A Man for All Markets (2017) Notes & Excerpts

In A Man for All Markets, Ed Thorp describes his life’s journey, from a prankster/tinkerer youth to beating the dealer in blackjack (and baccarat and roulette!) to successfully investing in derivatives, convertible arbitrage and other market-neutral systematic methodologies. Dr. Thorp is a pioneer in every field he’s touched, a real inspiration. After telling his life story, he gives some very solid practical advice for aspiring investors of any age. Of these, one of the best is making an annual balance sheet for your self/household to track your wealth creation over time.

Interesting facts about Dr. Thorp:

1. He wrote a book about how to beat blackjack and invented card counting.
2. He invented the Black-Scholes formula before Black-Scholes did.
3. In his investing career, he compounded returns over 20% for many years.
4. He created the first wearable computer to win at roulette.
5. He worked with Claude Shannon, who was the founder of information theory that’s a foundation to our current IT Information Age.

He was a curious kid. Always experimenting, sometimes getting into mischief and pulling elaborate pranks. (Seems pranksters can be quite intelligent, as long as their pranks are clever.)

He’s self-taught in many areas, including investing. Probably because it comes easy to him and he managed to figure out how to learn at a young age (took me longer). Being self-taught in finance and investing myself, I knew I was going to appreciate his stories in this area.

In investing, he takes a scientific approach, leveraging technology to execute arbitrage opportunities and stay market-neutral. He gives due respect to Buffet’s method, mainly on the basis of compounding with advantage of no taxes if you hold long-term. He doesn’t believe markets are efficient and gives several glaring examples (which are recurring) of market inefficiency.

• Random Characteristics of Stock Market Prices by Paul Cootner. [amzn] This is the book that got him interested in the market.
• Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger [wikipedia]
• Bill Gross on Investing [amzn]
• The Kelly Capital Growth Investment Criterion [amzn]
• Fortune’s Formula [amzn]
• The Snowball [amzn]
• Fooled By Randomness [amzn]

Selected Excerpts:

“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.”

“This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger.”

“Gambling is investing simplified. The striking similarities between the two suggested to me that, just as some gambling games could be beaten, it might also be possible to do better than the market averages. Both can be analyzed using mathematics, statistics, and computers. Each requires money management, choosing the proper balance between risk and return. Betting too much, even though each individual bet is in your favor, can be ruinous. “

“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.”

“As Warren and I talked, the similarities and differences in our approaches to investing became clearer to me. He evaluated businesses with the aim of buying shares in them, or even the entire company, so cheaply that he had an ample “margin of safety” to allow for the unknown and the unanticipated. In his view, such opportunities arose from time to time when investors became excessively pessimistic about an individual company or about stocks in general: “Be fearful when others are greedy and greedy when others are fearful.” His objective was to outperform the market in the long run and so he judged himself largely on his performance relative to the market.

     In contrast, I didn’t judge the worth of various businesses. Instead I compared different securities of the same company with the object of finding relative mispricing, from which I could construct a hedged position, long the relatively undervalued, short the relatively overvalued, from which I could extract a positive return despite stock market ups and downs. Warren didn’t mind substantial variations in market prices over months or even a few years because he believed that in the long run the market would be up strongly and by regularly beating it during its fluctuations his wealth would grow over time much faster than the overall market. His goal was to accumulate the most money. “

“That the market’s good years have to be better than its bad years just to come out even is a general rule. As an extreme example to make the point, using only month-end values throughout, the S& P 500 fell by 83.4 percent from its peak at the end of August 1929 to the close in June 1932. A dollar invested was reduced to 16.6 cents. For this 16.6 cents to become $ 1 again, the index needed to become 6.02 times as large, an increase of 502 percent. The wait was over eighteen years, until the end of November 1950. The rate of growth per year during this long recovery period was 10.2 percent, near the long-term historical average. “

“There is another kind of risk on Wall Street from which computers and formulas can’t protect you. That’s the danger of being swindled or defrauded. Being cheated at cards in the casinos of the 1960s was valuable preparation for the far greater scale of dishonesty I would encounter in the investment world. The financial press reveals new skulduggery on a daily basis. “

“To get quick approximate answers to compound interest problems like these, accountants have a handy trick called “the rule of 72.” It says: If money grows at a percentage R in each period then, with all gains reinvested, it will double in 72/ R periods.”

“Members of political parties react mildly to lies, crimes, and other immorality by their own but are out for blood when the same is done by politicians in the other party. “

“If you’re a one-marshmallow child who grew up to buy on credit at crushing rates of 16 percent to 29 percent annualized, and you ask me where to invest some free cash, the first thing I recommend is paying off your credit card debt. The interest is nondeductible and the saving is certain, so you’re earning a risk-free after-tax rate of 16 to 29 percent. The second thing I recommend is that you start investing some of your marshmallows, in order to enjoy more of them later, instead of gobbling them all immediately. “

“Note that market inefficiency depends on the observer’s knowledge. Most market participants have no demonstrable advantage. For them, just as the cards in blackjack or the numbers at roulette seem to appear at random, the market appears to be completely efficient. “