I first heard of Ed Thorp from the Mr. Skin-in-the-Game himself, Nassim Taleb. It was his glowing respect for Thorp that piqued my interest, as the maestro normally isn’t swift to dole out compliments. Ed has two notable books “Beat the Dealer” and “A Man for All Markets”, the latter being his colorful memoir and one of my personal favorite biographies. Such an intricate read with a multitude of stories from Sin City casinos to raucous Wall Street fuckery, big-brain academia to United States politics, and yes— even the Mafia.
Needless to say, I was entranced by his life story, the guy is cerebral rockstar. Once he got out of Vegas by the skin of his teeth, he started his own shop, “Princeton-Newport Partners”, which he ran for nearly twenty years and had only three down months. Thorp averaged a cool 20% in returns over thirty years. (idk is that good?)
At Newport, he represented many reputable corporate names and hollywood elites, but that wasn’t what intrigued me about Eddy. His early interest in the math’s eventually compounded into him slowly fleecing Las Vegas casino’s and playing the stock market like a fiddle. He was but a puny Harvard professor when he figured out how to beat the seemingly invincible game of blackjack. (if you’re beginning to think this is the plot of the movie “21”, that’s a bingo.)
Thorp’s contribution to the art of card counting is parallel to Michelangelo’s contribution to that one pretty cool chapel in Rome. Fortunately this collection of principles was jotted down and is known as “Beat the Dealer”. The book gave blackjack players an edge to the point of Vegas casino’s legitimately altering their rules so that “The House” wouldn’t become “Ed’s House”.
Oh he wasn’t done though; a year later he and a friend, Claude Shannon, developed the first wearable computer to crack the Da Vinci code that is the Roulette wheel. The result? An increase of 44% edge against the casino by predicting where that little ball would land. Soon, the suits behind the scene in Vegas started to wise up and ban Eddy T from playing their tables, so in the process of being exiled out of town he looked toward the next best opportunity zone to build wealth: Wall Street, duh.
He figured it was a hell of a lot safer than the wild west, and if he could take the same commandments he used to bitchslap Vegas and plug them into quantitative models for stock market, he would be printing money in no time. This is when the legendary Black-Scholes model was borne and Thorp soon became one of the Street’s first mathematical “quant”. Along the way, he’s earned Buffet’s respect (fwiw), pioneered statistical arbitrage, called out the Bernie Madoff fiasco long before it came to fruition, and became the first investor in Ken Griffin’s hedge fund, “Citadel”. Go ahead and check how many comma’s they take down each year, we’ll wait.