The Digest #184
Ed Thorp: A Man for All Markets, Howard Marks on easy money, Active patience, Activist investing, Damodaran's 2024 data update, Michael Ovitz, Live Oak, Red Bull, Capital allocation, and more ...
“Blessed is the man who has ordered his needs to so just a measure that his riches suffice them without worrying him or taking up his time, and without the spending and the gathering breaking into his other pursuits which are quiet, better suited, and more to his heart.”
A Man For All Markets
As Nassim Taleb wrote in the foreword to A Man For All Markets, parts of Edward Thorp’s autobiography read more like a James Bond thriller than the memoir of a mathematician who ventured outside his academic field to beat casinos, both in Las Vegas and on Wall Street. I recently revisited the book and identified ten highlights which I published in a post on X/Twitter and have listed below:
Thorp's early experiences in Las Vegas were crazy. In 1963, he was part of a team of six that pretended not to know each other and sat down at the baccarat tables at the Dunes Casino. He ended up doing so well that the pit boss drugged his coffee! Later, the brakes on his car mysteriously failed. Wild stuff!
Thorp gained an edge in blackjack with a card counting method. He proved the theory through hands-on methods in Reno and published his findings in a book, Beat the Dealer, which is still read by gamblers today.
Roulette was a bigger challenge. To gain an edge, Thorp collaborated with Claude Shannon to build the first wearable computer. It was intended to provide the user with an edge in roulette. The computer was conceived in 1955 and tested in Las Vegas in 1961. Some technical problems prevented serious betting but it was a success and unveiled to the public in 1961.
Thorp turned his attention to a bigger casino: Wall Street. At least on Wall Street, no one would doctor his drinks or mess with his car's braking system. Thorp read Graham and Dodd but also immersed himself in technical analysis. Early forays were not satisfactory but he kept at it and eventually struck gold ...
Common stock warrants proved to be fertile ground for Thorp. He came up with a mathematical model to detect mispricing of warrants relative to the underlying common stock. By purchasing the relatively underpriced security and shorting the relatively overvalued security, he scored profits. Thorp wrote another book, Beat the Market, to explain his strategy.
Thorp came up with the math behind the Black-Scholes model before Black and Scholes who were at least partly inspired by reading Beat the Market. Thorp was, at heart, a mathematician and academic and shared his ideas, perhaps a bit too freely. Otherwise, the Black-Scholes option pricing model might today be known as the Thorp-Black-Scholes model.
Meeting Warren Buffett. Thorp met Warren Buffett in 1969 when a dean at U.C. Irvine asked Warren Buffett to vet Thorp. The dean was receiving a distribution from the liquidation of the Buffett Partnership and wanted to know what Buffett thought of Thorp's warrant strategy. Warren Buffett must have been impressed enough because the dean invested additional funds with Thorp.
Princeton Newport Partners. Thorp remained an academic through the 1970s but his income from investments eventually grew larger than his salary. Princeton Newport was Thorp's investment vehicle and he eventually gave up academia and devoted all his time to investing starting in the early 1980s. From November 1, 1969 through the end of 1988, Princeton Newport returned 19.1% before fees and 15.1% after fees compared to 10.2% for the S&P 500. Importantly, this was accomplished with far lower volatility than the S&P 500.
Thorp and Madoff. In the early 1990s, Thorp was asked to evaluate Bernie Madoff's track record for a client. Thorp was stonewalled by Madoff, but eventually discovered that the returns claimed by Madoff were impossible and that the trades reported by Madoff could not have possibly happened since they exceeded the volume for the market for certain securities. Thorp made it known that Madoff was a fraud but the establishment simply ignored his warnings.
Personal Finance. The book ends with a section on personal finance because Thorp felt strongly that lack of education in this area is a major problem for society. This was an unusual ending to an autobiography, but one that I think can be helpful for many readers.
To learn more about Ed Thorp, I recommend reading my full review of his book:
In 2021, Ed Thorp appeared on the Tim Ferriss show. At nearly ninety, he was clearly in exceptional shape and looked more like a man in his sixties.
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Easy Money by Howard Marks, January 9, 2024. Listen to the memo. “In his latest memo, Howard Marks considers what financial history can teach us about periods of easy money, the impact they have on investor behavior, and what happens when they end. He analyzes macroeconomic trends using insights from Edward Chancellor’s latest book The Price of Time: The Real Story of Interest to argue that we’re unlikely to soon see the return of the permissive investment climate that prevailed in recent decades.” (Oaktree Capital)