AFTER finding a good stock to invest in, what percentage of the portfolio should you allocate to your investment idea?
In 1956, John Kelly Jr., a Texan scientist from Bell Labs, created the formula for position sizing bets from which someone should expect a positive return. It was published in the Bell System Technical Journal entitled A New Interpretation of Information Rate. Kelly, who was interested in information theory, had investigated the effect of inside information and how it affected uncertainty. He initially used it to analyze long-distance telephone signals but quickly realized it could apply to betting as well.
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