A Man For All Markets
Edward Thorp is one of those rare and special birds, like Richard Feynman, Warren Buffett, Benjamin Graham and I dare say, Nassim Nicholas Taleb whose singular intelligence, peculiar worldview, restless intellect and reluctance to take anything at face value converge with an innate compulsion to nut things out for themselves. 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. Interestingly these four men knew and worked with each other at formative points in their careers.
From an early age Edward O. Thorp was a mathematics prodigy, when a young tenured mathematics professor, in his spare time he devised a strategy to beat Las Vegas casinos at blackjack, and then, by observation, calculated the probabilities of deviance of a roulette wheel from true randomness. 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. Intuiting that the efficient market hypothesis was flat out wrong, he beat Wall Street, too, by careful convertible arbitrage and, later, inventing the statistical arbitrage techniques that form the foundation for modern quantitative trading, and founding one of the first and most successful hedge funds.
Throughout it all, Thorp retained his conviction, patience, clear thinking and overall decency: like Warren Buffet, Thorp is a fundamentally decent man, and often is helped to the right decision not by savant-grade mathematical aptitude, which he certainly has but, basic, blunt questions. Of the CMOs, it was this simple:
How could so many fees be collected and yet leave anything that could be be sold for a profit to the buyers of the CMO shares?
This is Thorp’s autobiography, made all the more colourful by his own narration. From his wanton childhood in the wake of the great depression — he had a knack for hair-raising public pranks, often involving explosives — to the extraordinary encounters in mob-controlled Vegas, and then his account of the succession of crises of hubris that afflicted the markets from 1969, 1987, 1998 and 2008 — he warned a client off Bernie Madoff in 1992, reasoning that his fund performance was almost certainly fraudulent — this is a fascinating, educating, salutary tale.
They don’t make them like this any more.