edward thorpe: a man for all markets

January 22, 2017 09:00 AM
Teachers, math and card counting--Edward Thorp’s new book, “A Man For All Markets” covers all these topics as they applied to him in his life and success as a trader.

Teachers, math and card counting--Edward Thorp’s new book, “A Man For All Markets” covers all these topics as they applied to him in his life and success as a trader. 

He talks about two teachers who helped him continue to develop his love of learning and encouraged him in his endeavors. In both his book and a subsequent interview with Thorp, he talked about the importance of education and teachers. He thinks of education as society’s seed corn and points out that economists have noted that one factor in determining a nation’s future economic growth and prosperity, more so than any other factor, is their output of scientists and engineers. He calls the rising costs of education one of the most ominous and underappreciated threats to our future.

Thorp delves into his exploits using math and physics to gain an edge on casino games. He invented card counting in Blackjack and used his techniques to do very well at Nevada casinos. Once his book on card counting became famous, casinos went to great lengths to keep him and his fellow card counters out of their casinos. Using disguises, he continued to return to casinos and did very well with the blackjack system. Working with MIT mathematician Claude Shannon, Thorpe also developed a computer that could determine the likely placement of a roulette ball on the wheel; and they used that with some success as well. It was the world’s first wearable computer. The card counting approach he developed for Baccarat changed the way the game is played in U.S. casinos and two types of bets were removed from the table forever. 

Of course, the bulk of the book is devoted to his adventures on Wall Street and many of Thorp’s insights and observations can help make you a better investor. An interesting aspect of this is that while Thorp is one of the founders of the quantitative approach to investing, he was heavily influenced by Warren Buffett’s long-term value approach to the markets. Rather than buying underpriced companies and waiting for them to appreciate, Thorp and his partners were buying undervalued securities and selling overvalued related securities and waiting for the mispricing’s to adjust themselves. The focus on valuation is present in both approaches.

Thorp views his success as a result of his love for the pure mathematics of the market and the intellectual challenges that quantitative investing offered. It was not a love of trading or some deep desire to get rich; money was never a driving factor for him. He mentions several times that his work as a hedge fund manager was structured in such a way that he could pursue his mathematical research and spend time with his family living the life he desired.

The book also covers a lot of history about Thorp’s formative years in Chicago and later Southern California. Encouraged initially by his father, Thorp developed a love of numbers early in life. He was a big fan of experimenting and trying things out for himself, and as his parents became busier working to support their immediate family and the war refugee relatives that lived with them, the experiments continued unsupervised. It was a difficult upbringing but one that fueled his success.

“A Man For All Markets” offers plenty of market and life lessons. Traders, investors, gamblers and math geeks alike will find it to be a great read.

About the Author

Tim Melvin is a 27-year veteran of the financial services and investment industry who has served as a broker, advisor and portfolio manager. He specializes in value investing. @timmelvin