QAV S01E28 — How To Structure A Portfolio

In this book, Joel Greenblatt provides a straightforward and accessible guide to value investing. He introduces a 'magic formula' that helps investors identify and purchase good businesses at below-average prices. The formula, explained using simple math and humor, has been extensively tested and proven to be effective in beating the market and professional managers. The book also explores why success often eludes individual and professional investors and why the formula remains viable even after widespread knowledge of it. Updated editions include data and analysis from the recent financial crisis and model performance through 2009.

In 'Fortune's Formula', William Poundstone examines the Kelly Criterion, a mathematical formula developed by John L. Kelly Jr. and Claude Shannon at Bell Labs. This formula aims to maximize the long-term growth rate of wealth by determining the optimal fraction of capital to bet on each wager. The book recounts how this formula was used by Shannon, Kelly, and MIT mathematician Edward O. Thorp to succeed in Las Vegas casinos and later in the stock market through arbitrage and hedge funds. It also discusses the broader implications of the Kelly Criterion on risk management, financial strategies, and the psychology of human behavior in high-stakes decision-making.

Against the Gods: The Remarkable Story of Risk chronicles the intellectual journey that has led humanity from relying on oracles and soothsayers to using sophisticated tools of risk management. The book delves into the history of probability, starting from ancient civilizations and their limitations in understanding chance, to the modern era where risk is quantified and managed. Bernstein discusses how the development of probability theory and risk management has been a key factor in distinguishing modern times from the past.