Inside Ed Thorp’s Investment Book
Blackjack legend, Ed Thorp has done it again. It’s been more than half a century since Thorp turned casino blackjack on its head with his book, Beat the Dealer, which proved that the house edge could be beaten via card counting. Now in his eighties, Thorp has turned his mathematical genius to a new money-making pursuit – the stock market.
In his latest revolutionary book, cleverly entitled A Man for All Markets, Thorp reveals how the principles of smart blackjack play can be applied to ensure stock market success. Here’s a quick overview of just some of the invaluable blackjack-based investment tips explained in A Man for All Markets:
Analysis Possible and Necessary
The reason why Beat the Dealer was such a game changer is that it conclusively and mathematically proved that the blackjack house edge is not untouchable. By sharing his card-counting secrets, Thorp revealed that the game can be analysed, enabling players to greatly increase their advantage by making informed decisions.
The stock market system, says Thorp, is simply a more complex version of blackjack. Although blackjack is a closed system (i.e. there are a limited, knowable number of variables) and investment involves myriad highly volatile possible outcomes – the essential principles of the two systems remain the same.
According to Thorp, the trick in investing is to identify as many variables as you possibly can. Information is king on Wall Street so the more you have, the greater your “edge”. This means that investment players need to be in it for the long haul because all that research takes time. Thorp lists the primary source of stock market information as internet data mining to identify trends. To turn this information into something of use, investors must then identify key performance indicators and rank them in order of their potential impact on the stocks.
Still Manage Your Bankroll
Even the most brilliant blackjack players can’t up their advantage to much more than 1.5%. This is why Thorp used the famous Kelly Criterion to weigh up risk and return. According to him, the same applies to investment.
In support of this view, Thorp reminds the reader that even Nobel laureates make costly mistakes, recalling how the brazenness and miscalculations of these experts in operating their massive long-term capital management hedge fund brought about its collapse in 1998, which “almost destabilized the U.S. financial system”. The stock market is, by definition, extremely volatile.
If this kind of catastrophe is to be avoided, investors must engage in meticulous risk management – just as blackjack players must exercise careful bankroll management. This doesn’t mean that you should never take risks (risks are how the big money is made in blackjack as well as the stock market); it is simply a matter of taking calculated risks that don’t involve putting absolutely everything on the line.
Strategy is Non-Negotiable
Just as, in 1962, Thorp proved that blackjack is not entirely a guessing game, he has now confirmed that strategy is essential in investment too.
Simply picking any old stock and hoping for the best is extremely unwise and certainly unnecessary. Remember, the stock market can be analysed. Thorp likens counting cards in blackjack to proper evaluation of stocks and identification of pricing anomalies (was the stock over- or undervalued?) in the investment game.
For proof of the continuing efficacy of Thorp’s blackjack-based investment strategy, one need only consider the fact that he has enjoyed a 20% return on his investment over almost 30 years.