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April 21 - June 20, 2018
Forty-six years later, when I stopped by our high school reunion for a couple of hours, the “ins” seemed the same as they had so long ago, only older and mellower. High school had been the apex of their lives. Many had married one another and lived locally ever since, whereas for me high school was a launching pad for life’s great adventure.
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:
Understanding and dealing correctly with the trade-off between risk and return is a fundamental, but poorly understood, challenge faced by all gamblers and investors.
well-known phenomenon that it is typically much easier to solve a problem if you know it can be solved.
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.
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.
This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger.
For the second time, the Ten-Count System had shown moderately heavy losses mixed with “lucky” streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.
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.
Occam’s razor—the principle that given more than one explanation, you should begin by choosing the simplest one—and plausible reasoning to arrive at a neat formula for determining the “correct” price of a warrant.
people tend to make the error of seeing patterns or explanations when there aren’t any,
“Thorp, my advice is to buy low and sell high.
A million dollars still sounds like real money, even though it doesn’t buy nearly what it once did. In fact, it would take $20 million today to match the buying power of $1 million a century ago.
What if, somehow, you could save $6 a day and buy shares in the Vanguard S&P 500 Index Fund at the end of each month? If that investment grows in a tax-deferred retirement plan at the long-term average for large stocks of about 10 percent, then after forty-seven years you can retire at age sixty-five with $2.4 million. But where do you find an extra $6 a day? The pack-and-a-half-a-day smoker who kicks his drug habit saves $6 each day. If the construction worker who drinks two $5 six-packs of beer or Coke each day switches to tap water he can save $10 a day, $6 of which he puts in an index fund
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“the rule of 72.” It says: If money grows at a percentage R in each period then, with all gains reinvested, it will double in 72/R periods.
Americans supposedly spend an average of forty or more hours a week watching television. Those who do have plenty of “junk time,” which they can use instead for an exercise or fitness program. Five hours a week for this can add five years of healthy life.
Assume that the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing.
When Commodity Futures Trading Commission chairperson (1996–99) Brooksley Born wanted to regulate the derivatives that would later be a major cause of disaster, the PBS program Frontline detailed how she was blocked in 1998 by the triumvirate of Federal Reserve chairman Alan Greenspan,
US Treasury Secretary Robert Rubin, and Deputy US Treasury Secretary Lawrence Summers, all of whom would later advise government on the 2008–09 bailout. Nassim Taleb asked why, after a driver crashes his school bus, killing and injuring his passengers, he should be put in charge of another bus and asked to set up new safety rules.
To see how crazy this was, imagine that Joe Sixpack offered to sell you a CDS on your $320,000 loan to your friend for $1,600 a year for five years. Joe is doing well, has a million-dollar house with no debt, and is therefore “good for the money.” Happy with $1,600 a year in extra income, Joe continues to sell CDSs on residential mortgages. Unregulated, he sells a thousand just like the one he sold you, and his income grows to $1.6 million a year. If these loans average $320,000 each, he is insuring a total of $320 million, all backed by his million-dollar house. You object, arguing that Joe
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Our corporate executives speculate with their shareholders’ assets because they get big personal rewards when they win—and even if they lose, they are often bailed out with public funds by obedient politicians.
We privatize profit and socialize risk.
David Ricardo and Adam Smith, writing more than two hundred years ago, “concluded that what a person earns is determined not by what that person has produced but by that person’s bargaining power. Why? Because production is typically carried out by teams…and the contribution of each member cannot be separated from that of the rest.
“Time is the stuff life is made of,” and how you spend it makes all the difference.
