#222 Ed Thorp My personal blueprint

In "A Man for All Markets," Ed Thorpe's memoir unfolds as an exhilarating narrative, blending his creation of wearable computers, encounters with notable scientists and mobsters, and his humble yet impactful contributions to the fields of mathematics, finance, and gambling. Despite his success, Thorpe remains unassuming, his humility masking the profound simplicity and practicality of his insights which revolutionized risk-taking through quantitative methods. As a pioneer in mathematical finance, he leveraged clear, uncomplicated edges—like calculating roulette wheel momentum with Claude Shannon—and emphasized the importance of bet sizing, as later refined by John Kelly's criterion. Thorpe's academic background and preference for learning by doing led him to prioritize simplicity in strategy and independence in practice, avoiding the stress of large-scale structures and maintaining control over his life. His genius lies in distilling complex research into accessible strategies, exemplified by his blackjack card counting system. Beyond his professional mastery, Thorpe's life philosophy centers on lifelong learning, balancing wealth with personal fulfillment, and valuing time spent with loved ones over relentless wealth accumulation.

• Ed Thorp's memoir is described as a thrilling narrative that includes wearable computers, shady characters, great scientists, and even poisoning attempts.
• Thorp is portrayed as methodical, rigorous, and thorough, yet humble and generous with his knowledge.
• His work is characterized by its simplicity, making it invisible in academia but highly practical for practitioners.
• Thorp is celebrated as a pioneer in applying quantitative methods to risk-taking in finance, achieving great success.
• His approach involves identifying a clear edge and managing betting dosages effectively, as demonstrated by his use of the Kelly criterion.

"Ed Thorpe's memoir reads like a thriller, mixing wearable computers that would have made James Bond proud, shady characters, great scientists and poisoning attempts."

This quote sets the tone for Thorp's memoir, highlighting the blend of adventure and intellectual pursuit that defines his life and work.

"For it is the straightforward character of his contributions and insights that made them both invisible in academia and useful for practitioners."

Thorp's work is noted for its simplicity, which is suggested as the reason for its lack of recognition in academic circles but its value to those in the field.

"Ed Thorpe 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."

Thorp's pioneering role in applying mathematical methods to finance is emphasized, marking his significance in the field.

"The edge has to be obvious and uncomplicated... And with no less a co-conspirator than the great Claude Shannon, he estimated a typical edge of roughly 40% per bet."

The importance of a clear, uncomplicated edge in Thorp's method is highlighted, along with his collaboration with Claude Shannon.

"It is the dosage of your betting. Not too little, not too much that matters in the end."

Thorp's focus on the right amount of betting, informed by the Kelly criterion, is crucial to his financial success.

• Academia often favors complexity over simplicity, with the perception of sophistication being more important than practicality.
• Thorp, however, preferred "learning by doing" and creating simple, effective strategies.
• His blackjack system, for example, was a straightforward tallying method that anyone could apply.

"A mountain giving birth to a mouse after huge labor is not a very good thing... It is the perception of sophistication that matters. The more complicated, the better."

This quote criticizes the academic preference for complexity, suggesting that simple but effective work is undervalued.

"Ed was initially an academic, but he favored learning by doing with his skin in the game."

Thorp's preference for practical application and real-world experience over theoretical work is highlighted.

"Ed's genius is demonstrated in the way he came up with very simple rules in blackjack."

The simplicity and accessibility of Thorp's blackjack system are emphasized as a testament to his genius.

• Having an edge in finance is different from surviving in the market; avoiding ruin is paramount.
• Warren Buffett's quote on survival preceding success is invoked to underline the importance of risk management.
• Thorp's ideas were often rejected by economists who favored general theories over practical strategies.
• The financial world is seen as divided between the approach of economists and that of traders who use information theory, with the latter being more successful in the long run.

"Having an edge and surviving are two different things. The first requires the second."

The distinction between having an advantage and being able to persist in the market is made clear, with survival being the foundational requirement.

"As Warren Buffett said, in order to succeed, you must first survive."

Buffett's quote reinforces the importance of survival as a pre-condition for success in finance.

"Not a single one of the works of these economists will ultimately survive."

The critique of economists' work is stark, predicting that their lack of practical application will lead to their irrelevance.

• Ed Thorp is seen as a model for mastering life, not just professional success.
• He emphasized lifetime learning, wealth without sacrificing other life aspects, health, relationships, and fun.
• Thorp's approach to life is encapsulated in five main areas: learning, wealth, health, relationships, and enjoyment.
• His story is a testament to the value of genuine intellectual curiosity and the pursuit of adventure.

"You can detect that this man is in control of his life."

This quote speaks to Thorp's ability to manage his life effectively, focusing on what truly matters to him.

"Ed Thorpe is my personal blueprint... He is the single person... who has come close to mastering life."

The admiration for Thorp's holistic approach to life is evident, positioning him as an ideal role model.

"Following your genuine intellectual curiosity is a better foundation for a career than following whatever is making money right now."

Naval Ravikant's quote aligns with Thorp's philosophy, emphasizing the long-term benefits of pursuing genuine interests over short-term financial trends.

• Thorp's love for reading and learning was cultivated from a young age, leading him to consume a wide range of books.
• His upbringing during the Great Depression and World War II instilled in him values of frugality and self-reliance.
• Thorp's intellectual curiosity and disdain for unfair systems are evident in his high school experiences.
• His college years were marked by financial struggles, personal betrayal, and the development of simple life principles.

"By the time I turned five, I was reading at the level of a ten year old, gobbling up everything I could find."

This quote illustrates Thorp's early passion for reading and learning, setting the stage for his intellectual pursuits.

"The depression permeated every facet of our lives... we never wasted food, and we wore our clothes until they fell apart."

The impact of the Great Depression on Thorp's family life and values is described, highlighting the importance of resourcefulness.

"I would learn to avoid them when I could and finesse them when I couldn't."

Thorp's realization and strategy for dealing with mediocrity and conflict in relationships are shared as a life lesson.

"None of this would have happened if... I had asked myself beforehand... What do you want to happen, and... What do you think will happen?"

Thorp's adoption of a reflective approach to decision-making is presented as a key to his future success and personal growth.

• Ed Thorp's first visit to Las Vegas left him with vivid, contrasting images of the city's glitz and the darker reality of homelessness.
• The luxurious casinos were funded by the losses of gamblers, which mathematically was inevitable.
• Thorp's understanding of mathematics led him to see the casinos as exploiting the gamblers' dreams for profit.

"A glitzy playground where suckers were induced to gamble at games that I knew from mathematics. They must collectively lose."

This quote highlights Thorp's realization that the casino's opulence was financed by the collective losses of the gamblers, whom he refers to as "suckers."

• Thorp compares investing to the Super Bowl, emphasizing the need for both offense and defense.
• A good defense in investing is about protecting your money from being taken away.
• Thorp quotes Charlie Munger and Warren Buffett on the prevalence of market shenanigans.

"Investing is like the Super Bowl. If you want a good Super Bowl team, you need a good offense and a good defense. A good defense keeps other people from taking your money."

This quote encapsulates Thorp's philosophy on investing, likening it to a sport where both offense (growing wealth) and defense (protecting wealth) are crucial for success.

• Thorp's interest in fitness began when he encountered weightlifters and took on a bet to double his strength within a year.
• His commitment to fitness and health became a lifelong pursuit.
• Thorp emphasizes the correlation between regular exercise and reduced time spent in hospitals in old age.

"I accepted their challenge. When the year ended, I had more than doubled what I could lift and gladly paid off the bet. This was the beginning of a lifelong interest in fitness and health."

Thorp's quote reflects on the moment that sparked his enduring commitment to physical fitness, which had a profound impact on his health and longevity.

• Arnold Schwarzenegger's early influencers emphasized the importance of balancing physical and mental development.
• Ed Thorp and Arnold Schwarzenegger both reached the conclusion that a balance between body and mind is essential.
• The Greeks are cited as an example of a culture that valued both physical prowess and philosophical thought.

"You have to build the ultimate physical machine, but also the ultimate mind."

This quote, attributed to one of Schwarzenegger's early mentors, underscores the importance of developing both the body and the mind to their fullest potential.

• Thorp was encouraged by the consensus that casinos could not be beaten, as it indicated that there was room for innovation.
• He was self-taught and habitually questioned everything, seeking to prove things for himself.
• Thorp's approach was to treat life as an adventure and to pursue intellectual curiosity.

"Since I was self-taught, I wind up just questioning everything I need to prove for myself what you're telling me is true."

Thorp's quote reflects his skeptical approach to conventional wisdom and his determination to validate claims through his own research and experience.

• Sharing knowledge and ideas can lead to unexpected opportunities and financial benefits.
• Thorp's work, particularly his books "Beat the Dealer" and "Beat the Market," was influential and opened doors for him in the financial world.
• The people interested in learning from you are often lifelong learners who engage in interesting and financially rewarding activities.

"And so the people that are interested in learning what you've learned also happen to be people that are lifelong learners, and those are the kind of people that get themselves involved in very interesting activities in the future."

This quote highlights the value of sharing knowledge, as it attracts like-minded individuals who are also committed to continuous learning and may offer collaborative opportunities.

• Thorp's genuine curiosity led him to challenge the idea that roulette could not be beaten.
• He believed that with the right equation, the motion of the roulette ball could be predicted despite the presence of noise.
• Thorp's pursuit of this challenge was driven by passion, not the prospect of monetary gain.

"What drew me was the chance of doing something people thought wasn't possible."

Thorp's quote reveals his motivation to pursue challenges that others deemed impossible, driven by intellectual curiosity rather than financial incentives.

• Life is seen as a combination of chance (the cards dealt) and choice (how you play them).
• Thorp's choice to investigate blackjack led to chance presenting him with new, unexpected opportunities.
• The importance of choice in determining life's direction is emphasized.

"In the abstract, life is a mixture of chance and choice. Chance can be thought of as the card you're dealt. In life, choice is how you play them."

This quote from Thorp philosophically considers life as a game of cards, where the outcomes are determined by both the randomness of chance and the strategic decisions one makes.

• The Kelly criterion is a formula used to determine the optimal size of a series of bets.
• It is designed to maximize the logarithm of wealth and helps prevent going broke.
• Claude Shannon introduced Ed Thorp to the concept through a 1956 paper by John Kelly.
• Thorp is credited with being the first to monetize the Kelly criterion in practice.

"I think it was published in 1956 by this guy named John Kelly. And that paper is famous for something people still use to this day called the Kelly criterion, which is a way to figure out the dosing in your bets so you never go broke."

The quote explains the origin of the Kelly criterion and its purpose in betting strategies to avoid bankruptcy.

• The Efficient Market Hypothesis (EMH) claims markets are always correctly priced, reflecting all available information.
• Many successful investors and thinkers, including Ed Thorp, Warren Buffett, and Charlie Munger, have found practical applications of theories from academia, challenging the EMH.
• There is a contrast between the success of practical investors and the theories promoted by academia.

"This idea of that the market was efficient. Efficient market theory. Efficient market hypothesis. And Ed talks about it a lot, actually, in this book, I'm not going to talk about it today, but what I found interesting is you have all these super smart people arriving at the realization that theory that you're teaching them is not accurate in the grand scheme of things."

The quote highlights the skepticism surrounding the EMH among successful investors who have found it lacking in real-world application.

• Ed Thorp applied lessons from blackjack to investing, emphasizing emotional comfort and disciplined accuracy.
• Thorp credits Claude Shannon for introducing him to these ideas.
• The approach proved invaluable as the stakes in investing grew larger.

"This lesson from the blackjack table would prove invaluable throughout my investment lifetime as the stakes grew ever larger."

The quote summarizes how strategies from blackjack, such as emotional control and discipline, were beneficial in Thorp's investment career.

• Ed Thorp was bankrolled by individuals who were later revealed to be mobsters.
• Despite the typical outcomes of such associations (death or jail), the mobsters involved with Thorp, Manny Kimmel and Eddie Hand, died wealthy and unscathed.
• Their stories are detailed in Thorp's recounting, reflecting the unexpected outcomes in high-risk situations.

"Manny Kimmel died in Florida in 1982 at the age of 86, leaving a young widow named Ivy... Eddie Hand was prospering in the wealthy enclave of Montecito in southern California."

The quote provides a narrative of the fates of the mobsters who funded Thorp, highlighting their escape from typical repercussions.

• Cheating was rampant in Las Vegas casinos during the 1960s.
• Thorp spent significant time learning about the methods of cheating to protect himself.
• The corruption extended to the regulatory bodies, with gaming control agents in collusion with the casinos.

"Everywhere we went, we reached a point where we were cheated. Barred from play. Or the dealer reshuffled the cards after every hand."

The quote illustrates the widespread cheating that Thorp encountered, emphasizing the need for a strong defense against corruption.

• Thorp and Claude Shannon developed the first wearable computer to predict roulette outcomes.
• They tested the computer in Vegas, successfully demonstrating a 44% edge over the house.
• The experiment highlighted the intersection of technology, mathematics, and gambling.

"One of us wore the computer, which had twelve transistors and was the size of a pack of cigarettes... The computer forecast was transmitted by radio."

The quote describes the innovative wearable computer and its covert use in a casino setting to gain an advantage in roulette.

• Thorp faced life-threatening situations as a result of his gambling success.
• He was poisoned and nearly killed in a car sabotage incident.
• These events influenced his decision to focus on financial markets instead of professional gambling.

"The six of us left Las Vegas the next morning to drive back... I finally managed to stop the car in a turnout."

The quote recounts a harrowing experience where Thorp's life was endangered, illustrating the risks associated with his activities.

• Thorp applied his knowledge from gambling to the financial markets.
• He saw Wall Street as a larger casino and sought to find an edge using mathematical methods.
• Thorp's approach to investing was distinct from Warren Buffett's but equally successful.

"Could my methods for beating games of chance give me an edge in the greatest gambling arena on earth, Wall street."

The quote captures Thorp's realization that his gambling strategies could be applied to the financial markets for potentially greater gains.

• Ed Thorp and Jay Regan founded Princeton Newport Partners, one of the first quantitative hedge funds.
• The fund was highly successful, rarely experiencing losses.
• Thorp's methods were often misunderstood but ultimately proved to be groundbreaking in the investment world.

"Princeton, Newport Partners was a revolutionary idea when we set it up in 1969."

The quote highlights the innovative nature of Thorp's hedge fund, which was a pioneering force in quantitative investing.

• Thorp met Warren Buffett through a mutual connection.
• Buffett's investment strategies and philosophy impressed Thorp, leading to a profitable investment in Berkshire Hathaway.
• The meeting was facilitated by Thorp's publication "Beat the Market," which caught the attention of influential investors.

"Impressed by Warren's mind and his methods, as well as his record as an investor, I told Vivian that I believed he would eventually become the richest man in America."

The quote reflects Thorp's early recognition of Buffett's potential and the significance of their meeting.

• Ed Thorp discusses his management philosophy which includes four key ideas: management by walking around, hiring for intelligence and enthusiasm over experience, hiring on a trial basis, and recognizing that talent is expensive but worth it.
• He evolved into a management style where he would talk directly to each employee, explaining the general plan and direction and revising roles based on feedback.
• Thorp chose young, smart people fresh out of university to teach a unique set of skills, as they were not set in their ways from previous jobs.
• New hires were considered temporary for the first six months, after which they could become regular employees if mutually agreed.
• To attract and retain superior staff, Thorp paid well above market rate, which saved money by limiting turnover and maintaining high productivity.

"Now I had to learn how to choose and manage employees. Figuring this out for myself, I evolved into the style later dubbed management. By walking around. I talked directly to each employee and asked them to do the same with their colleagues. I explained our general plan and direction and indicated what I wanted done by each person, revising roles and tasks based on their feedback."

This quote emphasizes Thorp's hands-on approach to management, where direct communication and feedback were key components of his successful management style.

• Ed Thorp reflects on his decision to leave academia after 13 years of founding his hedge fund, citing pettiness and fractionism in academic departments.
• He found the same issues in the graduate school of management where he taught mathematical finance.
• Thorp only managed to recruit one faculty member from UC Irvine without tenure to join his hedge fund, as others were too afraid to leave academia.
• He contrasts his willingness to take risks with that of George Lucas, highlighting the importance of self and moving forward in life.
• Thorp's hedge fund was raided by the IRS led by Rudy Giuliani, who wanted dirt on Goldman Sachs and Michael Milken, but the charges were eventually dropped.

"So he's going to wind up leaving academia. I was wrong. It's 13 years after founding his hedge fund and he just points out how petty they can be when the stakes are so small."

This quote discusses Thorp's realization of the pettiness within academia and his subsequent decision to focus on his hedge fund, indicating a pivotal moment in his career path.

• Ed Thorp gives a history lesson on the rise of junk bonds by Michael Milken and the subsequent backlash from the established corporate America.
• He explains the agency problem between management and shareholders and how unfriendly takeovers revealed poor management in many old firms.
• Thorp sees the federal prosecution of his hedge fund as politically motivated, with the old establishment using their influence to target newcomers like Milken.
• He shares a metaphor about DUIs to illustrate selective enforcement and the role of power and influence in legal outcomes.
• Thorp also discusses his experience with Bernie Madoff, highlighting Madoff's establishment connections and the SEC's failure to act on warnings about his Ponzi scheme.

"The case against this hedge fund appears to be a federal prosecution of securities violators on superficial level."

Thorp suggests that the prosecution of his hedge fund was superficial and motivated by the established financial powers' desire to eliminate a threat.

• Ed Thorp reflects on what he could have done with Princeton Newport Partners had it continued, comparing it to Citadel Investment Group, which was built on a similar model.
• Thorp emphasizes the importance of how one spends their time, sharing anecdotes about J. Paul Getty and Henry T. Nichols II to illustrate the point.
• He decided against continuing a PNP style partnership to avoid stress and instead focused on a life of enjoyment with his family and friends.
• Thorp also mentions his investments in other hedge funds, including Berkshire Hathaway, and the benefits of diversification.
• He advises on the importance of fitness and health, suggesting that time spent on fitness is time saved from the hospital.

"Success on Wall street was getting the most money. Success for us was having the best life."

This quote encapsulates Thorp's philosophy on life, which values personal fulfillment and quality of life over financial success alone.

• Ed Thorp stresses the importance of education and the ability to teach oneself, which has been crucial in his life.
• He believes that learning probability and statistics should be taught from a young age as they are essential for understanding gambling games and everyday problems.
• Thorp concludes by reflecting on the true value of wealth, power, and honor, and the importance of spending time with loved ones and leaving a positive legacy.

"Education has made all the difference for me. Education builds software for your brain."

Thorp highlights the transformative power of education and self-learning in his life, likening it to software that enhances the brain's capabilities.