YouSaid · the spoken record

Edward Thorp

lines on the record: 20
first: 2019-10-07
most recent: 2019-10-07
sittings or episodes: 1
sources: podcast

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“How much the stock price has changed in the past few days or months, but how the earnings have changed in the past few years. Shannon plotted company earnings on logarithmic graph paper and tried to draw a trend line into the future. He also tried to surmise what factors might cause the exponential trend to continue or sputter out. The Shannons would also visit startup technology companies and talk with the people running them. Shannon became a board member of Teledyne. He was not just a distinguished name in the annual report, but was actively scouting potential acquisitions for CEO Henry Singleton, in other words he had an edge. He knew he had an understanding and access to information that other people did not. And this also tells you why I'm going to be reading about Singleton soon. And it's going to be a podcast you're going to be able to listen to. Warren Buffett himself said the Singleton had the”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“This is more on how Shannon thought about price and value and the methods he used to invest. In the early 1960s, Shannon had played around with technical analysis. He had rejected such systems. This is Shannon's talking now. He says, I think that the technicians who work so much with price charts and head and shoulders formations and pledging necklines are working with what I call a very noisy reproduction of the important data. Shannon emphasized what we can extrapolate about the growth of earnings in the next few years from our evaluation of the company management and the future demand for the company's products, stock prices will, in the long run, follow earnings growth. Therefore, he paid little attention to price momentum or volatility. The key data, in my view, this is Shannon talking, the key data is, in my view,”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“He said, Shannon, he said that a smart investor should understand where he has an edge and invest only in those opportunities. And I know I've said this before, but Buffett and Munger say the same thing over and over and over again in different ways throughout multiple decades. Only invest where you have an edge. Find your edge and invest in it.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“The August 11, 1986 Barons reported on the recent performance of 1,026 mutual funds. Shannon achieved a higher return than $1,025 of them. When Warren Buffett bought Berkshire Hathaway in 1965, over 30 years, he had a return of 27%. By the late 50s through 1986, Shannon's stock Right again, this is what I like about Shannon. He had an idea and he backed it up. He's like, no, I think efficient market theory is bull crap, and I'm going to see if I can teach myself how to do this. And he did.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Says Storp Link the LTC. Now, this is Storp on it. Link the LTCM collapse to Merton and Schroll's intellectual critique of the Kelly system. So Ed continues. He says, I could see that he didn't understand how controlled the danger of extreme risk and the danger of fat tail distributions. It came back to haunt them in a grand way. Estimates about market probabilities are always just going to be that estimates. It is a good practice to have a sense of how far off these estimates may be. Margins of error are themselves estimates, and human nature often skews these estimates optimistically. A decade rarely passes without a market event that some respected economist claims, with a straight face, to be a perfect storm. If they keep happening, that means they should be expected, shouldn't they?”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Temporarily where the market is not efficient, and you can make like five cents. So their point is they're going to use massive amounts of leverage so they could pick up a bunch of nickels. But what they're really doing is they're picking up a bunch of nickels in front of a steamroller and they just don't know that they're doing that yet. So since Thorpe decided not to put any money in this fund, he was concerned that Merton and Scholls had little experience investing other people's money. And it didn't help that Merton was a critic of the Kelly criterion. The general chatter was”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“So it took him until 1982 until he quit his day job teaching at UC Irvine. So that's pretty crazy. That's what? Close to 15 years. Thorpe is slow to display his now considerable wealth. In the office, he dressed like a California professor on his day off in shirts and sandals. When the Thorpes finally decided it was time to buy a big house, they chose a hillside 10-bathroom home said to be the largest in Newport Beach. This kind of gives you an idea of how he's doing. I've seen interviews. He won't tell how much money he's made. It had a Fallout shelter with 16 inch thick concrete walls and steel doors. And why do I bring that up? Like, why am I including that part in the podcast? It's not just to talk about big houses. It's because it gives you an insight into his mind. Ever mindful of the odds, Thorpe computed that it could withstand a one megaton hydrogen bomb blast as close as a mile away. Neither Thorpe”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Also, a smart way for entrepreneurs to do so. He measured his words like he measured everything else. Thorpe was careful to characterize his fund's performance as getting rich slowly. So what I mean about approaching things as a scientist is like he has a theory that he needs to test that theory in the real world. And as a result of testing your theories in the real world, you're going to get unexpected results. That's what I meant about that. Okay.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“He believed that Buffett would one day become the richest man in America. Buffett's verdict on Thorpe was also positive. Gerard, who had done quite well with Buffett, decided to invest with Thorpe, and so they're kind of bonding over the fact that their Thorpe, Shannon, Buffett, they're the direct opposite of this idea that the market is efficient. And Thorpe says, the question wasn't, is the market efficient, but rather how inefficient is the market and how can we exploit this? So Thorpe's approach is completely different than others at this time and anytime you're going to do anything different you can be expected to be criticized and be told that you're wrong. So now is he applying math, but he's using computers. And so the Wall Street Journal does a story on Thorpe and his new Princeton Newport hedge fund.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“And Thorpe finds this guy named Reagan. And Thorpe lives in California. Reagan lives on the East Coast. And what blew my mind is Thorpe starts working remotely. And this is, I think back in the 60s. All right, so this is Thorpe talking. He says, Regan was a natural promoter and extrovert. He was going to have, he was going to do the things I didn't want to do, which were like interface with brokers, accounting, runaround Wall Street, getting information, that sort of thing. What I wanted to do was think workout theories and try to put them into action. We were actually happy being separate because we had different styles and very different personalities. Being separate was one of the oddest parts of this arrangement. So they're talking about the fact that this is a remote company. Thorpe did not want to give up his UC Irvine Post Ralph. It's kind of crazy that he's running one of the most successful hedge funds. And then he finally quits years later. But this kind of showed you how cautious he is.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“He's looking for partners, and you have to pick lesson here is you have to pick the right business partners. And the reason Thorpe doesn't pick Cass off because there's a philosophical difference. It says, Cassoff believed that he could sometimes predict in which direction certain stocks were going to move. Kassoff was willing to buy stocks he thought were going up and sell short stocks he thought were going down Thorpe wasn't He was unconvinced at Cassoff or anyone could predict the market that way So he winds up, I know I left myself as Storp finds the right partner and starts a hedge fund. I find out later on that that might not have been the case. He definitely started a hedge fund. Not sure he found the right partner. But now this is going to be the beginning of one of the most successful.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Thorpe began trading warrants. His hedging system, and he calls this the Delta hedging system. His hedging system hoped, or his hedging system worked as he had hoped by 1967, Thorpe had parlayed his original $40,000 into $100,000. So Thorpe writes a letter to Shannon, and he tells them, he's like, listen, after several false starts, I have finally hit pay dirt with the stock market. I have constructed a complete mathematical modical model for a small section of the market. A major portion of my modest resources has been invested for several months. We set a tentative first goal of doubling the capital every two years. It isn't far away now. So Thorpe winds up being successful. He winds up wanting to run money for other people, for outside investors, so he writes a book, publishing his system.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Switches schools to UC Irvine. So it says summer 1964 brought changes in Thorpe's life. The grant supporting his appointment at New Mexico State had run out. On Thorpe's first day at UC Irvine, he had happened to mention his interest in warrants to Julian Feldman, the head of the computer sciences department. Oh, Feldman said, We've got a guy who's doing the same thing. He was talking about the economist named Sheen Kassoff. Feldman introduced Thorpe to Kassoff, and they resolved to do a weekly research seminar on the subject. But there were no students. Thorpe and Kasoff simply met weakly to figure out how to get rich.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Realized that if I pushed it sooner or later, some unpleasant physical things would happen in Nevada. He decided to direct his talents toward the biggest casino of all, the stock market. So he starts out, but he doesn't really know too much about investing. And he loses a large percentage of the little money he has speculating on silver, and he learns a very valuable lesson that kind of ties into Buffett's ideas, among others, about never betting or investing your time or money in an area where you have no edge. So Thorpe says, I learned an expensive lesson regarding all the money you lost in silver. And he says the lesson was you are unlikely to get an edge out of what you see in the news. So Thorpe decides, hey, I got to look where I have an edge. He has some unique insights on options and warrants. And at this point in his life, Ed Thorpe is going to move to Southern California, and he's going to start his work on options.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“So, this is the problem, though. He's drawing a lot of attention to himself. So even if they don't, they're not recognizing him because he's walked into their casino before, he starts, people obviously end up the gambling industry are going to hear about his book. And so even though Thorpe is playing on his own, the casinos fight back. And this is what I mentioned earlier. Like there's no rule in life that saying that other humans are going to play by the rules. And if you don't understand that, you could put yourself in a very dangerous situation. And Ed Thorpe almost died doing so. He says, no interference from casinos was becoming an unrealistic assumption. While playing at one casino, Thorpe was offered a drink. After drinking it, he noticed he had problems concentrating. Thorpe staggered up from the table and got to his room. His eyes were dilated. It took about eight hours for the effect to wear off. I know of three beatings, Thorpe said. One was a well known blackjogged card counter and he had a lot of his face caved in.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Now, what's so special about the specific system that Kelly devised? The answer is simply that the Kelly system grows wealth faster than any other. All right, so let's go back to Ed Dorp. At this point, it's funny to me because if you really think about the life story of Ed Dorp, he's a kid that's born poor, and yet he goes on to learn and build more wealth than he could ever spend. And the reason he moves across the country and stops working with Shannon is because he needed the money. New Mexico State offered a salary of about 50% more than Thorpe was making. Living costs would be much less as well. The money weighed heavily on Thorpe as he and his wife were now raising a family. So Thorpe accepts the offer. Thorpe writes a best-selling book called Beat the Dealer, and then he starts using his counting system to make some side money. So now he's going to his own. He's not with Manning and all these other mafia guys. He obviously realizes they're in a mafia by now. So as doing some press for Beat the Dealer, he gets profiled by a magazine. And it says...”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“of proportional betting. As the bank role grows, you make larger bets. Assuming you have an edge, and that is the biggest, biggest, biggest part, one of the biggest parts. Maybe, no, let me say it's the biggest part. Assuming you have an edge, in the long run, you will win more than you lose. This is important to investors. It's important to entrepreneurs. There's no point in starting a business if you don't feel you have an edge. Buffet, munger, Thorpe, and Shannon all agree. If you don't have an edge, you don't bet and you don't compete.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Wind up burning to $11,000. Like, he didn't know what he was doing. So essentially, it should have been $32,000, but they made $11,000. So it says, this is how profitable, and then this is how Thorpe thinks about it. He breaks it down profitable per hour. Thorpe's system, $11,000 profit in 30 hours is $366 per hour playing blackjack. If Manny didn't mess it up, they would have made $733 per hour. So it's safe to say that Ed Thorpe has thrown away to indeed beat the dealer. And not only is the system effective, but he's also using the Kelly system, the Kelly criterion, to figure out how much to bet. So I want to talk to you a little bit more about that real quick. And again, it's just states that even in unlikely events must come to pass eventually. So it says, given a fair...”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“They don't care if they could prove you're counting cards or if you have a system for beating blackjack. When you're too successful, especially at this time, they immediately start cheating or kicking you out of a casino or in some cases trying to kill you. So eventually they're all identified at all the casinos they go to. So they walk in a casino and they're immediately like pushed out. So they make money though. And again, Manny wanted to start with $100,000. Thorpe was the one that brought it down to 10, right? You can imagine how much money they would have made if they would have started with $100,000. But this is a, so once they become too well known in Vegas, it terminates their experiment. Now, here's the result of that. By Thorpe's estimation, they had built $10,000 into $21,000 in about 30 hours of play. And that was after Kimmel wasn't listening to Thorpe.”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source
“Thorpe is going to run into some of these people. And I think just something you should learn in life that I think is obvious, like there are some people in life that you should just not mess with. And I always go back to that book I did on Cornelis Vanderbilt where, yeah, he's a businessman, he's an entrepreneur, he's the wealthiest person in the world at the time, but he also will break the law and try to have you killed if you go against him, if you remember what he did to in the book Tycoon's War when somebody thought they had a good idea of confiscating some of the ships. He went and sent like assassins and mercenaries and other countries' armies after him. So you just have to understand that in life there's just certain people that don't care about rules. And if you mess with them, you could have consequences, which is what makes what Thorpe is doing right now extremely dangerous. And this is an example of somebody, I'm going to call him Wilman because it's”
2019-10-07 · Founders · #92 Ed Thorp and Claude Shannon · IDENTIFIED FROM THE TRANSCRIPT · source