#93 Ed Thorp A Man for All Markets

In "A Man for All Markets," Ed Thorpe's memoir, recounted by Nassim Taleb and further explored by the host, we delve into the life of a mathematical genius who applied his skills to conquer casinos and Wall Street. Thorpe, a humble yet methodical individual, leveraged simple, clear-cut strategies to gain an edge in blackjack and the stock market, emphasizing risk management and the Kelly criterion. Despite his financial success, Thorpe chose a path less traveled after his hedge fund, Princeton Newport Partners, was unjustly targeted by prosecutors. Reflecting on the wisdom of historical figures and personal experiences, Thorpe prioritized a fulfilling life over the relentless pursuit of wealth. He valued education, self-teaching, and the journey of life, cherishing time spent with loved ones and imparting a legacy that transcends material gain.

• Ed Thorpe's memoir combines elements of a thriller, scientific discovery, and personal growth.
• Thorpe is portrayed as thorough, methodical, and rigorous in his pursuits.
• He is also described as generous and humble, sharing knowledge freely.
• His contributions to finance and gambling are noted for their simplicity and practicality.

"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." "Thorpe is a generous man, eager to share his discoveries with random rangers, something you hope to find in scientists but usually don't." "Yet he is humble. He might qualify as the only humble traitor on planet Earth."

The quotes emphasize Thorpe's unique combination of qualities, including his humility and his willingness to share knowledge, which are uncommon traits among individuals of his caliber.

• Ed Thorpe is recognized as the first modern mathematician to successfully use quantitative methods for risk-taking and financial success.
• His method involves identifying a clear edge and capitalizing on it through simple, uncomplicated strategies.
• Thorpe's work with Claude Shannon on the wearable computer provided a significant edge in roulette, turning a disadvantage into a 40% edge per bet.

"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." "For instance, calculating the momentum of a roulette wheel, which he did with the first wearable computer and with no less a co-conspirator than the great Claude Shannon, he estimated a typical edge of roughly 40% per bet."

These quotes highlight Thorpe's pioneering role in applying quantitative methods to gambling and finance, and his collaboration with Claude Shannon that led to a significant advantage in roulette.

• Simplicity is a key element in Thorpe's approach, making his strategies both invisible in academia and useful for practitioners.
• Academia often values complexity, but Thorpe focused on simplicity for practical application.
• Thorpe's blackjack strategy exemplifies this simplicity, distilling complex research into an easily implementable system.

"For it is the straightforward character of his contributions and insights that made them both invisible in academia and useful for practitioners." "Instead of engaging in complicated and challenging card counting, something that requires one to be a savant, he crystallizes all of his sophisticated research into simple rules."

These quotes demonstrate the value Thorpe placed on simplicity, making his strategies more accessible and effective for practical use, as opposed to the complicated models preferred by academia.

• Having an edge in gambling or investing is different from having a strategy that ensures survival.
• Thorpe and Kelly's ideas about money management were initially rejected by economists despite their practical success.
• Avoiding ruin is a fundamental principle that distinguishes successful strategies from those that are academically praised but practically flawed.

"Having an edge and surviving are two different things. The first requires the second." "As Warren Buffett said, in order to succeed, you must first survive."

These quotes encapsulate the critical importance of survival in risk-taking ventures, as recognized by both Thorpe and Warren Buffett, and the distinction between having an edge and being able to persist in the long run.

• Thorpe chose not to engage in large-scale structures, valuing independence and stress reduction over building more wealth.
• His experiences taught him the value of controlling one's life and activities for peace of mind.
• The contrast between Thorpe's stress-free lifestyle and the high-pressure environment of academia or large financial firms is stark.

"True success is exiting some rat race to modulate one's activities for peace of mind." "You can detect that the man is in control of his life."

The quotes underline Thorpe's philosophy of true success being the control over one's life and the ability to maintain a stress-free and independent lifestyle, even in the high-stakes world of finance.

• Thorpe's early life during the Great Depression shaped his frugality and resourcefulness.
• He developed four rules for learning: questioning accepted views, testing theories with experiments, setting goals with realistic plans, and basing decisions on evidence.
• Thorpe's self-taught background and his approach to problem-solving were instrumental in his later success.

"I learned how to think because of circumstances. I was largely self-taught, and that led me to think differently." "I strove to be consistently rational, not just in a specialized area of science, but in dealing with all aspects of the world."

These quotes reflect Thorpe's self-reliance and critical thinking skills, which were honed from an early age and became foundational to his approach to challenges throughout his life.

• Thorpe maintained a focus on health and fitness, understanding its importance for a well-lived life.
• He developed simple systems for maintaining a healthy lifestyle, which contributed to his longevity and well-being.
• Thorpe's balance between wealth, family time, and health is presented as an ideal way to live well.

"He's 85 years old in the videos, and today he's 87, and he's still fit and healthy."

This quote serves as a testament to Thorpe's commitment to health and fitness, which has allowed him to remain active and healthy well into his later years, underscoring the importance of a balanced approach to life.

• Ed Thorpe shares an anecdote from his past about a bet that led to him doubling his strength after a year of working out, sparking a lifelong interest in fitness and health.
• The story illustrates the importance of challenging oneself and the potential benefits of adopting a health-focused lifestyle.

"I accepted their challenge. When the year ended, I had more than double what I could lift and gladly paid off the bet."

The quote highlights the outcome of accepting a physical challenge, demonstrating the tangible results of consistent effort over time.

• Ed Thorpe emphasizes the value of investigating things for oneself rather than accepting the consensus view without question.
• He recounts a conversation with physics students about the impossibility of beating casino games, which prompts him to consider the application of physics to roulette.

"We investigate things for ourselves, right?"

This quote underlines Thorpe's belief in personal inquiry and skepticism of widely accepted beliefs.

• Thorpe discusses the possibility of beating roulette using physics, specifically the prediction of a ball's position based on its deceleration due to friction and gravity.
• He acknowledges the presence of noise, or random irregularities, but believes it won't ruin the prediction, leading to the creation of a wearable computer with Claude Shannon.

"I argued that an equation could forecast the ball's position."

Thorpe's quote captures his confidence in the predictive power of physics despite the conventional wisdom that casino games cannot be beaten.

• Thorpe's curiosity leads him to explore gambling and eventually finance, areas previously unfamiliar to him.
• He echoes Warren Buffett's philosophy of staying within one's circle of competence, applying it to his own approach to markets and investments.

"Try to figure out what your skill set is and apply that to markets."

The quote suggests the importance of self-awareness and the strategic application of one's skills to succeed in various domains.

• While working on a theory of blackjack, Thorpe aims to publish his findings to get academic credit and avoid having his ideas stolen.
• He meets Claude Shannon at MIT, who helps him publish his work and later collaborates with him on the roulette computer project.

"I settled on the National Academy of Sciences."

Thorpe's quote indicates his strategic choice of a reputable institution to protect and validate his academic work.

• Thorpe's experience with blackjack teaches him about risk management and the importance of betting only when comfortable, a principle he later applies to his investment strategies.
• He also learns about human nature and cheating, which he finds is prevalent in gambling and other areas like business and investing.

"Cheating was so relentless during those days in Las Vegas that I spent as much time learning about the many, many ways it was being done as it did playing."

The quote reveals Thorpe's realization that cheating is a significant factor in gambling, necessitating a defensive strategy to protect oneself.

• Thorpe reflects on his life philosophy, valuing the quality of time spent and the people he shares it with over accolades and recognition.
• He views life as a mix of chance and choice, where investigating one's interests can lead to unexpected opportunities.

"What matters is what you do and how you do it, the quality of time you spend and the people you share it with."

The quote encapsulates Thorpe's belief in focusing on meaningful actions and relationships rather than external validation.

• Thorpe emphasizes the need for an edge to succeed in business and compares it to having a good offense in a Super Bowl team.
• He also stresses the importance of a good defense, which involves being aware of potential cheating and protecting oneself from others' advantages.

"If you want a good Super Bowl team, you need a good offense and a good defense."

The quote draws an analogy between sports and business, highlighting the necessity of both offensive and defensive strategies for success.

• Thorpe's interactions with the Nevada Gaming Control Board reveal that the regulatory body is influenced by the casinos, highlighting issues of regulatory capture.
• He learns that even regulatory institutions can be compromised, further emphasizing the need for a strong defense in all pursuits.

"He's going to discover that the Nevada gaming control board is not the regulator, has been captured by the casino."

This quote sheds light on the corruption within regulatory systems, where the supposed protectors of fairness are actually in collusion with the entities they should be regulating.

• Casinos employ tactics to disrupt winning streaks by switching dealers.
• New dealers may use sleight of hand to manipulate the game, known as "second carding."
• Casinos' surveillance or "protectors" often ignore cheating, implying corruption.

"And that person is very skilled at being able to look at the top card, the card they're taking. And if it's not good, they can immediately, with a really fast sleight of hand, take the second card, right?"

This quote explains the technique called "second carding," where a dealer can manipulate which card is dealt to disrupt a player's winning streak.

• Regulatory agents, who are supposed to protect consumers, may be complicit in casino cheating.
• A personal anecdote highlights the lack of action from a regulatory agent when cheating is evident.

"This agent had been sitting 3ft from the dealer. He saw everything and pretended to see nothing."

The quote exemplifies the corruption within regulatory bodies, showing that agents may turn a blind eye to casino malpractices.

• Ed Thorpe's investigation revealed Bernie Madoff's fraudulent activities in the early 1990s.
• Madoff's respected position in the financial industry and consistent approval from the SEC suggested systemic issues.

"Bernie Madoff had been the chairman of the Nasdaq. He was the third biggest market trader in the United States."

This quote highlights Madoff's influential position, suggesting that his fraud was overlooked due to his high standing and the flawed system that failed to detect his malpractices.

• Financial frauds and swindles have been a constant throughout market history, dating back to the 17th century.
• Human nature, rather than history, tends to repeat itself, leading to recurring financial irrationalities.

"But then hoaxes, scams and large scale financial irrationalities have been with us from the beginning of the markets in the 17th century."

The quote indicates that financial fraud is not a modern phenomenon but has been present since the inception of financial markets.

• Ed Thorpe's system for beating blackjack was met with resistance from casinos.
• Casinos changed rules and resorted to physical threats when Thorpe's methods proved successful.
• Thorpe transitioned from gambling to investing, applying his mathematical skills to the stock market.

"I felt satisfaction and vindication when the great beast panicked."

Thorpe's quote reflects his triumph in forcing casinos to acknowledge the effectiveness of his system by changing blackjack rules in response.

• Initial stock market investments were unsuccessful due to a lack of knowledge and bad luck.
• Thorpe educated himself on financial markets, drawing parallels between gambling and investing.

"I invested money from book royalties and gambling winnings in stocks, but I was ignorant of the market as well as unlucky."

This quote shows Thorpe's initial foray into the stock market and the realization that he needed to learn more to succeed.

• Thorpe emphasizes proper risk management as a key lesson from early investment experiences.
• He connects the importance of risk management to the financial crisis of 2008.

"For a few thousand dollars, I'd learned from this to make proper risk management a major theme of my life for more than 50 years thereafter."

The quote underscores the importance of learning from losses and the long-term value of risk management in investing.

• Thorpe's investment strategy involved identifying mispriced securities within the same company.
• He constructed hedge positions to exploit these mispricings and secure returns regardless of market movements.

"Buy the relatively underpriced security and sell short the relatively overpriced security."

Thorpe's quote describes his method for capitalizing on relative mispricing between different securities of the same company to create a hedged investment.

• Thorpe's interaction with Warren Buffett provided insights into different investment strategies.
• Buffett's focus was on undervalued companies, while Thorpe looked for mispriced securities to hedge.

"Warren's goal was to accumulate the most money. I enjoyed using mathematics to solve certain interesting puzzles."

This quote contrasts Buffett's goal of wealth accumulation with Thorpe's intellectual interest in applying mathematical theories to investing.

• Inspired by Buffett, Thorpe decided to consolidate his investments into a single limited partnership.
• Gerard's introduction to Buffett's methods was instrumental in Thorpe's hedge fund development.

"It was clear from this that the ideal plan would be to pull my investing for myself and others in a single limited partnership, just as Warren had eventually done."

The quote reflects Thorpe's realization that a single limited partnership, modeled after Buffett's approach, was the most efficient structure for his hedge fund.

• Life's unpredictability can lead to significant and unforeseen impacts on one's career path.
• Thorpe's chance encounters and decisions led to valuable connections and investment opportunities.

"The time I spent with him, meaning Gerard, had two major effects on my life."

Thorpe acknowledges the profound impact that his relationship with Gerard had on his career, leading to the creation of his hedge fund and a profitable investment in Berkshire Hathaway.

• Ed Thorpe had modest goals when starting his hedge fund, aiming for a $5 million capital with a target of making $200,000 a year.
• The economic environment was tough, and they could only raise $1.4 million initially.
• Thorpe's hedge fund strategy was likened to his blackjack strategy, with a focus on expected return, risk estimation, and bankroll management.
• Thorpe emphasized risk reduction as a central feature of his investing approach.

"If we made 20% net of expenses and charged 20% of that as a performance-based fee each year, we'd share 4% of $5 million. That's $200,000."

This quote outlines Thorpe's initial financial expectations for his hedge fund, which were modest compared to what he eventually achieved.

• Thorpe's hedge fund grew significantly, requiring him to learn management skills.
• He adopted a "management by walking around" style, engaging directly with employees and avoiding formal meetings.
• Thorpe preferred hiring smart, young university graduates who were adaptable and could be taught new skills.

"I had to learn to choose and manage employees."

This quote emphasizes the new challenge Thorpe faced in managing a growing business and his innovative approach to it.

• Princeton Newport Partners (PNP) grew from $1.4 million to $273 million.
• PNP was highly analytical and computer-oriented, earning an annual return of 22.8% before fees.
• The fund closed after being caught up in Giuliani's campaign against Wall Street crimes, though Thorpe was not implicated.

"In Princeton's office, we were never implicated in any wrongdoing in this or any other matter."

Thorpe clarifies that neither he nor the majority of his partners and employees were involved in the illegal activities that led to the fund's closure.

• After the shutdown of PNP, Thorpe reflected on the importance of spending time well.
• Thorpe decided against continuing with a new hedge fund to focus on what he enjoyed.
• He shared his knowledge with Citadel Investment Group, which later became successful.

"Life is really about spending time well."

This quote captures the essence of Thorpe's philosophy after the closure of his hedge fund, prioritizing meaningful activities and relationships over relentless wealth accumulation.

• Thorpe valued education highly, seeing it as software for the brain.
• He taught himself skills that were not available in formal education, which paid off in his professional ventures.
• Thorpe believed in continuous learning and taking on new mental challenges.

"Education builds software for your brain."

This analogy highlights the importance Thorpe places on learning as a foundation for success in various endeavors.

• Thorpe discusses the concept of satisfiers and maximizers, with satisfiers being content with near-optimal results and maximizers seeking the absolute best.
• He implies that he aligns more with the satisfier mindset, valuing time and opportunity cost.

"The satisfier, so called because he is satisfied with a result that is close to the best factors in the cost of searching and decision making, as well as the risk of losing a near optimal opportunity and perhaps never finding anything as good again."

This quote distinguishes between two types of people, highlighting Thorpe's preference for a balanced approach to decision-making and life.

• Thorpe reflects on the importance of the journey rather than the destination.
• He values the time spent with loved ones and believes in leaving a positive legacy.
• Thorpe shares lessons from history and personal experiences to underscore the significance of knowing when one has enough.

"Life is like reading a novel or running a marathon. It is not so much about reaching a goal, but rather about the journey itself and the experiences along the way."

Thorpe uses this analogy to convey the idea that life's value lies in the experiences and relationships formed along the way, not just the achievements or end results.