Monish Pabrai, and other legends in the value investing community. A few months ago, we presented commentary from Peter Lupoff, founder of Tiburon Capital Management. We saw some of his new commentary on the Kelly Formula and Event-Driven Investing and he allowed me to share it on the site. Enjoy.
- Kelly applies to sequential bets with, therefore, no correlation. Professionally run pools of capital are done so in a portfolio with underlying “bets” influenced by macro factors, markets and each other. There is some inherent correlation.
- Gambling games are won and lost in ways that can be statistically derived. Movement and terminal value of investments have idiosyncratic properties.
- Determining the “edge” in gambling is quantitative and precise. Determining the “edge” in investments is most often qualitative and based on personal perspective, and therefore hard to define precisely.
- Professionally run investment pools rarely have the ability to place highly concentrated bets with no care for short term volatility, while seeking long term absolute returns. In the real world, there are competing objectives.