I will admit, I haven’t written any book reviews in the last few months. That is why I’ll give you two book reviews one after another. Today it will be A Man For All Markets (2017) by Edward O. Thorp. If you’re in finance and you haven’t read this book, well, you’re lacking.
About book reviews: a lot of people charge for book reviews which they sell in packages. We’ve never done that. Some people with popular blogs don’t even write book reviews, which they consider “below” them. Others write bite-sized “buy this book” reviews which aren’t really reviews, only recommendations. Needless to say, on this blog I don’t do that. I believe in reading books as a main source of knowledge and whenever possible I buy paper books. (just to keep me away from the damn digital space). Reading a book is a process that I enjoy, it is one of my “keystone” habits. If you don’t have the habit, and you open your phone and tablet every time…you know what you’re doing. Good luck wasting your life away. (and get off my blog).
Dr. Thorp need little introduction. He wrote The Beat the Dealer, Beat the Market, Elementary Probability. He had bridge with Buffett. He ran the very successful hedge fund Princeton Newport Partners and Ridgeline Partners (18% YOY return in 25 years). Although I’m in finance, I dab in games of luck, so I was very interested in the blackjack and roulette technique Thorp develop in the ’60s.
Thorp thinks the ordinary player can still beat the game of blackjack. “For instance, never play at a table where the payoff for getting the two-card 21 has been changed from the original 3:2 to lesser amounts like 6:5 or 1:1“. Or course, casinos changed the rules when people like Thorp showed up, and many times he was declared non-grata. How do you play it? Do you stand when the dealer shows an upcard of 4, 5 or 6 ?
On roulette, as we know, the winning bet on a single number pays 35:1 meaning you get back your stake plus a profit 35 X you bet.”
The author tells us the childhood game of Rock, Paper and Scissors is a simple example of a nontransitive rule. How ? Rock beats (breaks) Scissors, Scissors beats (cuts) Paper and Paper beats (covers) Rocks. Wow !
Thorp muses on the distinction between “satisficers” and “minimizers” which he likens to something called the secretary or marriage problem:
“Assume that you will interview a series of people, from which you will choose one. Further, you must consider them one at a time, and having once rejected someone, you cannot reconsider. The optimal strategy is to wait until you have seen about 37% of the prospects, then choose the next one you see who is better than anybody among the first 37% that you passed over. If no one is better you are stuck with the last person on the list.”
A Man for All Markets
Thorp pioneered the STAR or “STatistical ARbitrage” and his portfolio was market-neutral by “constraining the relation between the long and short so that the tendency of the long side to follow the market is offset by an equal but opposite effect on the short side.”
Thorp brings compound interest into the discussion and “The Rule of 72”:
“If money grows at a percentage R in each period the, with all gains reinvested, it will double in 72/R periods.”
He makes the interesting observation that “we typically put less value on each successive $1,000 increase into our net worth, and that we feel that way about all scarce useful items, so called economic goods.”
The author discusses the Financial Crisis of 2008 in his “Financial Crises: Lessons Not Learned” Chapter. Does he ever touch on the subject of executive over-compensation, that we talk about so often on this blog ? Yes ! He quotes Mosher Adler’s article “Overthrowing the Overpaid”:
“Over 200 years ago, economists David Ricardo and Adam Smith concluded that what a person earns is determined not by what that person has produced but by that person’s bargaining power.”
Gee, no wonder you read this blog instead of the dozens of bullshitters out there.
You’re being fucked ever time and time again…I don’t mean it properly.