Notes on

Fortune’s formula

The Untold Story of the Scientific Betting System that Beat the Casinos and Wall
Street

William Poundstone

Kelly System
• No other Money Management System has Higher Geometric Mean Returns
• Maximizes MEDIAN Wealth
o Exact Middle of the List
• Can Not Engineer Luck
o Can End up with less than the Median
• Over time Virtue of Kelly System becomes more apparent

Geometric Mean – More Wealth at the end of the Portfolio Select

Harry Markowitz – Utilizes function of long term investor should be denominate in

compound return not terminal wealth

Kelly Criterion = Edge/Odds

1/n = chance of downturn - Chance of downturn of ½ of your original bank roll is ½

2 Ways to Smooth Down Drawdowns

1. Fixed Fraction or Position Sizing

a. Stake less than the fully Kelly bet
i. Decreases Volatility drastically
ii. But Decreases the return
iii. ½ Kelly Bet
1. Full Kelly Bet = 10 % Return
2. ½ Kelly Bet = 7.5 % Return
2. Diversification
a. Very Low Correlation between Stocks