You can’t time the market, and you can’t beat the house. Right? Wrong.
What makes a good investor? To gauge from this amiable account by math whiz, professor, gambler, hedge fund manager, and investor Thorp (The Mathematics of Gambling, 1984, etc.)—one of the early “quants,” as brokers call number nerds—much hinges on being curious and being willing to do the work necessary to satisfy that curiosity. In his case, there’s also a contrarian streak at play; told, like all of us, that the winning odds are always with the casino and that there’s no way to reliably play against the house, he took the scientific approach and tested the assertion. “I formed the habit of taking the result of pure thought—such as a formula for valuing warrants—and using it profitably,” he writes. And did he ever. Blessed with a bent for understanding complex mathematics and being able to do sums in his head (a lost art, he assures us, that just about anyone can master), he first went to Las Vegas as a kind of validating experiment to confirm the suspicion that a deck of cards “that isn’t well shuffled may have predictable patterns that can be exploited.” Discovering those patterns is the rub, and Thorp’s abilities outshine those of most mortals, which would seem to be true of his power to read a futures contract and a balance sheet. His account of making a broker blanch with a daring hedge maneuver during the height of the October 1987 crash is an exercise in learned derring-do, with the upshot that while the S&P dropped by a quarter, he at least broke even during the worst of it and gained in the long term. It’s the kind of thing any would-be investor, to say nothing of casino cowboy, ought to read.
Thorp’s in-the-trenches account of gaming the system(s) is a pleasure—and instructive, too.