It sounds like we might mostly agree in substance and a debate over semantics isn’t productive.
I agree that “the inputs to the Kelly formula are imprecise and therefore we should not mindlessly implement its recommendations.”
I agree that retail investors should not model their 401k allocations like Soros and Buffett.
Having run a factor neutral long short book I’m extremely familiar with the role of correlation and volatility in portfolio management and position sizing. As others have noted, there are extensions of Kelly (and related portfolio construction formulas) that account for correlations.
I disagree that risk-reward (broadly defined) shouldn’t be the primary bet sizing metric. I think many investors ignore risk reward calculations in their sizing and they would be better off if they paid attention to it. Many of the smartest investors I know have their entire sizing strategy based on risk reward.
To suggest that active investors should ignore risk reward / odds / whatever you want to call it, is wrong, in my opinion.
“ The fundamental principle of Kelly is that you know your edge, in the markets that is mostly untrue.” Most every professional investor I’ve met attempts to quantify the risk-reward of each trade and size accordingly. I agree that naieve investors engage in false precision eg assuming backtest sharpe for position sizing, or ignoring correlated risks. That makes them size too aggressively. But that doesn’t mean pros don’t try their best to estimate risk reward and size accordingly. Indeed many of the best traders ever (Buffett, Soros) put on massive bets when the risk reward were highly in their favor.
I agree that “the inputs to the Kelly formula are imprecise and therefore we should not mindlessly implement its recommendations.”
I agree that retail investors should not model their 401k allocations like Soros and Buffett.
Having run a factor neutral long short book I’m extremely familiar with the role of correlation and volatility in portfolio management and position sizing. As others have noted, there are extensions of Kelly (and related portfolio construction formulas) that account for correlations.
I disagree that risk-reward (broadly defined) shouldn’t be the primary bet sizing metric. I think many investors ignore risk reward calculations in their sizing and they would be better off if they paid attention to it. Many of the smartest investors I know have their entire sizing strategy based on risk reward.
To suggest that active investors should ignore risk reward / odds / whatever you want to call it, is wrong, in my opinion.