Episode summary
The Kelly Criterion and the One Rule That Keeps Investors Alive
How I Invest With David Weisburd
· · Hosts: David Weisburd · Guests: Ari Levy
Summary
Ari Levy frames his investing style around probability theory, risk control, and the Kelly Criterion rather than prediction. He traces that mindset back to sports statistics, card games, and a Stanford course on math and sports, then connects it to public markets where outcomes are less fixed and idiosyncratic risks can appear out of nowhere. His core point is that even attractive arbitrage only works if position sizing keeps a portfolio alive when something unexpected breaks the trade.
He argues that small-cap stocks remain structurally inefficient because they get less analyst coverage, face heavier compliance costs, and sit outside the focus of passive capital. That creates opportunities for investors willing to do more work, talk directly to management, and exploit gaps between public-market pricing and private-market value. Ari says his favorite setups are arbitrage-like trades and friendly activism, where ownership stakes of 5% to 15% can push boards toward better capital allocation, asset sales, or even a sale of the company.
He also says the market has changed enough that old deep-value rules are not always enough. Growth has outperformed value for decades, technological disruption can turn cheap businesses into value traps, and investors now need to pair low valuations with strong returns on invested capital. His approach has moved from classic deep value toward more selective, higher-quality bargains.
Key takeaways
- Ari Levy says the Kelly Criterion and position sizing matter more than being right on every trade, because unexpected events can still blow up seemingly safe arbitrage.
- He argues small-cap equities are less efficiently priced because they have less coverage, higher public-company costs, and less passive capital attention.
- Ari says his preferred opportunities are arbitrage-like trades and friendly activism, especially where a 5% to 15% stake can influence outcomes.
- He says many small public companies should be private if they are too niche, too small, and too expensive to maintain as public entities.
- Ari warns that technological change has made some classic value screens dangerous, so he now looks for cheap companies with strong returns on invested capital.
Notable quotes
“the catchall solution for that risk management is position sizing”
“small cap companies uh just get much less efficiently priced”
“My first love, my favorite are the more arbitrage trades”
“friendly activists”
“history would tell you to do that”
How the episode opens
You said that probability theory was your first love. What made you love probabilities from an early age?
Uh sports statistics. I would say number one would like to simulate baseball seasons uh when I was really little on the Apple 2e computer on a very uh early video game that didn't, you know, was uh pretty much mostly statistics and not not actually like interacting in the in the game as like a batter or pitcher, but just hitting SB if you're trying to steal a base. But I would simulate baseball seasons between, you know, you could have the 1927 Yankees play the 1955 uh Giants and have Willie Mays play against Babe Ruth.
And so I I was like just love that concept and trying to think about advanced statistics at a young age and and and just games of strategy. Played a lot of cards, try to figure out how to uh win things, make good riskadjusted asymmetric calculated bets effectively. And you ran a blackjack team when you were at Stanford.
What did you learn about that? And how does that relate to how you do public investing today?
I took a course my freshman year at Stanford. Uh this would have been 1997 uh called math and sports. That was my favorite class I I ever took.
Um professor Tom Cover uh at Stanford taught this freshman seminar. small group of 15 like-minded uh folks uh just thinking about this same kind of um you know game theory, probability theory in both uh sports which was the name of the class but also the deck of cards uh and professor Cover had his own blackjack team in the 70s and just great stories, fascinating statistics professor u and a couple of us uh from the class my friend Brad Griffith who founded game time uh which is um ticketing you online ticketing platform and I just took a real liking to it.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- kelly criterion
- position sizing
- arbitrage risk
- small-cap inefficiency
- public vs private investing
Companies and tickers mentioned
- TACO
- JACK
- Lakeview Investment Group
- Advisory Research
- Levy Acquisition Corp.
- Del Taco
- Jack in the Box
Watch the episode
Watch “The Kelly Criterion and the One Rule That Keeps Investors Alive” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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How I Invest With David Weisburd, this episode and its artwork belong to David Weisburd. Octagon is not affiliated with the show; this page is an independent summary.
