A Response to Professor Paul A. Samuelson's Objections to Kelly Capital Growth Investing

The Kelly Capital Growth Investment Strategy maximizes the expected utility of final wealth with a Bernoulli logarithmic utility function. In 1956 Kelly showed that static expected log maximization yields the maximum asymptotic long run growth. Good properties include minimizing the time to large asymptotic goals, maximizing the median, and being ahead on average after the first period. Bad properties include extremely large bets for short term favorable investment situations because the Arrow-Pratt risk aversion index is essentially zero. Paul Samuelson was a critic of this approach. His various points sent in letters to Ziemba are responded to. Samuelson's criticism is partially responsible for the current situation that most finance academics and investment professionals, except superior investors, do not recommend Kelly strategies. Samuelson's points are theoretically correct and sharpen the theory. They caution users of this approach to be careful and understand the true characteristics of these investments including ways to lower the investment exposure. His objections help us understand the theory better, but they do not detract from numerous valuable applications, some of which are briefly surveyed.