How much of your portfolio does a good investment idea deserve? Kris Abdelmessih of Moontower joins Matt Zeigler to explain why having an edge is only part of the decision: position size can determine whether favorable odds translate into long-term growth or damaging losses.
Through a coin-flipping experiment and everyday examples, Kris makes the Kelly Criterion accessible without a complicated derivation. The conversation explores the difference between expected returns and compounded wealth, why growth-maximizing bets can still be uncomfortable, and how uncertain probabilities make a case for betting less. From portfolio decisions to insurance and extended warranties, the goal is to build better intuition about how much risk to take.
Topics covered:
How a favorable coin-flipping game exposed costly mistakes in bet sizing
Why maximizing the expected payoff of one bet differs from maximizing long-term compounded growth
How oversized bets can undermine an otherwise profitable opportunity
The Kelly Criterion's three inputs: probability of winning, probability of losing, and payoff
Why a constant percentage of your bankroll means changing the dollar amount after wins and losses
How different payoffs change the appropriate size of a bet
Applying the framework to hypothetical self-insurance and extended-warranty decisions
Why full Kelly can involve substantial drawdowns, and the tradeoffs of fractional Kelly
Working backward from a position size to the odds needed to justify it
Allowing for uncertainty in your estimates and preserving capital for future opportunities
Chapters: 00:00 Position sizing and the favorable coin-flip experiment 04:45 Why a good bet can produce bad outcomes 13:49 The Kelly Criterion formula explained 18:10 Adjusting your bankroll and accounting for the payoff 23:03 Applying Kelly to a self-insurance decision 30:25 Full Kelly, drawdowns, and reasons to bet less 34:59 Working backward from bet size and evaluating warranties 41:09 Volatility drag, uncertain odds, and the experiment's results 46:09 How much capital does your edge deserve?
No information discussed in this podcast should be construed as investment advice. Securities discussed may be held by the hosts and guests, their firms or their clients.
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