MI374: Fortune’s Formula: The Scientific Betting System For Beating Wall Street w/ Shawn O’Malley

The Intrinsic Value Podcast - The Investor’s Podcast Network

The Investor's Podcast Network

Business, Education, Investing

4.6 • 592 Ratings

🗓️ 21 October 2024

⏱️ 54 minutes

🔗️ Recording | iTunes | RSS

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Summary

In today’s episode, Shawn O’Malley (@Shawn_OMalley_) discusses the formula used by some of history’s best investors to systematically beat the market averages. It’s not a secret formula for winning if you don’t have any investing edge, but it is a system for maximizing wealth over time by properly sizing bets based on your conviction in terms of how favorable bets are for you ( your “edge.”) You’ll learn about the great minds of Bell Labs behind the Kelly formula, how Ed Thorpe used the Kelly formula to beat the dealers in Las Vegas, which investors have used the Kelly formula and found success with it, how to define having an “edge” in investing and what that can mean for you, the controversies surrounding the Kelly formula, and why the Kelly formula isn’t better known, plus so much more! Prefer to watch? Click here to watch this episode on YouTube. IN THIS EPISODE, YOU’LL LEARN 00:00 - Intro 01:57 - The origins of the esteemed Bell Labs and how its research led to the Kelly formula’s creation 02:27 -How to define and use the Kelly formula 18:22 - Why the Kelly formula is helpful 23:40 - Why there are limits to the Kelly formula 25:17 - How Ed Thorpe beat the dealer and the markets with the Kelly formula 28:22 - How Claude Shannon’s approach to beating the markets with the Kelly formula differed from Thorpe’s 36:38 - What it means to have an edge in markets 38:52 - Why the Kelly formula is controversial 41:02 - How to think about your own edge in markets 41:44 - Why the Kelly formula isn’t better known And much, much more! *Disclaimer: Slight timestamp discrepancies may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Kyle and the other community members. Check out Fortune’s Formula by William Poundstone. Check out Beat the Dealer by Ed Thorpe. Read Beat the Market (free PDF) by Ed Thorpe. Bell Labs’ history. Read about the Information theory. The Kelly Formula, explained. William Thorndike's book The Outsiders. Check out the books mentioned in the podcast here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Follow our official social media accounts: X (Twitter) | LinkedIn | Instagram | Facebook | TikTok. Check out our Millennial Investing Starter Packs. Browse through all our episodes (complete with transcripts) here. Try Kyle's favorite tool for picking stock winners and managing our portfolios: TIP Finance. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts. SPONSORS Support our free podcast by supporting our sponsors: Fiscal.AI Connect with Shawn: Twitter | LinkedIn | Email HELP US OUT! Help us reach new listeners by leaving us a rating and review on Spotify! It takes less than 30 seconds and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

Transcript

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0:00.0	On today's episode, I'll be going through what has been called the secret formula for
0:07.3	succeeding in casinos, racetracks, and investing.
0:11.2	Investing is not gambling, but they do share similarities.
0:14.1	Both deal with uncertainty, risk, and financial payouts, and many great investors are also
0:18.9	excellent gamblers.
0:20.6	I recently read the book Fortune's Formula, The Untold Story of the Scientific
0:24.4	Betting System that beat the casinos in Wall Street by William Poundstone.
0:28.9	If you're skeptical, good because you should be, things that sound too good to be true
0:33.5	almost always are.
0:35.0	This formula is less a secret guide to infinite riches and more a
0:38.7	disciplined way to think about making bets. To some extent, every investment is a bet.
0:44.2	A bet that a company's management will continue to treat shareholders well. A bet that competition
0:49.3	will not consume a company's returns. A bet that a company's new product will be a big hit, or
0:55.0	maybe even a bet that a company will turn its fortunes around.
0:58.7	Buying attractively priced stocks isn't as uncertain as buying lottery tickets, but it is
1:03.2	still a bet based on some assumptions.
1:05.6	Therefore, I think it's important for investors to understand the science behind making
1:09.3	good bets.
1:10.6	So I'll be sharing my favorite
1:11.9	takeaways and anecdotes from Poundstone's book today with the hope that I can help you learn
1:16.3	a thing or two about making good bets, either in investing, gambling, or any other part of your
1:21.4	life that deals with uncertainty. The approach outlined in the book is actually widely used by
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