Bill Miller speaks

As manager of Legg Mason Value Trust, Bill Miller beat the market for 15 years in a row until his run ended last year. He also has probably has the most original mind in the investing business.

On how much to bet
On how much to bet
Bill Miller: The Kelly criterion is named after J.L. Kelly, Jr., who in 1956 wrote a paper drawing on work by Claude Shannon, the father of information theory. What Kelly did was to take an aspect of Shannon's work and derive a formula that tells you what fraction of your bank roll you should commit to any particular probabilistic endeavor, whether it be a gambling debt, or an investing debt.

If you were 100% certain that a particular investment would pay off at your expected rate then - according to the formula - 100% of your bankroll should go into that investment.

The formula also shows that if you were only, say, 60% sure, then only 20% of your bankroll should go into that proposition.

And if you have less than a 50/50 proposition, you shouldn't bet at all. Which again, makes perfect sense.

I would advise people basically to understand, A) people are overconfident, and B) that therefore whatever probability you think you have of being right, it's probably less than you think. So if you think you have a small edge, you probably don't have any edge at all.
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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.