Book review: “A Man for all Markets” – Edward O. Thorp

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“A man for all markets” was a book I was eagerly waiting for. Although not as famous as other financial gurus like George Sorros or Warren Buffett, Ed Thorp in my opinion beats most of them when it comes to actual achievements. Among other things he

  • developed the first system to “crack” Black Jack
  • developed the first wearable computer in order to get an edge in Roulette
  • became the first quant hedge fund after he switched from gambling to investing
  • developed and used the option pricing formula years before Black and Scholes published it and latter received the Nobel prize
  • met Warren Buffett in the 60ies and later invested into Berkshire at a price below 1000 USD per share (although he complained that he didn’t invest at 50 USD)
  • proved for a client that Bernie Madoff  was a fraud in the early 90ies, 15 years before the whole thing blew up
  • created one of the best hedge fund track records of all times
  • gave his “system” to Ken Griffin from Citadel who then created one of the most succesful Hedge Fund firms based on Thorp’s insights

 

The book starts with some childhood stories which show Ed Thorp as an introverted but clever guy who was most happy tinkering with stuff. He grew up in what we would now call “lower middle class” and had to work hard to get into university. Interestingly, he started studying physics but then switched to math because he could get his phd faster.

I think the really remarkable aspect of Ed Thorp’s career is that he was 100%  self tought. He didn’t go to any fancy business school or had some guru to teach him how it is done.

He describes that his way into finance was simply  to read a few books during the university summer break  including Benjamin Graham and then just applied his mathematical knowledge to the stock market.

One fun fact: I think this is the first time that I read about Warren Buffett’s beach house in California. Ed Thorp had been invited by Buffett at some point in time and describes it as a very nice house in a gated community with a great private beach. So much for humble old Warren only living in his old house in Farnam Street, Omaha, Nebraska.

Another interesting aspect was that he also seems to like “special situation” investing such as undervalued closed end funds, thrift conversions but also situations like 3Com/Palm etc..

Towards the end of the book, Ed Thorp shares his insights on the financial markets and life in general and also recommends index funds to “normal” investors.

As with the whole book, his advice is very down to earth (buy index funds or Berkshire Hathaway…)

 

Summary:

I highly recommend this book to anyone interested in investing. Ed Thorp is a great character with so many unlikely achievements. For me the most inspiring aspect of this is that being “self-taught” really seems to be a clear advantage in investing, especially combined with a good grasp of probabilities.

 

16 comments

  • Self taught seems to be good, especially when you are a genius 🙂

  • So, I am a fan of Taleb (foreword) and want to be a fan of Thorpe, and seems like people like that don’t want to say anything bad about this book…
    but found myself skipping through the first couple of childhood chapters which were not only not interesting, but also badly written imo (might be a biography thing… haven’t read many of those).

  • Super review as always 🙂

  • Warren Buffett’s “beach house” as you call it, really isn’t a beach house. It’s the residence he purchased for his wife Suzie in San Francisco after they split up and she moved away. Unless you’d consider his annual visits to her a “summer home event”, it wasn’t anything like you described.

    • I think you are talking of something different. In Thorp’s book, Thorp is talking about a “house” in Emerald Bay, Laguna Beach /Los Angeles. According to the book he bought it in the 1960ies. I think he didn’t split up with Suzie in the 1960ies…..

      And again, I don’t call it a “House” but Ed Thorp in his book.

      I would suggest you read it yourself first and then discuss 😉

      Ther you go: It clearly is a “House”:

      http://la.curbed.com/2011/10/10/10435130/laguna-beach-buyers-selling-warren-buffett-house-at-a-loss

      • The Laguna house was purchased by Warran AND Suzie in 1996. Your last statement comes to mind. 😏

        http://www.realtor.com/news/real-estate-news/warren-buffetts-former-home-in-laguna-beach-on-the-market-photos/

        • Well, two answers to this:
          1) Ed Thorpe was in Buffett#s beach house in the 1960ies or early 70ies. Just read it !
          2) in this article it says Buffett bought the house in 1971:
          http://www.forbes.com/2005/08/15/laguna-oceanfront-luxuryhomes-cx_sc_0815how_ls.html

          Prices took a dip in the mid-1990s, but consider this: Warren Buffett, the king of value investing, bought a house in the gated community of Emerald Bay for around $150,000 in 1971. Today, it’s thought to be worth somewhere around $5 million.

          So I assume that the link you have posted either has a wrong date for the purchase or Buffett had more than one house. Again, I am not the Buffett real estate expert but it seems pretty clear that he had a nice beach home since a very long time. Maybe hi signed it over to Suzie in 1996 ?

          Maybe Thorp with his 84 years doesn’t remember things correctly ? Who knows, but it’s in the book and fits to the Forbes article which I think is the higher quality source.

      • Here are more details :
        From book “A Man for all Markets” :
        Warren invited the Gerards and me to join him another time for an afternoon of bridge at his house in Emerald Bay. This upscale gated community of the very rich at the north end of Laguna Beach, California, had its own magnificent private beach and ocean views.

        From book “Snowball” :
        She [edit: Susie] had “fallen in love” with the place they had been renting at Emerald Bay in Laguna Beach, perched fifty feet
        above the ocean among a group of other luxury vacation homes. [Interviews with Racquel Newman, Tom Newman]
        Warren particularly disliked buying houses, considering money spent on them as lying fallow, not earning its
        keep. Susie needled him about money. “If we were rich,” she said, “you would just go up to that house, and
        ask the owner how much she wants for it, and pay however much she asked. But I know we’re not rich.” In
        their perpetual tug-of-war, however, Susie was usually able to dislodge the cash from him in the end. Buffett
        eventually sent Roy Tolles’s wife, Martha, a canny bargainer, to negotiate for the house. She dickered the
        owner down to $150,000, [His mortgage was $109,000 in 1973.] and when Roy Tolles called to tell Warren, he said, “I have bad news. You bought it.”
        (…)
        After Susie’s death [2004], both of her apartments in San Francisco’s Pacific Heights were sold, as was the
        Buffetts’ second house, “the dormitory,” in Emerald Bay. Buffett kept the original house in Emerald Bay,
        which continues to be used by his children and grandchildren. He never goes there.

        From “Fortune’s Formula”, by William Poundstone 2005:

        “The dean of UC Irvine’s graduate school, Ralph Gerard, happened to be a relative of legendary value investor Benjamin Graham. Gerard was then looking for a place to put his money because his current manager was closing down his partnership. Before commiting any money to Thorp, Gerard wanted his money manager to meet Thorp and size him up.

        [Ed Thorp UCLA Phd. in Physics, author of ‘Beat the Dealer’, Math instructor at MIT and UC Irvine. He Had just started Convertible Hedge Associates in 1968 with James Regan].

        “The manager was Warren Buffett. Thorp and wife [Vivian] met Buffett and wife for a night of bridge at the Buffetts’ home in Emerald Bay, a community a little down the coast from Irvine. Thorp was impressed with Buffett’s breadth of interests. They hit it off when Buffett mentioned nontransitive dice, an interest of Thorp’s. These are a mathematical curiosity, a type of “trick” dice that confound most people’s ideas about probability.

        “At the end of the evening, Ed told Vivian he believed that Buffett would one day be the richest man in America. Buffett’s verdict on Thorp was also positive…..”
        cite Page 153.
        http://boards.fool.com/nontransitive-dice–23309144.aspx?sort=whole#23309144

        from 2005:

        WARREN BUFFETT’S O.C. HOUSING

        STILL OWNS
        Address: xx Emerald Bay, Laguna Beach
        Built: 1936
        Bedrooms: 3
        Baths: 2
        Home size: 1,818 square feet
        Lot size: 3,248 square feet
        Last tax bill: $2,361
        Buffett’s purchase: April 6, 1971 for $151,000
        Value: In October 2003, Buffett said $4 million. Assuming the market’s ensuing typical appreciation: $5.2 million today.

        JUST SOLD
        Address: 35 Emerald Bay, Laguna Beach
        Built: 1954
        Bedrooms: 2
        Baths: 2.5
        Home size: 2,409 square feet
        Lot size: 3,190 square feet
        Last tax bill: $12,359
        Buffett’s purchase: September 1996 for $1.05 million
        Sold: February 2005 for $3.5 million

        Sources: DataQuick, Multiple Listing Service, county records

        Price history of the sold house :
        https://www.zillow.com/homedetails/35-Emerald-Bay-Laguna-Beach-CA-92651/25140158_zpid/
        Photos
        http://boards.fool.com/buffetts-former-home-29623391.aspx

        From book : Of Permament Value :
        “Buffett’s net worth now is roughly equal to the gross national product of oil-rich Kuwait. But he
        carries no debt.
        For years his only debt was a mortgage he has since paid off. That mortgage was on a three-
        bedroom, two-bath second home he bought in 1971 in Laguna Beach, California, at Emerald Bay,
        overlooking the Pacific Ocean. Laguna Beach, where John Steinbeck wrote Tortilla Flat in 1935, is
        known for its Mediterranean climate and artsy atmosphere. He bought the home, now enlarged, for
        $150,000 when the assessed value was $185,000. Buffett sold the home after his first wife died in
        2004. He sold at the top of the housing market 2005 for $5.45 million.
        (…)
        Speaking to Salomon Inc’s clients on September 13, 1991, about his distaste for debt, Buffett
        said, ‘You’re looking at a fellow who owes $70,000 on a second home in Laguna and I’ve got
        that because of the low rate…and that’s all I’ve owed for I don’t know how many years.’ …
        ‘If you’re smart, you don’t need debt. If you’re dumb, it’s poisonous,’ he said.”

        Buffett bought another home in Laguna right behind the first one in order to meet the needs of an
        ever-growing family. Later, he sold the second Laguna home for $3.5 million.[It sold the first day ! ] At the Berkshire annual meeting in 2005, he said, “It was on about 2,000 square feet of land maybe a 20th of an acre,
        and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre,” he joked.”

        • Wow, thank you. So we have now 2 houses in Laguna beach and 2 appartments in SF. Already a small real estate empire,,,,,

        • So the 3 of you were right! Don’t forget from the “empire” a “farm and the NYU real estate” http://fortune.com/2014/02/24/buffetts-annual-letter-what-you-can-learn-from-my-real-estate-investments/ 😉

        • Well, it seems that Warren reads your blog ! Hi Warren ! Just come by and say hello ! 😉

          Warren Buffett lists longtime Laguna Beach home for $11 million
          https://www.wsj.com/articles/warren-buffett-lists-longtime-laguna-beach-home-for-11-million-1487344530
          Zillow estimates it at $3M.
          https://www.zillow.com/homedetails/27-Emerald-Bay-Laguna-Beach-CA-92651/25140190_zpid/
          $0.3M recently spent for renovation ?
          https://www.arivify.com/property/search/RleapSQGc

          A few more info :
          From book “The Quants” by Patterson : “It occurred to Thorp that the best way
          to invest for a number of people would be to create a single pool of assets,
          but he wasn’t sure how to go about it.
          The solution came from a man quickly gaining a reputation as one of the
          savviest investors in the world: Warren Buffett.
          In the summer of 1968, Thorp drove from Irvine to Buffett’s house in
          Laguna Beach, where Buffett often vacationed when he wasn’t
          accumulating millions from his office in Omaha, Nebraska. Buffett was in
          the process of winding down his investing pool, Buffett Limited
          Partnerships, and distributing its assets to his investors—including shares
          of a New England textile factory called Berkshire Hathaway. In the coming
          years, Buffett would transform Berkshire into a cash-generating
          powerhouse that would turn the legendary investor who came to be known
          as the “Oracle of Omaha” into the richest man in the world.
          At the time, however, Buffett wasn’t very enthusiastic. Market conditions
          were unfavorable, he’d decided, and it was time to call it quits. One of his
          investors was Ralph Gerard, dean of the University of California, Irvine,
          where Thorp taught. Gerard was looking for a new place to invest his
          money and was considering Thorp. He’d asked Buffett if he would size up
          the hotshot math professor who was making a killing on stock warrants.
          Buffett told Thorp about his partnership, which used a legal structure
          similar to the one created by his mentor, Benjamin Graham, author of The
          Intelligent Investor and father of value investing. The structure was also
          used by a former writer for Fortune magazine named Alfred Winslow
          Jones. It was called a hedge fund.”

          Thorp’s Hedge Funds Performance :
          http://www.fortunesformula.com/ThorpsHedgeFunds.html
          http://www.fortunesformula.com/ThorpsFoFs.html
          Since the late 1960s, Thorp has used his knowledge of probability and statistics in the stock market by discovering and exploiting a number of pricing anomalies in the securities markets, and he has made a significant fortune.[4] Thorp’s first hedge fund was Princeton/Newport Partners. He is currently the President of Edward O. Thorp & Associates, based in Newport Beach, California. In May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years
          https://en.wikipedia.org/wiki/Edward_O._Thorp#cite_note-Market-15
          http://webhome.idirect.com/~blakjack/edthorp.htm

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