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

by Edward O. Thorp

It’s that increase in net worth from year to year that takes you up the ladder of wealth. To measure your increase in wealth from one year to the next, compare the yearly balance sheets. Divide the difference by the beginning wealth to get your percentage change for the year. This gives you an idea of how fast you are compounding. If you also construct an income statement for the period, the net income after expenses should match your change in net worth. Balance sheets are snapshots that tell you where you are at a particular time. The income statement tells you what happens between two balance sheets. To appreciate the income statement without bothering to look anything up, jot down a list of all the sources that added to, or subtracted from, your wealth during the last twelve months. Do this “rough and dirty”; focus on the ideas rather than details and precision. Here are some categories to check: A. Income, taxable and nontaxable: 1. Earned income such as wages and salaries. 2. Unearned income such as interest and dividends. 3. Realized capital gains and losses. 4. Royalties, honoraria, all other taxable receipts. 5. Tax-free interest, such as municipal bonds. B. Nontaxable gains and losses: 1. Appreciation or depreciation of property such as real estate, art, and autos. 2. Unrealized capital gains or losses in securities. C. Expenses (all money paid out for “costs”—that is, not saved): 1. Living expenses, consumption. 2. Income taxes. 3. Gifts. 4. Any other money earn...