A Man for All Markets by E Thorp Book Review Wall Street Financier: Notes from High Altitude©

If you don’t have the habit, and you open your phone and tablet every time…you know what you’re doing. Reading a book is a process that I enjoy, it is one of my “keystone” habits. Others write bite-sized “buy this book” reviews which aren’t really reviews, only recommendations. Some people with popular blogs don’t even write book reviews, which they consider “below” them. That is why I’ll give you two book reviews one after another.

A Man for All Markets by E. Thorp Book Review

• Mr. Thorp came up with the idea of developing mathematical models to determine whether warrants are mispriced relative to the price of the common stock.
• In such circumstances, he advocates holding Berkshire Hathaway and index funds.
• Thorp thinks the ordinary player can still beat the game of blackjack.

This paid off later because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund.” Mark S. Rzepczynski, PhD, is CEO and Chief Investment Officer at AMPHI Research and Trading, a consulting firm to institutional investors and hedge funds on derivatives markets across all asset classes. Instead, in the short run, the stock market more closely resembles a casino with players who are interested in making quick gains. However, the volume of trading in the stock market makes it clear that the majority of activity has little to do with providing capital to business or allocating capital to its best and highest use. Of course, there is an element of truth in this sentiment since capital is indeed provided to business via the stock market. The book would provide even greater value for finance-oriented readers if it focused more on the “card counting” of finance and the identification of new trading opportunities.

• When I was eight years old, my dad caught me trying to cheat at blackjack.
• Conventional wisdom in the 1950s held that it is impossible for players to gain a consistent edge in games such as blackjack, baccarat and roulette.
• The nature of roulette implies a built-in advantage for the casino and casts doubt on the wisdom of participating at all since the expected value of a large number of bets will be negative for the gambler.
• If he could maximize his understanding of the system, perhaps he could beat the market, just as he had beaten Vegas.

I will admit, I haven’t written any book reviews in the last few months. Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies. The East Coast office handled all the business administration and trading execution work that Thorp found tedious. Both players would roll the dice at the same time, and the highest number would win.

By applying the tools of physics, computer science and math to finance, Thorp created the world’s first “quant shop,” and a trading system that functioned profitably for decades with few drawdowns. In knowledge work fields (like investing), the variable you want to maximize is actionable understanding. Thorp’s contributions span academia, gambling, and finance, establishing him as a multifaceted innovator in applied mathematics and probability theory. He pioneered modern hedge fund techniques and collaborated with Claude Shannon to create the first wearable computer in 1961. However, some find the book self-aggrandizing and criticize the later chapters for basic financial information.

Here, for the first time, Thorp tells the story of what he did, how he did it, his passions and motivations, and the curiosity that has always driven him to disregard conventional wisdom and devise game-changing solutions to seemingly insoluble problems. Along the way, the so-called godfather of the quants played bridge with Warren Buffett, crossed swords with a young Rudy Giuliani, detected the Bernie Madoff scheme, and, to beat the game of roulette, invented, with Claude Shannon, the world’s first wearable computer. Nonetheless, gambling was forever changed. They barred him from their premises, even put his life in jeopardy. His remarkable success—and mathematically unassailable method—caused such an uproar that casinos altered the rules of the game to thwart him and the legions he inspired.

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The last quarter of the book focuses on Thorp’s views regarding modern finance and investing. His efforts to find an edge in finance led to the development of pricing models for trading options, convertibles, and warrants before the published academic literature of Black–Scholes–Merton. From blackjack and roulette, where he helped develop the first wearable computer, Thorp moved on to the “big casino” — that is, Wall Street. Thorp is a very smart talented man driven by proving that it is possible to gain an edge, ie playing repeated bets with an edge, and thus, many things or markets are not as efficient as proclaimed by many others in academia. Praise for A Man for All Markets “In A Man for All Markets, Thorp delightfully recounts his progress (if that is the word) from college teacher to gambler to hedge-fund manager. An intellectual thrill ride, replete with practical wisdom that can guide us all in uncertain financial waters, A Man for All Markets is an instant classic—a book that challenges its readers to think logically about a seemingly irrational world.

What is card counting, and how does it work in blackjack according to A Man for All Markets?

Thorp’s journey from academia to gambling and investing was built on a solid mathematical foundation. Having brushed shoulders with casino mobsters and survived, he shared his secrets with the world, launching a gambling renaissance. And I would see it again and again in real life in both the gambling and the investment worlds.” Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. This formula promises a life of hard work, but judgment based on evidence is the best road map for anyone practicing finance. Thorp a man for all markets makes it clear that achieving an edge is not easy and should not be attempted by most investors.

Now Thorp shares his incredible life story for the first time, revealing how he made his money and giving advice to the next generation of investors. Edward O. Thorp rose up from nothing to become a professor at MIT, invented card counting and proceeded to beat the dealers of Las Vegas at blackjack, roulette and baccarat. The author of Beat the Dealer and Beat the Market, he went from math professor and blackjack whiz to renowned hedge fund manager.

Those who wish to make the attempt must choose between finding managers who can hopefully outperform the market after taking into consideration their fees or must do the work required to personally manage the account. The question of whether to attempt to beat the market or not is ultimately a personal decision. He believes that personal finance should be taught in elementary and secondary schools, noting that most people seem to not understand basic probability and statistics.

In a move similar to Warren Buffett’s gift to the Bill and Melinda Gates Foundation (but predating it), Mr. Thorp donated Class A Berkshire stock to the university and directed that shares should be converted to Class B stock and sold slowly in order to fund the endowment. Although not the focus of the book, many readers will find Mr. Thorp’s treatment of personal finance worthwhile. Rather than immediately starting another large fund, he stepped back for a while but still provided consulting services related to hedge fund selection. Mr. Thorp focused on identifying opportunities that could be hedged in a way that did not depend on the movements of the overall market.

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Surely, the life expectancy of someone gambling in the greatest casino of them all — the stock market — would be far greater than someone confining himself to the smoky casino halls of the 1960s. Princeton Newport employed a true “hedge fund” strategy, meaning that it was designed to be market neutral and profitable regardless of the movement in the overall stock market. Perhaps the stock market was a natural and inevitable next step for Mr. Thorp after achieving success in casino gambling.

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Seeing that I wasn’t quite following, and still reeling from the casual death threat, my dad handed me a dog-eared copy of Ed Thorp’s book Beat the Dealer, and said that that was how he had learned. Even as a boy, I sensed his fascination, and caught an early glimpse of my dad’s gambling streak. My dad became calm as he methodically explained a simplified counting method involving the five card.

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Lacking any background related to investing, Mr. Thorp spent the summer of 1964 educating himself, as he had on many other subjects earlier in life. Mr. Thorp, in collaboration with Claude Shannon, developed the first wearable computer which was intended to provide the gambler with an edge in roulette. However, the fact that many roulette wheels are not perfectly aligned and maintained implies that a gambler could gain an edge by waiting until the wheel and ball is in motion and betting based on minor flaws in the wheel. The nature of roulette implies a built-in advantage for the casino and casts doubt on the wisdom of participating at all since the expected value of a large number of bets will be negative for the gambler. Or course, casinos changed the rules when people like Thorp showed up, and many times he was declared non-grata. He ran the very successful hedge fund Princeton Newport Partners and Ridgeline Partners (18% YOY return in 25 years).

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Professional investors can learn much from Thorp’s application of his gambling-based methods of solving problems, measuring probabilities, and formulating choices to stock and options trading. Ed Thorp is not well known among money managers, but he is held in awe by traders as a polymath, successful card counter, mathematician, finance specialist, and hedge fund manager. The race within financial market participants to be better and faster to gain an edge calculating fair values of instruments, ideally hedging off all risks becomes clear in the book. The last few chapters of the book delve into a number of personal finance topics that, while perhaps unexpected in a memoir, provide many good insights for both beginning and experienced investors. Today, what we call “hedge funds” are usually not market neutral funds of the type Mr. Thorp ran but are instead usually net long or net short, meaning that managers are taking a directional view of their holdings or the market as a whole. Early forays into investing in the silver market produced unsatisfactory results but Mr. Thorp’s self education continued, eventually reaching the subject of common stock warrants.

What is statistical arbitrage, and how does Thorp describe it in A Man for All Markets?

I believe in reading books as a main source of knowledge and whenever possible I buy paper books. If you’re in finance and you haven’t read this book, well, you’re lacking. Sometimes, the edge doesn’t always go to the actor who boldly picks the apparently best option, but to the person who adapts to the first mover, and counters with something better. Their hedge fund, Long Term Capital Management, blew up in 1998 and had to be bailed out by a government led consortium.

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They have a strong mutual respect but different views on how to make money — that is, value investing versus relative value. In such circumstances, he advocates holding Berkshire Hathaway and index funds. He provides sound advice in recommending that if one cannot find either an edge or a manager who has one, then it is best to hold a diversified, passive portfolio. I would have enjoyed reading more about Thorp’s development of options pricing and arbitrage in the early days of options trading. Thorp’s goal was not to be published but to beat the market.