Money and Finance
- Links
Bill Gross' latest Investment Outlook: Goodnight Vietnam (LINK) Robert Shiller on CNBC (LINK) John Hempton on CNBC (LINK) Hempton also recently re-recommended the book Fatal Risk: A Cautionary Tale of AIG's Corporate SuicideLosing...
- Ed Thorp Quote
“If you have a really strong conviction about your edge, then the best thing to do is sit there and take your lumps. If, however, you believe there is a reasonable chance that you might not have an edge, then you better have a safety mechanism that...
- Ed Thorp On Npr (2010)
Thanks to Lincoln for passing this along. In 1962, Ed Thorp became every gambler's favorite mathematician when he published the first mathematically proven method for beating the dealer at blackjack. Thorp's work revolutionized the game. But he...
- Notes From The 3rd Annual New York Value Investing Congress By Marcelo Lima
Notes from 5 speakers: http://blog.valueinvestingcongress.com/2007/12/-.....-Mark Sellers at the 3rd Annual New York Value Investing Congress by Marcelo Lima - Mark Sellers of Sellers Capital spoke at length about the Kelly Criterion (you can read all...
- Bill Miller: What's Luck Got To Do With It?
This interview is from July of this year and since I don't believe I posted it before now, here it is.-Bill Miller on poker and investing - Question: Right. Who's Puggy Pearson, and why should anybody care? - Answer: Well, the late Puggy Pearson...
Money and Finance
Old Pros Size Up the Game
WSJ interview with Ed Thorp and Bill Gross.
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WSJ: What can your blackjack strategy tell us about how to manage risk in today's markets?
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Mr. Thorp: You have to make sure that you don't over-bet. Suppose you have a 5% edge over your opponent when tossing a coin. The optimal thing to do, if you want to get rich, is to bet 5% of your wealth on each toss -- but never more. If you bet much more you can be ruined, even if you have a favorable situation.
Mr. Thorp: You have to make sure that you don't over-bet. Suppose you have a 5% edge over your opponent when tossing a coin. The optimal thing to do, if you want to get rich, is to bet 5% of your wealth on each toss -- but never more. If you bet much more you can be ruined, even if you have a favorable situation.
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WSJ: Your key risk-management strategy is known as the Kelly Criterion. What is it?
WSJ: Your key risk-management strategy is known as the Kelly Criterion. What is it?
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Mr. Thorp: It's a formula Bell Labs scientist John Kelly devised in the 1950s for maximizing the long-term growth rate of capital. It tells you how to allocate your money among the choices available, and how much to invest as your edge increases and the risk decreases. It also avoids the over-betting that can ruin an investor who otherwise has an edge.
Mr. Thorp: It's a formula Bell Labs scientist John Kelly devised in the 1950s for maximizing the long-term growth rate of capital. It tells you how to allocate your money among the choices available, and how much to invest as your edge increases and the risk decreases. It also avoids the over-betting that can ruin an investor who otherwise has an edge.
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WSJ: What's your assessment of the state of hedge funds today?
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Mr. Thorp: In the last 15 years or so, there has been a large flow of capital into the hedge-fund world, from $100 billion in the early 1990s to $2 trillion now. But the amount of available investing opportunities hasn't increased that much. That has led to the over-betting phenomenon Bill and I were talking about, or gambler's ruin.
Mr. Thorp: In the last 15 years or so, there has been a large flow of capital into the hedge-fund world, from $100 billion in the early 1990s to $2 trillion now. But the amount of available investing opportunities hasn't increased that much. That has led to the over-betting phenomenon Bill and I were talking about, or gambler's ruin.
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Hedge funds started using a great deal of leverage to increase returns. But you can get wiped out if you bet too aggressively. A classic example is Long-Term Capital Management [the huge hedge fund that blew up in 1998]. We'll probably be seeing more of that now.
Hedge funds started using a great deal of leverage to increase returns. But you can get wiped out if you bet too aggressively. A classic example is Long-Term Capital Management [the huge hedge fund that blew up in 1998]. We'll probably be seeing more of that now.
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Mr. Gross: It's true that the available edge has been diminished, and that led to increased leverage to maintain the same returns. It's the leverage, the over-betting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people.
Mr. Gross: It's true that the available edge has been diminished, and that led to increased leverage to maintain the same returns. It's the leverage, the over-betting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people.
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Mr. Thorp: Any good investment, sufficiently leveraged, can lead to ruin.
Mr. Thorp: Any good investment, sufficiently leveraged, can lead to ruin.
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On a related note, I've been meaning to do a write-up one weekend on the Kelly Criterion, how I use it and how I believe it should be used in investing. Many opinions have been given on this topic but I believe a simplified, expected value approach that still involves the art behind valuation work is the correct one. Until then (or in case there is no then), here are a few related links:
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Book: Fortune's Formula
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Mauboussin: Size Matters
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William Poundstone site page (author of Fortune's Formula)
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Previous post and link: Bill Miller: What's luck got to do with it?
- Links
Bill Gross' latest Investment Outlook: Goodnight Vietnam (LINK) Robert Shiller on CNBC (LINK) John Hempton on CNBC (LINK) Hempton also recently re-recommended the book Fatal Risk: A Cautionary Tale of AIG's Corporate SuicideLosing...
- Ed Thorp Quote
“If you have a really strong conviction about your edge, then the best thing to do is sit there and take your lumps. If, however, you believe there is a reasonable chance that you might not have an edge, then you better have a safety mechanism that...
- Ed Thorp On Npr (2010)
Thanks to Lincoln for passing this along. In 1962, Ed Thorp became every gambler's favorite mathematician when he published the first mathematically proven method for beating the dealer at blackjack. Thorp's work revolutionized the game. But he...
- Notes From The 3rd Annual New York Value Investing Congress By Marcelo Lima
Notes from 5 speakers: http://blog.valueinvestingcongress.com/2007/12/-.....-Mark Sellers at the 3rd Annual New York Value Investing Congress by Marcelo Lima - Mark Sellers of Sellers Capital spoke at length about the Kelly Criterion (you can read all...
- Bill Miller: What's Luck Got To Do With It?
This interview is from July of this year and since I don't believe I posted it before now, here it is.-Bill Miller on poker and investing - Question: Right. Who's Puggy Pearson, and why should anybody care? - Answer: Well, the late Puggy Pearson...