From Rags to Hedge Funds: A Journey of Innovation

What I learned from reading A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market by Edward Thorp. 

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[0:01] Ed Thorp’s memoir reads like a thriller—mixing wearable computers that would have made James Bond proud, shady characters, great scientists, and poisoning attempts. The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and, not least of all, fun. Thorp is also known to be a generous man, intellectually speaking, eager to share his discoveries with random strangers.  

[1:23] Ed Thorp is the first modern mathematician who successfully used quantitative methods for risk taking—and most certainly the first mathematician who met financial success doing it.  

[3:19] Ed was initially an academic, but he favored learning by doing, with his skin in the game. When you reincarnate as practitioner, you want the mountain to give birth to the simplest possible strategy, and one that has the smallest number of side effects, the minimum possible hidden complications. 

[4:33] As Warren Buffet said: “In order to succeed you must first survive.” You need to avoid ruin. At all costs. 

[6:48]  It is vastly less stressful to be independent—and one is never independent when involved in a large structure with powerful clients. It is hard enough to deal with the intricacies of probabilities, you need to avoid the vagaries of exposure to human moods. True success is exiting some rat race to modulate one’s activities for peace of mind. 

[7:51] Read the forward by Nassim Taleb 

[9:14] Ed’s 4 rules for learning 

First, rather than subscribing to widely accepted views—such as you can’t beat the casinos—I checked for myself. 

Second, since I tested theories by inventing new experiments, I formed the habit of taking the result of pure thought—such as a formula for valuing warrants—and using it profitably. 

Third, when I set a worthwhile goal for myself, I made a realistic plan and persisted until I succeeded. 

Fourth, I strove to be consistently rational, not just in a specialized area of science, but in dealing with all aspects of the world. I also learned the value of withholding judgement until I could make a decision based on evidence.  

[11:15] I admired the heroes who, through extraordinary abilities and resourcefulness, achieved great things. I may have been inspired to mirror this in the future by using my mind to overcome obstacles. 

[14:29] They told us that my aunt Nona and her husband had been beheaded in front of their children. 

[16:45] At its core, this is a book about how to live well. 

[17:55] Ed develops simple systems for everything in his life. 

[20:37] If anyone knew whether physical prediction at roulette was possible, it should be Richard Feynman. I asked him, “Is there any way to beat the game of roulette?” When he said there wasn’t, I was relieved and encouraged. This suggested that no one had yet worked out what I believed was possible. With this incentive, I began a series of experiments. 

[21:15] “Try to figure out what your skill set is and apply that to the markets.” Thorp likes to stay within his circle of competence. This is a hallmark of people who are rational. In that sense, Thorp reminds me of Warren Buffett. A Dozen Things I learned from Ed Thorp  

[21:50] I also believed then, as I do now after more than fifty years as a money manager, that the surest way to get rich is to play only those gambling games or make those investments where I have an edge.  

[23:50] He wrote a book that sold over a million copies: Beat the Dealer: A Winning Strategy for the Game of Twenty-One  

[26:48] In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. 

[27:52] Ed’s philosophy on life: My thoughts then were much like I expected his to have been: that acknowledgment, applause, and honor are welcome and add zest to life but they are not ends to be pursued. I felt then, as I do now, that what matters is what you do and how you do it, the quality of the time you spend, and the people you share it with.  

[30:01] Even though the Goliath I was challenging had always won, I knew something no one else did: He was nearsighted, clumsy, slow, and stupid, and we were going to fight on my terms, not his.

[33:09] A good defense keeps other people from taking your money. 

[36:39] History doesn’t repeat, human nature does: The frauds, swindles, and hoaxes, a flood reported almost daily in the financial press, have continued unabated during the more than fifty years of my investment career. But then, hoaxes, scams, manias, and large-scale financial irrationalities have been with us from the beginnings of the markets in the seventeenth century. 

[40:24] You are unlikely to have an edge on anything you hear in the news.  

[46:24] As we chatted about compound interest, Warren gave one of his favorite examples of its remarkable power, how if the Manhattan Indians could have invested $24, the value then of the trinkets Peter Minuit paid them for Manhattan in 1626, at a net return of 8 percent, they could buy the land back now along with all the improvements. Warren said he was asked how he found so many millionaires for his partnership. Laughing, he said to me, “I told them I grew my own.”   

[52:07] How Ed selected employees: For this to work, I needed people who could follow up without being led by the hand, as management time was in short supply. Since much of what we were doing was being invented as we went along, and our investment approach was new, I had to teach a unique set of skills. I chose young smart people just out of university because they were not set in their ways from previous jobs. Better to teach a young athlete who comes fresh to his sport than to retrain one who has learned bad form. 

[57:13] Life is really about spending time well.  

[1:01:45] When Princeton Newport Partners closed, Vivian and I had money enough for the rest of our lives. Though the ending of PNP was traumatic for us all, and the future wealth destroyed was in the billions, it freed us to do more of what we enjoyed most: spend time with each other and the family and friends we loved, travel, and pursue our interests. Taking to heart the lyrics of the song “Enjoy Yourself (It’s Later than You Think),” Vivian and I would make the most of the one thing we could never have enough of—time together. Success on Wall Street was getting the most money. Success for us was having the best life. 

[1:04:30] I learned at an early age to teach myself. This paid off later on because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund. 

[1:07:19] As Benjamin Franklin famously said, “Time is the stuff life is made of,” and how you spend it makes all the difference. 

[1:07:37] Whatever you do, enjoy your life and the people who share it with you, and leave something good of yourself for the generations to follow. 

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