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

by Edward O. Thorp

None of this would have happened if, as I wish I had done, I had asked myself beforehand, If you do this, what do you want to happen? and If you do this, what do you think will happen? I wouldn’t have liked either answer. These two questions became valuable guides for me in the future.

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.

I also believed then, as I do now after more than fifty years as a money manager, that the surest way to get rich is to play only those gambling games or make those investments where I have an edge.

Mathematically, interruptions didn’t matter, because my lifetime of playing was just one long series of hands, and chopping it into sessions and playing them at various times and in various casinos should not affect my edge, nor the long-run amount I could expect to win. This principle applies in both gambling and investing.

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. I began to teach myself about the financial markets, lighting my way with an unusual lamp, the knowledge I had gained from gambling games.

Warren gave one of his favorite examples of its remarkable power, how if the Manhattan Indians could have invested $24, the value then of the trinkets Peter Minuit paid them for Manhattan in 1626, at a net return of 8 percent, they could buy the land back now along with all the improvements.

The stock market also is a game of imperfect information and even resembles bridge in that both have their deceptions.

Financial models like the Black-Scholes formula for option prices were built using the lognormal.

Then again, people tend to make the error of seeing patterns or explanations when there aren’t any, as we’ve seen from the history of gambling systems, the plethora of worthless pattern-based trading methods, and much of story-based investing.

time was worth more to me than the extra money.

This is net economic gain and, as an investor, it’s what you want to maximize.

prefer to think in terms of the inverse of P/E, or earnings divided by price, sometimes known as E/P but perhaps better described as earnings yield. When the P/E is 20, for example, the earnings yield is 1/20, or 5 percent. An investor who owns the S&P 500 Index could think of it as a low-grade long-term bond, comparing the earnings yield of this “bond” to the total return from some benchmark for actual bonds, such as long-term Treasuries or corporates of a particular quality grade.

Clark Kerr observed that “since 1520, only about 85 institutions have remained continuously in existence…about 70…[of these]…are universities…few things last longer or are more resilient than universities.”

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.

Warren Buffett, who had better information and insight than almost anyone, later told The Wall Street Journal’s Scott Patterson that at one point he was looking into the abyss and considering the possibility that everything could go down, even Berkshire Hathaway. It was only when the US government indicated it would do whatever was necessary to bail out the financial system that he realized we were saved.

Was that a Bush or Obama decision?

However, as Moshe Adler, in his article “Overthrowing the Overpaid,” points out, economists 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.”

To end this story of my odyssey through science, mathematics, gambling, hedge funds, finance, and investing, I would like to share some of what I learned along the way. Education has made all the difference for me.

One of my great pleasures from the study of investing, finance, and economics is the discovery of insights about people and society.

More insights come from a much bigger idea of fundamental importance for all investors, the recognition that the group I call the politically connected rich are the dominant economic and political power in the United States. This is a key concept for understanding what happens in our society and why it happens.

Simplistically, there are two types of rich, those who use government to tilt the playing field in their favor and those who don’t.

“Nobody can take away the dance you have danced.” Life is like reading a novel or running a marathon. It’s not so much about reaching a goal but rather about the journey itself and the experiences along the way. As Benjamin Franklin famously said, “Time is the stuff life is made of,” and how you spend it makes all the difference.