Book Review: The Kelly Capital Growth Investment Criterion

by: David Merkel, CFA

I have not read this book. I read almost all books that I review, so I disclose when I have merely scanned a book such as this.

Why scan? First, I didn't ask for the book. Second, it is 800+ pages long. Third, it is a series of academic articles defending and attacking the Kelly Criterion - it will have a very specific audience that cares about the academic side of the debate. The popular side is covered by the book, "Fortune's Formula," which I have favorably reviewed here.

The simple way to phrase the argument for the Kelly Criterion is this: you have an advantage versus the markets for whatever reason. You have an edge on average, and the odds are tilted in your favor. You size your bets as a ratio of edge over odds. If your edge is durable, and the odds are calculated right, the optimal decision leads to the best compound growth of capital on average.

Samuelson sits in his ivory tower, where only efficient markets exist. Those of us that are practitioners know that the markets are hard, but not efficient.

To me, the Kelly Criterion is intuitive, whereas the ideas of Modern Portfolio Theory are a stretch. They don't fit the way the market operates.

Who would benefit from this book: If you are really interested in the Kelly Criterion debate , and are willing to pay up to get a good summary of the debate, it is available here. Note: you have to like math. If you want to, you can buy the book here: The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic) (World Scientific Handbook in Financial Economic Series).

Disclosure: This book came out of the blue; did not ask for it.