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

by Edward O. Thorp

“How the heck do I know how he does it? I guess he’s got one of them mathematical minds or photographic memories, or something.”

I’m just telling you, this book-learning SOB has ruined us…we’re out of the blackjack business.”…

I felt satisfaction and vindication when the great beast panicked. It felt good to know that, just by sitting in a room and using pure math, I could change the world around me.

Bringing Down the House,

I found that if I was able to count one deck in twenty to twenty-five seconds I could easily keep up in any game I was in, so I simply checked to be sure I was up to this standard each time before I played.

Currently, this is automated, incorporating face-recognition software. RFID chips keep track of a player’s bets, and machines can track the cards and check the play of the hands, searching for patterns characteristic of counters.

book The Green Felt Jungle.

Can an ordinary player still beat the game? My answer is a qualified yes.

As is my lifelong habit, I tested this claim,

The few steps that connect strangers explain how rumors spread rapidly and widely. If you have a good investment idea, you might want to keep it secret.

We got along so well because, from an early age, science was play for both of us. Tinkering and building things was part of the fun, as was letting our curiosity range freely.

For bet sizing in favorable games, Shannon suggested I look at a 1956 paper by John Kelly. I adapted it as the guide for bets in blackjack and roulette, and later in other favorable games, sports betting, and the stock market.

it was worth trading a little expected gain for a large reduction in risk by betting on several (neighboring) numbers, rather than a single number.

I was at a point then in life when I could choose between two very different futures. I could roam the world as a professional gambler winning millions per year.

I told him in my letter that I had found an extraordinary method for investing in a small niche in the stock market, which I thought could make 30 percent per year. Given time, I could surpass the 211 figure. He never said what he thought of this hubris. And hubris it was, as the actual rate of profit would turn out to be closer to 20 percent.

White Sands Proving Ground and National Monument,

As I predicted by reasoning and we verified by computation,

I am often asked what it takes to be a successful card counter. I’ve found that an academic understanding is not enough. You need to think quickly, be disciplined enough to follow the system, and have a suitable temperament, including the ability to switch your mind into the here and now and stay focused on the cards, the people, and your surroundings.

By 1995 baccarat in Nevada accounted for half as much casino profit as did blackjack, yet with only one-fiftieth as many tables. A baccarat table was twenty-five times as profitable as a blackjack table.

Investments presented a new type of uncertainty, but the theory of probability might help me make good choices.

Could my methods for beating games of chance give me an edge in the greatest gambling arena on earth, Wall Street? Ever curious, I decided to find out.

Gambling is investing simplified.

Betting too much, even though each individual bet is in your favor, can be ruinous.

The psychological makeup to succeed at investing also has similarities to that for gambling. Great investors are often good at both.

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.

I was surprised and encouraged by how little was known by so many.

anchoring (of yourself to a price that has meaning to you but not to the market).

Anchoring is a subtle and pervasive aberration in investment thinking.

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

I still owed more tuition to Mr. Market for his introductory course in investment mistakes.

For a few thousand dollars I learned from this to make proper risk management a major theme of my life for more than fifty years thereafter.

Once again, I was invited to accept the consensus opinion at face value, and once again I decided to see for myself.

Beat the Market,

I was willing to share our discoveries with the public for several reasons. Among them was the awareness that sooner or later, others would make the same discoveries, that scientific research ought to be a public good, and that I would continue to have more ideas.

He evaluated businesses with the aim of buying shares in them, or even the entire company, so cheaply that he had an ample “margin of safety” to allow for the unknown and the unanticipated.

“Be fearful when others are greedy and greedy when others are fearful.”

Making money confirmed my theories by showing that they worked in the real world.

This nearly total reliance on quantitative methods was unique, making us the earliest of a new breed of investors who would later be called quants, and who would radically transform Wall Street.

Betting on a hedge I had researched was like betting on a blackjack hand where I had the advantage.

We were guided in this trade and thousands of others by a formula that had its beginnings in 1900 in the PhD thesis of French mathematician Louis Bachelier.

Unknown to Einstein, his equations describing the Brownian motion of pollen particles were essentially the same as the equations that Bachelier had used for his thesis five years earlier to describe a very different phenomenon, the ceaseless, irregular motion of stock prices.

Influenced by having been born during the Great Depression and by my early investment experiences, I made reducing risk a central feature of my investing approach.

I evolved into the style later dubbed management by walking around. Instead of the endless schedule of formal meetings I abhorred in academia, I talked directly to each employee and asked them to do the same with their colleagues.

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

“They don’t teach ethics in law school.”

One problem in large bureaucracies is that many of the members decide it is better not to cross people, instead of standing on principle.

That the market’s good years have to be better than its bad years just to come out even is a general rule.

produce even steadier returns, we hedged the overall risk from our entire collection of hedges by neutralizing the impact on our portfolio of shifts in interest rates (across the spectrum of quality and maturity). We also offset the danger to the portfolio from sudden large shifts in overall stock market prices and in the volatility level of the market.

The defect of VaR alone is that it doesn’t fully account for the worst 5 percent of expected cases. But these extreme events are where ruin is to be found.

We took a more comprehensive view. We analyzed and incorporated tail risk, and considered extreme questions such as, “What if the market fell 25 percent in one day?”