I have written earlier in my blog on managing the personal financial portfolio and asset allocation which I follow personally, you can read it here. But I am no genius, so writing this post to help you understand a very popular stock investment, asset allocation and money management strategy known as “The Kelly Criterion”.
First a word on who is Kelly?
John Kelly was a physicist working with AT&T’s Bell Laboratory. He developed the Kelly Criterion to assist long-distance telephone signal noise issues in AT&T. In 1956, John Kelly published a paper titled A New Interpretation of Information Rate, now available as a book – Bet Smart: The Kelly System for Gambling and Investing. In the paper, he draws an analogy between the outcomes of a gambling game and the transmission of symbols over a communications channel. This is basically an allocation technique also called the Kelly strategy, Kelly formula, or Kelly bet, that we can follow in our investments that you will read in this article. Kelly’s original paper can be found here ( not easy to understand, lots of mathematics there). In the paper, Kelly described a simple and elegant way for investors to strategically allocate capital in the face of uncertainty. This is what is now known as the Kelly Criterion.