What is the FatKelly?
The FatKelly answers the most important question for the Fractional Social Trader of today: How much should I buy? It is simple, and provably makes betting/investing better. Don’t take just our word for it: Warren Buffett, Charlie Munger, Mohnish Pabrai, and Bill Gross, and other impressive financial types love it too.
How does it work?
The Kelly criterion is a time-tested formula for sizing bets or investments. The idea is simple, and has been called Fortune’s Formula: Given a sum of money to invest, allocate it in proportion to your edge/odds (The edge is the amount of gain Vs loss. The odds, the chances of a gain Vs loss).
The FatKelly, is our extension of the traditional Kelly criterion. With two modifications:
- We use Options data implied win/loss probabilities and expected returns, and
- Make fractional adjustment to preserve dry powder for opportunities ahead
How do I use it in my trading?
It’s a three step process:
- Consider how much money you have to invest (the purse/cash you’re willing to risk without FDIC insurance)
- Source and screen available investments/bets on the basis of edge and odds (Surprise: Social-media and Options data do help)
- Pick the ones you like and use some type of modified Kelly to size the bet given your purse
Check out the 💎 Oracle if you like. It is a tool we made for ourselves and friends to make these steps easier.
Where can I learn more? (References)
There is some math, but it is surprisingly simple. Examples and some simple formulas can be found in the references below and the others they cite.
- The Kelly Criterion: You Don’t Know the Half of It, CFA Institute
- Option Prices Imply A Probability Distribution, Global Capital
- Understanding the Kelly Capital Growth Investment Strategy, CAIA
The 💎 Oracle Design Principles: SAVER
Simple - to understand and explain
Actionable - to use and test
Value - for users. Saves money/time/effort/pain
Enthusiastic - energize with exciting possibilities
Reliable - always works and signals are robust