The Tim Ferriss Show

#596: Edward O. Thorp, A Man For All Markets — Beating Blackjack and Roulette, Beating the Stock Market, Spotting Bernie Madoff Early, and Knowing When Enough is Enough

May 25, 2022

Join Edward O. Thorp, the mathematical mastermind behind blackjack and a savvy investor, as he shares his journey from physics to gambling and finance. He discusses innovative strategies that revolutionized card games and highlights the significance of a buy-and-hold investment approach. Thorp emphasizes the importance of recognizing when you have 'enough' and reflects on life lessons intertwining personal fulfillment and wealth. Listen in for his valuable insights on critical thinking in investing and the balance between success and happiness.

01:35:03

Episode guests

Edward O. Thorp

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Quick takeaways

Long-term investing in equities, particularly in the US market, provides higher returns compared to active trading and can be achieved by investing in an equity index fund or ETF.

Understanding and mitigating risks is crucial in investing and decision-making, and a risk-averse mindset can help protect one's financial standing.

Different investment strategies should be employed based on the time horizon, with a long-term perspective essential for retirement planning, using methods like the '4% rule' to determine a sustainable withdrawal rate.

Deep dives

Long-Term Investing: Buy and Hold Equities

The key to long-term investing is to buy and hold equities, particularly in the US market which has a historical average annual return of around 10-10.5% for the past couple of centuries. This outperforms most other investment strategies, as the majority of investors who actively trade often incur high trading costs, taxes, and fees, resulting in lower returns compared to the market index. Investing in an equity index fund or ETF is a simple and effective approach to benefitting from long-term compounding growth.

The Fundamental Attribution Error

01:21

Investing Your Endowment Fund

01:21

Anticipating and Preparing for Societal Changes

01:19

Investing: How to Stress Test Your Thinking

01:48

Intro

4min

From Physics to Blackjack: A Winning Journey

13min

Journey Through Fitness and Finance

20min

The Power of Buy-and-Hold Investing

4min

Investing Insights and Critical Thinking

32min

Reflections on Investing and Life Choices

14min

Recognizing the Value of Enough in Wealth and Success

2min

Reflections and Upcoming Curiosities

6min

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Edward O. Thorp is the author of the bestseller Beat the Dealer, which transformed the game of blackjack. His subsequent book, Beat the Market, coauthored with Sheen T. Kassouf, influenced securities markets around the globe. He is also the author of A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.

Edward was one of the world’s best blackjack players and investors, and his hedge funds were profitable every year for 29 years. He lives in Newport Beach, California.

Please enjoy!

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Edward fills us in on where he grew up, how he was educated, what made the application of mathematics to gambling such a compelling challenge, and why he rushed to publish his successful system after testing it in the real world. [04:51]

What reference material did Edward use in his first trip to the blackjack table in Vegas, and why was Claude Shannon at MIT — a person known to be difficult to reach — willing to spare five minutes to meet with him around this time? [12:01]

What method did Edward and Claude devise to beat roulette with the assistance of what MIT considers to be the first wearable computer? [15:11]

Edward looks great for a man in his 60s — which is especially incredible when you consider he’s 89! Is it just a case of lucky genetics, or does he follow some kind of mortality-cheating health regimen? Has his approach to remaining in shape changed over the years? [17:13]

How did finance and investing enter the picture for Edward? Where did this lead, and who did he meet along the way? [25:19]

What was it about Warren Buffett that made Edward come away from their first meeting convinced he’d someday be the richest man in the world? [34:22]

If Edward were teaching a seminar in investing to a modern student body (some of whom might not possess an aptitude for math), what frameworks would he impart to get them started? [38:55]

What lessons learned from investing are transferable to other areas of life? [43:50]

Even at 89, Edward considers himself a long-term thinker. How might those of us who struggle to think beyond the short-term be more like Edward? [45:59]

How did Edward suss out that something was fishy about the way the Madoff brothers were doing business 17 years before everybody else finally caught on? [50:58]

Exploring the mental models of externalities, the tragedy of the commons, and fundamental attribution errors. [59:15]

What you should be reading and listening to if you want to enact positive change in the world right now — politically or evolutionarily. [1:08:29]

What investors, aside from Warren Buffett, impress Edward — and why? [1:13:48]

How has Edward known where to draw the line between growing a business and withdrawing before it consumed all else in his life? What catalyzed his decision to wind things down? [1:17:48]

What does independence mean to Edward and how did he spend his time after winding down the investment side of things? [1:22:52]

Is there anything Edward’s particularly curious about learning right now? [1:24:27]

Pondering a conversation between Joseph Heller and Kurt Vonnegut and other parting thoughts. [1:26:37]

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