A Man for All Markets

A Man for All Markets is the autobiography of Edward Thorp, a former professor of mathematics, who developed a card-counting scheme that gave him an edge in blackjack. And while he was a professor at MIT he developed, together with Claude Shannon, a wearable computer to get an edge in roulette. Later, he started a very successful hedge fund.

My impression of A Man for All Markets is mixed. I found the first half of the book very fascinating, especially the stories about the author's trips to Las Vegas to test his theories. Unfortunately, in the second half the author seems to lose his focus and he moves more towards general (investment) topics like compounding, indexing, and so on. This was rather boring as I already read about these topics in other books. And at least to me they didn't fit to the rest of the autobiography. It would have been better to move this stuff into its own book and deepen it there.

My notes

Loving to Learn

From the beginning, I loved learning through experimentation and exploration how my world worked.

But the next winter, when my father gave me a nickel to shovel the snow from our sidewalk, I hit a bonanza. I offered the same deal to our neighbors and, after an exhausting day of snow removal, returned home soaked in sweat and bearing the huge sum of a couple of dollars, almost half of what my father was paid per day. Soon lots of the kids were out following my lead and the bonanza ended – an early lesson in how competition can drive down profits.

Over the next six years I'd face the difficulties of coping with being an extreme misfit at a school where muscles were important and brains were not.

Science Is My Playground

My parents worked long hours and when they were home they were either seeing to the needs of the ten refugee relatives who were staying with us, taking care of household logistics, or falling into an exhausted sleep. I and my brother were left to manage on our own. I didn't volunteer any information about my experiments. If they had realized the full extent of what I was up to, they would have shut it down.

[...] one gram of this dye would color six cubic meters of water a deep red, so a mere pinch, one-quarter of a gram of dye, ought to do the job on the pool. To be sure, I put in four times that much, a whole gram, stirring the water vigorously as I scattered it, and the goldfish pool turned a satisfying blood red. [...] I returned to work in my lab. Several minutes passed before I heard my mother scream and scream and scream. She thought someone, probably me, was in the pool bleeding to death.

Our physics teacher was an athletics coach who babysat the class and knew nothing of the subject. I taught myself.

Physics and Mathematics

The course was taught by a famous professor, and we were using his book. As he was then preparing a revision, he offered 10 cents per misprint to the first student to report it. I set to work and soon brought him a list of ten errors to see if he would pay. He gave me my dollar. Encouraged, I came back with a list of seventy-five more mistakes. That netted me $7.50 but he wasn't happy. When I returned a few days later with several hundred he explained that they needed to be errors, not mere misprints. Despite my objections, he disqualified nearly all of them. This unilateral retroactive change in the deal, which I would later encounter often on Wall Street, done by someone for their benefit just because they could get away with it, violated my sense of fair play. I quit reporting additional corrections.

This was the first time I had seen Las Vegas and it left me with conflicting, but vivid, images. The glitter and glamour of the strip, with its promise of easy unearned riches, contrasted with the crowd of homeless in the park, victims of the dark side of the dream. It was a memory that stuck: a glitzy playground where suckers were induced to gamble at games that, I knew from mathematics, they must collectively lose. The winners were celebrated as poster-people to draw more suckers while a greater number, betting too much or too often, were impoverished and sometimes even ruined.

Curious, I ventured inside and found three muscular residents hoisting barbells. When I suggested that this seemed like a lot of work for who knew how much gain, they bet me a milkshake that if I worked out with them for one hour, three times a week, for a year, it would double my strength. [...] I accepted their challenge. When the year ended [...], I had more than doubled what I could lift and gladly paid off the bet. This was the beginning of a lifelong interest in fitness and health.

Vivian said yes, and her parents were willing to accept a son-in-law who would be forever poor on an academic salary.

Las Vegas

Fifteen minutes later, I had lost $8.50 of my $10 stake and quit. But now, to Vivian's dismay, I was hooked on blackjack – though not in the usual sense. The atmosphere of ignorance and superstition surrounding the blackjack table that day had convinced me that even good players didn't understand the mathematics underlying the game. I returned home intending to find a way to win.

Conquering Blackjack

It wasn't the money that drew me to blackjack. Though we could certainly use extra dollars, Vivian and I expected to lead the usual low-budget academic life. What intrigued me was the possibility that merely by sitting in a room and thinking, I could figure out how to win.

The Day of the Lamb

In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.

[...] acknowledgment, applause, and honor are welcome and add zest to life but they are not ends to be pursued. I felt then, as I do now, that what matters is what you do and how you do it, the quality of the time you spend, and the people you share it with.

Card Counting for Everyone

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

Often, a suspected card counter was simply barred from playing blackjack. [...] To get around this, I experimented with disguises, including contact lenses, sunglasses, a beard, and drastic changes of wardrobe and table behavior.

Players Versus Casinos

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A Computer That Predicts Roulette

The basement [of Claude Shannon's house] was a gadgeteer's paradise, with perhaps $100,000 worth of electronic, electrical, and mechanical items. There were thousands of mechanical and electrical components – motors, transistors, switches, pulleys, gears, condensers, transformers, and on and on. As someone who had spent much of his boyhood building and experimenting in electronics, physics, and chemistry, I was now happily working with the ultimate gadgeteer.

An Edge at Other Gambling Games

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Wall Street: The Greatest Casino on Earth

Do not assume that what investors call momentum, a long streak of either rising or failing prices, will continue unless you can make a sound case that it will.

I also learned from my losing silver investment that when the interests of the salesmen and promoters differ from those of the client, the client had better look out for himself.

Bridge with Buffett

The time I spent with him [Warren Buffett] had two major effects on my life: It helped move me along the path to my own hedge fund, and it later led me to make a very profitable investment in the company he transformed, Berkshire Hathaway.

Going into Partnership

Our computers used so much electricity that the office was always hot. We left the windows open and blew out the heat with fans, even during the coolest part of the California winter. Our landlord didn't charge tenants for utilities, instead paying it from his lease revenues. When the heat got my attention, I calculated that the cost of the electricity we used was more than our rent. We were getting paid to be there.

Front-Running the Quantitative Revolution

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Rise...

[...] we traded between one and two million shares a day, which was then 1 or 2 percent of NYSE daily volume.

...And Fall

[...] what matters in life is how you spend your time.

Period of Adjustment

I told my client that the trades were fake and Madoff's investment operation was a fraud. My client had a dilemma. If I was right and he closed his accounts with Madoff he would protect his money, save his reputation, and avoid a legal mess. He argued that if I were wrong, he would needlessly sacrifice his best investment. I answered that I could not be wrong: I had proven from public records that the trades never happened. He was being sent make-believe trade slips. I made the point that to ignore this could put his job at risk. That clinched it. He closed his accounts with Madoff and got his money back. Over the next eighteen years, he watched other Madoff investors seem to get rich. I wonder how often he regretted hiring me.

Swindles and Hazards

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Buying Low, Selling High

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Backing the Truck Up to the Banks

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One Last Puff

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Hedging Your Bets

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How Rich Is Rich?

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Compound Growth: The Eighth Wonder of the World

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Beat Most Investors by Indexing

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Can You Beat the Market? Should You Try?

Note that market inefficiency depends on the observer's knowledge. Most market participants have no demonstrable advantage. For them, just as the cards in blackjack or the numbers at roulette seem to appear at random, the market appears to be completely efficient. To beat the market, focus on investments well within your knowledge and ability to evaluate, your "circle of competence". Be sure your information is current, accurate, and essentially complete. Be aware that information flows down a "food chain", with those who get it first "eating" and those who get it late being eaten. Finally, don't bet on an investment unless you can demonstrate by logic, and if appropriate by track record, that you have an edge.

Asset Allocation and Wealth Management

Stories sell stocks: the wonderful new product that will revolutionize everything, the monopoly that controls a product and sets prices, the politically connected and protected firm that gorges at the public trough, the fabulous mineral discovery, and so forth. The careful investor, when he hears such tales, should ask a key question: At what price is this company a good buy? What price is too high?

When making an investment, it is important to understand how easy it might be to sell later, a feature known as liquidity. The lack of liquidity in hedge funds and in real estate would prove costly for investors in the 2008-09 recession.

Because you can't get out in time when trouble is coming, the excess returns you expect from illiquid investments may be offset by the economic impact of unforeseen future events.

The lesson of leverage is this: Assume that the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing.

Giving Back

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Financial Crises: Lessons Not Learned

Asset bubbles, where investor mania drives prices to extreme heights, are a recurring puzzle for investors. Can you profit? Can you avoid major losses? In my experience, it has been easy to spot a bubble after it is well under way, as prices and valuations far exceed historical norms and seem to have no economic sense. [...] Making a profit is trickier. Like a Ponzi scheme, it's not easy to tell when it will end. If you bet against it too early you can be ruined in the short run even though you are right in the long run. As Keynes said, the market can remain irrational longer than you can remain solvent. What about avoiding losses? Once you spot the bubble, you simply don't invest in it. However, there is the problem of spillover damage or contagion.

Thoughts

I don't object to some people being richer, even much richer, than others. I object to gain of wealth through political connections rather than earning it by merit.

Epilogue

Life is like reading a novel or running a marathon. It's not so much about reaching a goal but rather about the journey itself and the experiences along the way. As Benjamin Franklin famously said, "Time is the stuff life is made of", and how you spend it makes all the difference.