Monday, January 22, 2024

Guest Review: @pdxsag on A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

Noted investor and polymath Edward O. Thorp wrote an autobiography back in 2017: A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (3/5).

His first book, which enjoyed huge popular success, was his guide to counting cards in blackjack, Beat the Dealer, published in 1962.

In 1967, he wrote Beat the Market, a guide to market arbitrage using warrants and convertible bonds. Five years later, Fischer Black and Martin Scholes would publish their options pricing model which would win the Nobel Prize, largely inspired by the work in Thorp's book.

This latest book by Thorp (his fifth for a popular audience) is mostly a memoir, though it finishes with a few chapters of general advice on investing, geared to a mostly non-investing public.

Man for All Markets starts with Thorp's earliest childhood memories as an odd-duck and prodigy, continues through high school in rural Orange County, California – back when it actually had oranges – then college at Berkley before transferring to UCLA, starting his career in academia, then his side-hustles in the gambling and the investment worlds, the latter of which turned into his main-hustle after he quit work as a college professor to run full-time the hedge fund which he had started several years prior.

As a timeline: born in August 1932, he graduated high school in 1949, graduated college in 1953, and received his PhD in Mathematics in spring of 1958. He did a post-doc stint in 1959-1961 at MIT, where he met Claude Shannon and among a bunch of fun side-projects, they invented the first wearable computer for predicting roulette. He taught at New Mexico State from '61 to '65, before moving to the then brand-new UC-Irvine where he would remain until retiring from academia in 1982.

I had seen Thorp name-dropped in fin-twit a few times. He was remarked upon for his phenomenal investing record running an arb shop, almost as a proto-Citadel or Reniassance Tech. Equally often remarked upon was his youthful visage, easily passing for someone 10 to 20 years younger. In fact, here is a photo of him taken this month looking remarkably youthful at the age of 91.

Here Ed is in a pair of Tim Ferris interviews in May and June 2022. Based upon the show notes, it appears the first episode covers the outline of Man for All Markets, and the second episode uses the book's latter third on investing advice as jumping off points for discussing a wider range of topics.

Our interest in this autobiography was three-fold. One, did his story add-up?

I hadn't heard of him before last year. I was curious whether he truly was as he was presented by others on twitter as a proto Jim Simons or Ken Griffin. He boasted their acumen and success, but from the late 60's to the late 80's. This was well before the financialization of the economy in the later Greenspan era in which the numbers put up by the biggest hedge fund managers on Wall Street, the 0.1%, beggar belief if you bother to think about them in terms of buying power, instead of just numbers on a screen.

Two, did he share any useful information on the source of his youthfulness?

Since this was a memoir and one of his popular anecdotes was how he got into strength training at college in the early 1950's, we wondered what else he might have to share on the topic of health and longevity. He certainly looks great for his age, but was it lucky genes or something else. As an autist before the era of the internet, he taught himself card counting and investing arbitrage; then wrote the book on each. Maybe he taught himself the keys to health and longevity in a similar fashion.

Thirdly, we always like to see if we can read between the lines and pick up interesting bits that are usually missed by the conventional reading public.

This also relates to assessing whether his story adds up. Reading between the lines, you can often figure out whether someone's story adds up, or whether they are relying on borrowed ideas and successful execution of partners, which they spin a story around to make themselves into the central character. This is particularly true for anyone lucky enough to be entering adulthood in the 1950's and 1960's. The second half of the 20th century for the United States was such a phenomenal growth engine, many people got incredibly far just by being lucky enough to be in the right place at the right time, such as, for example, moving to Orange County, California, in the late-1960's.

As fortune has it, after I read the book I saw that blogger Rational Walk had written a pretty thorough synopsis of Man for All Markets not long after it was first published in 2016. I'll save myself a couple thousand words and direct your attention to his longer synopsis and then (more recently) in ten bullet points.

As to the first question, did his story add up? It certainly did to me. I went to a large suburban high school and a small engineering college. I knew first-hand the type of incredibly smart, 1% of the 1%, math and science guys which Ed's anecdotes from his youth fit to a 'T': self-taught in chemistry and electronics, cringy sense of humor – particularly for practical jokes, treated academic performance as a competition just like athletes treat sports competitions – if you don't win first place, you lost. With that character, the story definitely fit.

He also rubbed elbows with some incredibly smart people before they were household names – Claude Shannon, Fischer Black, and Warren Buffett. He also caught a massive fraud decades before he infamously became a household name – Bernie Madoff. I have no doubt Ed was truly the central character in his gambling and investing hustles.

What did we pick up between the lines? There were a few interesting things.

* Ed was born in 1932, a Silent. From our reading of Helen Andrews' Boomers, we know Silents were really behind all the social liberalism Boomers gave themselves credit for. True to form, Ed couldn't resist slipping in a few socially liberal comments and opinions from events in college as an undergrad, and also with regard to the current events as of his writing in the chapters covering general investment advice. Just wanted it to be known, I guess. (CBS pointed out the same thing in John McPhee's latest work. McPhee and Thorp are the same age.)

* Some of the best asides were of his wife's sharp judgement of character. Physiognomy is real, readers. Could have used more of these in the book.

As Vivian said at the start, “this is going to be a waste of time. Norman's been doing this for years and you can tell he's barely getting by. Just look at his worn-out shoes and shabby clothes. And you can tell from the quality of his wife's old and dated outfits that they were once better off.” (p.149)

My wife was an almost unerring judge of character, motives, and future behavior. I was repeatedly amazed when she applied this to business and professional people I introduced to her for the first time. She did this easily, based on so little evidence I couldn't believe it. But over and over again, Cassandra-like if I didn't listen, she was right... After meeting one of the characters, she said, “He's greedy, insincere, and you can't trust him... You can see he's greedy from the way he drives. The insincerity comes out when he smiles. His eyes don't really smile, too; they mock you. And his wife has a sad look in her eyes that doesn't add up. The face she sees at home isn't the one he shows the world.”

* Post World War II really was easy-mode for anyone that was first to apply scientific rigor to some corner of business.

Much of what I read was dross, but like a baleen whale filtering the tiny nutritious krill from huge volumes of seawater, I came away with a foundation of knowledge. Once again, just as with casino games, I was surprised and encouraged by how little was known by so many. (p.146)

Our computers used so much electricity that the office was always hot. Our landlord didn't charge tenants for utilities, instead paying it form his lease revenues. When the heat got my attention, I calculated that the cost of the electricity we used was more than our rent. (p.169)

When the CBOE opened for business we appeared to be the only ones trading the [Black-Scholes] formula. Down on the floor of the exchange it was like firearms versus bows and arrows.

*The Efficient Market Hypothesis was dunked on every chance Ed got. As a hard science guy, his disdain of economics and economists was subtle but sharp.

When the S&P500 Index fell 23 percent on October 19, 1987, a leading academic finance professor said that if the market had traded every day for the thirteen-billion-year life of the universe, the chance of this happening even once was negligible.
(p. 190)

I also asked believers in the EMH to explain why the stock failed to recover in the eleven days after the hoax was exposed. The news for EMLX was good. So...?
(p. 227)

* On the successful "word-cel that never reads" type of guy:

I also learned early that when I gave Ned my opinion on anything, no matter how careful or reasoned, it didn't have much impact. Others had the same experience. To make a decision, Ned would simply poll everyone he knew for their opinion and then go with the majority view. Once I figured this out, I stopped wasting my time sharing my thoughts with him. The Ned polling method works remarkably well in certain situations... But like most simplifications, this has a flip side. Here [Bernie Madoff] there were just two answers, fraudster or investment genius. The crowd voted genius and got it wrong. I call the flip side to the wisdom of crowds the lunacy of lemmings. (p219-220)

Good stuff. Strictly speaking none of that is new territory at CBS blog, but we're always on the look-out for evidence that tests our rules, be it confirms or contradicts.

Now, returning to the second reason for picking up this book. What did Ed have to say about health and longevity? Is it a case of lucky genes or is it something more, and, more importantly, reproducible by us? The short answer is nothing definitive. The book barely made a couple oblique references on the topic. However, there are a few things that can be gleaned from Ed and his life. A long answer will be its own future post.


Allan Folz said...

Epiphany from the Thorp reviews: with hindsight we always think how easy earlier investors had it. Graham, Buffett, Thorp... they were exploiting obvious market inefficiencies where everyone else was blind to the underlying intrinsic value.

When we look back on today I think we'll say the same thing about foreign-domiciled resource co's. 80% of investors ignore energy, and 90% of investors think every company operating outside the US is a corrupt kleptocracy.

They are not easy to find, but like with those guys from decades ago, gems are out there waiting to be found. The companies aren't broken or ticking timebombs. It's that no one else cares and most people are afraid to think for themselves. They are wordcels that don't read. Lunatic lemmings, as Thorp called it.

Also good time to remind ourselves this is what Einhorn was saying back in 2022. Buy FCF-ing companies no one cares about and sit tight. The cash they're throwing off will have to go back to shareholders eventually, whether buybacks or dividends. There's no other place for it to go. (Self-dealing managements excepted, of course.)

CP said...

I think we'll say it about old economy companies generally, as well as inflation beneficiary companies.

I think the bubble will be seen, retrospectively, in government bonds.

CP said...

This is definitely true:

"Most people are afraid to think for themselves. They are wordcels that don't read."

Anonymous said...

Great comments above.

@CP what if the USA is leading the charge to free the world of tyranny, here and abroad, if it were to happen, wouldn't that put a bid on US Treasuries?