I really enjoyed this book and felt that, given his achievements, Edward Thorp could be a lot more famous if he wanted to be. Born into a poor family during the depths of the Great Depression, his experiences of childhood privation stayed with him; as did a fascination with numbers and empirical research. His father had to leave university after a year or so for lack of funds and was always keen that his son get more education than he could. The young Thorp seems obsessed with finding out how things around him worked and conducting his own scientific research, initially mainly in Chemistry. This hunger for knowledge and understanding reminded me of the famous physicist Richard Feyneman but this was a far better book than ‘You Must Be Joking Mr. Feyneman’, which was insufferable.
Thorp’s interest in probability led him to develop a system for ‘counting cards’ at Blackjack, which allowed him to beat the casinos. He then went on to develop ‘the world’s first wearable computer’ to help predict where the ball will land in roulette. Following these investigations into casino games, Thorp turned his attention to the stock market and options trading. Using mathematical models and arbitrage, Thorp’s hedge fund was at the leading edge of quantitative investment and options pricing theory between 1969-1988. Returns averaged between 15-19% vs. 10% for the S&P 500 and the funds never had a down year even while the S&P 500 experienced three over the same period. The funds also never had a down quarter, which is remarkable.
There were a few things that struck me as unusual about Thorp and the book. One is that he seems to value a balance between his work and the other parts of his life. Many successful people don’t seem to know when to stop, which could explain why they’re so successful. Thorp, on the other hand, doesn’t seem interested in exploiting his blackjack strategy to the fullest financial extent and even writes a book to let everyone else know about it. Equally, he publishes his option trading strategies (admittedly only some!) in academic papers while running his hedge fund and also shuts it down in spite of its success and popularity. It seems common for rich people, especially in finance, to claim that they’re not really in it for money and that they do it for the intellectual stimulation. This usually strikes me as rubbish because most people in finance aren’t doing anything particularly intellectual and if they really didn’t care about money they could work in academia. In Thorp’s case, he truly was intellectual and he worked in academia before, during and after the success of his hedge fund.
Another aspect of the book I enjoyed is Thorp’s irreverence for the other big wigs he mentions. He more or less accuses Richard Feyneman of lying to him about his knowledge of research into blackjack strategies when they meet early in his career. He also paints a wonderful picture of Warren Buffett as an extreme cheapskate, which perhaps shouldn’t be surprising given his style of investment. Thorp meets Buffett early in his career and makes lots of money investing with him in spite of their different investment styles. Normally, this would set the stage for lots of gushing praise, and there is some of that, but Thorp also points out how Buffett charges $8 for a photo with a cardboard cutout of him during Berkshire Hathaway’s AGM and how the ‘shareholder special steak dinner’ at Buffett’s favourite restaurant costs $21 during the AGM when it is normally $18! A less amusing incident related in the book is how Thorp was suspicious of the regularity of returns at Bernie Madoff’s hedge fund and did some preliminary research into it by checking the trades the fund reported against transactions recorded by the exchange. He discovered his dealing history was fictitious but was roundly ignored by the supposedly sophisticated investors he informed. This was in 1991, a decade before another whistle blower tried to inform the SEC in 2001 and was also ignored. Sadly, this is just one more example in a long history of regulatory bodies all over the world doing the exact opposite of their job (cf. SEC & FSA / GFC, BaFin / Wirecard to name two recent examples).
Perhaps the most suspicious part of the book is the episode where six partners at his hedge fund (PNP) are investigated with securities fraud and threatened with RICO charges in the late 80s before the fund was closed. Thorp presents himself as an honest person and his statistical methods for trading should’ve prevented any interest in using nefarious practices. However, his fellow managing partner in NY, James Regan, and five others seem to have conspired with Drexel Burnham to create fake losses to reduce their tax bill. Thorp was never accused of any wrongdoing and the five partners convicted eventually had their judgements overturned. In Thorp’s telling, Rudy Giuliani, US Attorney in Manhattan at the time, was desperate to nail Mike Milken, the junk bond innovator, because he had upset too many establishment figures by facilitating hostile takeovers. To this end, Giuliani used the unprecedented threat of RICO charges against PNP partners and employees to try to get them to rat on Milken. Some of this has a ring of truth to it. However, Thorp is also very quick to explain that all of the charges related to people in the NY office where, he writes, the office operated with a very different ‘culture’. This sounds a lot like someone trying to distance himself from the bad behaviour of other employees. It also doesn’t inspire much confidence that the highly successful fund then closed. I suspect the charges were a bit trumped up and it is undeniable they came with a highly unusual threat of extremely long sentences allowed by connecting the crimes to the RICO Act. However, it also seems fairly obvious that Thorp’s partner was up to no good and that the two might have had a major falling out after this. Thorp certainly doesn't make any effort to exonerate anyone from NY except by saying, more generally, that he thought the whole thing was motivated by a Mike Milken witch hunt. Regan, his partner and the highest ranking miscreant, is scarcely ever mentioned. Undoubtedly there’s more to the story than what’s in the book!
It’s inevitable that someone who’s had as much success as Thorp is going to be pretty pleased with themself. However, overall I felt the book wasn’t too self-congratulatory. He’s achieved some amazing stuff in his life and hasn’t made it his job to publicise this (cf. Buffett, Dalio). Obviously, writing books isn’t exactly hiding your light under a bushel but it’s fair to say two of these (‘Beat the Dealer’ and ‘Beat the Market’) were designed to help other people. Even if the advice of the second one was a bit after the fact and seemingly not as applicable as the first. It’s not a spectacularly well written book and the author has some odd habits, like sometimes writing ‘I and my brother’ or ‘I and my wife’ as opposed to doing it the other way round, which he sometimes does. Initially , I thought this was a sign of deep seated egotism but by the end I didn’t see Thorp as an especially self-centered person. He is effusive in his praise for some of his former colleagues (NB - not Regan!), his academic collaborators and, especially, his wife. Thorp is obviously a voracious reader, although not as prolific as his wife, and the book references lots of interesting articles, books and authors. This aspect is made even more helpful by the fact the book has truly excellent notes and a good index, which spoke to me of a thorough and meticulous mind. I probably would have preferred it if numbered footnotes were included in the main body of the text but this is a minor complaint.
Overall, I really enjoyed this book and felt it was a good mixture of stories from his life and advice about how he thinks and approaches problems. He is without doubt a fascinating character and I wouldn’t hesitate to recommend this to anyone with an interest in probability or investment as he is a master of understanding both subjects.
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