Book review: A Man for all Markets Edward O Thorp

The East Coast office handled all the business administration and trading execution work that Thorp found tedious. Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies. What I find incredible about Thorp’s example is not only that maximized his understanding and beat the market, but that he a man for all markets avoided the quackery and hubris that can so often bedevil people who have ventured so far from the average. Mr. Thorp concludes with a compelling account of the causes and aftermath of the financial crisis. The follies described may be familiar to most readers but will be an eye opener for some.

Slow Investing, Special Situations & Occasionally Wild Punts

Like Mr. Buffett’s instructions to the Gates Foundation, Mr. Thorp insisted that his gift would result in funding for additional research that would not otherwise have been funded through existing financial resources of the university. Unlike Mr. Buffett’s intention for his gift to the Gates Foundation, Mr. Thorp would like his gift to continue to provide funding for the chair in perpetuity. As such, he limited the annual draw from the endowment to only 2 percent.

He next trained his skills on solving problems in statistical arbitrage as well as finding arbitrage opportunities across the capital structure and through relative mispricing.
Thorp is a model of someone who theorizes how markets and games operate, tests his ideas through evidence and hard work, and then puts his “skin in the game” by playing with real cash.
Clearly, if more Americans understood the power of compound growth when leaving high school, there would be far fewer cases of misery caused by mistaken accumulation of debt and lack of savings.
By applying the tools of physics, computer science and math to finance, Thorp created the world’s first “quant shop,” and a trading system that functioned profitably for decades with few drawdowns.
Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies.
Perhaps the most important lesson to take away from this book is that intellectual curiosity combined with a refusal to blindly accept conventional wisdom is almost always required to advance human knowledge and, in some cases, achieve great wealth.

The book would provide even greater value for finance-oriented readers if it focused more on the “card counting” of finance and the identification of new trading opportunities. I would have enjoyed reading more about Thorp’s development of options pricing and arbitrage in the early days of options trading. Thorp is forthcoming about the more difficult periods of his career, such as the closing of his firm in the late 1980s.

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Thorp popularized the Kelly Criterion for optimal bet sizing in both gambling and investing. This mathematical formula helps determine the ideal amount to risk based on your edge and bankroll. To make this point clear, consider how Thorp’s example compares with inventors of the Black-Scholes model. Thorp, and later Fischer Black, Myron Scholes and Robert Merton, stretched their understanding of the world to the extreme, and were able to deduce a theoretical model for pricing derivatives.

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Another interesting aspect was that he also seems to like “special situation” investing such as undervalued closed end funds, thrift conversions but also situations like 3Com/Palm etc.. The excruciating story of a young man on a quest for knowledge and experience, a search that eventually cooked his goose, told with the flair of a seasoned investigative reporter by Outside magazine contributing editor Krakauer (Eiger Dreams, 1990). AMfAM is the autobiography of Edward O. Thorp, who is by his own account a bit of a genius, and a cool-looking guy. CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations. We promote the highest ethical standards and offer a range of educational opportunities online and around the world.

This compared favorably to the S&P 500 annual return of 10.2 percent, but more importantly, it was accomplished with a small fraction of the volatility of the overall market. The last quarter of the book focuses on Thorp’s views regarding modern finance and investing. It conveys substantial wisdom from someone who has “played the game.” From market efficiency to compound growth to asset allocation to financial crashes, Thorp offers clearly reasoned opinions that will help the reader think through the nuances of these broad topics. He also holds strong views on how to size risk effectively via a Kelly criterion — a core concept for traders, if not necessarily for money managers. Lacking any background related to investing, Mr. Thorp spent the summer of 1964 educating himself, as he had on many other subjects earlier in life.

What is statistical arbitrage, and how does Thorp describe it in A Man for All Markets?

In a move similar to Warren Buffett’s gift to the Bill and Melinda Gates Foundation (but predating it), Mr. Thorp donated Class A Berkshire stock to the university and directed that shares should be converted to Class B stock and sold slowly in order to fund the endowment.
This mathematical formula helps determine the ideal amount to risk based on your edge and bankroll.
These traits are rare enough when separate, but in those few in whom they converge achieve in one lifetime what ordinary genius would take several.

The author of Beat the Dealer and Beat the Market, he went from math professor and blackjack whiz to renowned hedge fund manager. In A Man for All Markets (Random House, 2017), he reflects on his life and the power of thinking differently—and deeply. Ed Thorp is an excellent and understudied example of how to thread this needle between growth and humility.

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Perhaps the most important lesson to take away from this book is that intellectual curiosity combined with a refusal to blindly accept conventional wisdom is almost always required to advance human knowledge and, in some cases, achieve great wealth. Although not the focus of the book, many readers will find Mr. Thorp’s treatment of personal finance worthwhile. The question of whether to attempt to beat the market or not is ultimately a personal decision.

Personal tools

He included Graham and Dodd’s Security Analysis in his reading but also went further into scores of other books including the study of technical analysis. Early forays into investing in the silver market produced unsatisfactory results but Mr. Thorp’s self education continued, eventually reaching the subject of common stock warrants. He describes that his way into finance was simply to read a few books during the university summer break including Benjamin Graham and then just applied his mathematical knowledge to the stock market. He ran the very successful hedge fund Princeton Newport Partners and Ridgeline Partners (18% YOY return in 25 years). Although I’m in finance, I dab in games of luck, so I was very interested in the blackjack and roulette technique Thorp develop in the ’60s.

When Thorp began to study the stock market, he was surprised and encouraged to discover “how little was known by so many.” He quickly recognized that the stock market was full of the same ignorance and lazy analysis that had pervaded the gambling world. Where others saw an unbeatable game of chance, Thorp saw a system of probabilities and payoffs masked by a veil of psychology and whim. If he could maximize his understanding of the system, perhaps he could beat the market, just as he had beaten Vegas. In the idealistic view of economics, the stock market is a venue for providers of capital to invest in promising businesses that have the ability to generate attractive returns on capital. Of course, there is an element of truth in this sentiment since capital is indeed provided to business via the stock market.

Thorp’s contributions span academia, gambling, and finance, establishing him as a multifaceted innovator in applied mathematics and probability theory. When the casinos out west wised to him and banned him from their premises, he moved to the big casino, out east, on the corner of Broad and Wall, NY. Conventional wisdom in the 1950s held that it is impossible for players to gain a consistent edge in games such as blackjack, baccarat and roulette. Driven by an innate sense of curiosity and powered by raw intellect, combined with some help from early computer technology, Ed Thorp demonstrated that players could gain an edge in blackjack through straight forward card counting methods.

His ideas went on to inspire the success of the next generation of great quantitative firms such as D.E. When the top five officers at PNP’s East Coast office were charged with stock manipulation and other white collar crimes in the late 1980s, the system Thorp created did have the resilience to guarantee the firm’s survival. The decentralization of the two offices had let one veer dangerously off track, but the interrelatedness of the two parts meant that neither could survive independently.

The first warning sign was the evasive behavior of Peter Madoff who was filling in for Bernie during Mr. Thorp’s planned office visit. Peter made it clear that Mr. Thorp would not even be allowed through the front door. Mr. Gerard was planning to take cash and wanted Mr. Buffett’s opinion regarding Mr. Thorp. Both men had employed warrant hedging and merger arbitrage strategies and spoke about it during a lunch arranged by Mr. Gerard. Although Mr. Buffett’s style of investing extended far beyond Mr. Thorp’s activities, he apparently had a positive overall assessment since Mr. Gerard ended up investing additional funds with Mr. Thorp.

Book review: “A Man for all Markets” – Edward O. Thorp

Thorp’s book is chock- full of knotty lessons for investors, thinkers, and business people, but because Thorp is far less well covered than Munger, many of these ideas felt new and let me see them with fresh perspective. Warren Buffett reappears toward the end of the book as Mr. Thorp notes his use of Berkshire Hathaway shares to endow a chair in mathematics at U.C. In a move similar to Warren Buffett’s gift to the Bill and Melinda Gates Foundation (but predating it), Mr. Thorp donated Class A Berkshire stock to the university and directed that shares should be converted to Class B stock and sold slowly in order to fund the endowment.