The ultimate dream of market mavens is discovering a method that predicts the price movement of the major common stocks such as the 30 Dow Jones Industrials. Obviously, such a system could not make the perfect prediction, could not be 100% right all the time. But there have been prediction methods exploiting price discrepancies that gave investors an edge of perhaps 20-25% or more a year.
For instance, back in the 1960s, Edward O. Thorp, onetime university professor and mathematical whiz, discovered a hedging system for all kinds of convertible securities and their related common stocks that produced an average yearly gain of 25% for five years. But guess what? When he tried to interest wealthy investors in his scientific system for stock market profits, he ran into either rampant skepticism and/or an attitude that they would rather do it themselves.
One oil baron with an income of more than $1 million a year . . . was not excited when he learned that we were making 25% a year in the market. Suspecting the reason, one of us questioned him closely and learned he expected to earn 50% on his assets in the coming year. All his funds were committed to his oil business and he was hungrily seeking more cash. It was more profitable for him to invest his money himself.
One of our millionaire friends saw his equity in the market shrink from $1 million to $400,000 during the 1966 crash. He then invested $20,000 with us. After he got a glimmer of the method from the trade slips, he commented that it was a ‘sure thing’. He accepted our estimate that it would most probably take about four or five years to expand his $400,000 to $1 million again.
This was too slow for him. In his heart he believed that this market which had so quickly sliced his $1 million to $400,000 would just as quickly give it back again. He was not the owner now of a mere $400,000, but rather of $1 million that was whimsically imprisoned and that must soon be returned to him. To get his $1 million back he would have to invest his money himself, presumably by the same amazing methods that had recently been so costly.
We knew that he wondered how our abstract ‘system’ could produce better profits than his investments. The investments which dealt him such rapid, enormous losses were recommended by close friends on the inside of companies. Those tipsters assured him that they too had lost temporarily. But they were investing even more now that prices had fallen to such bargain levels. When prices rebounded soon, all losses would be wiped out, the originally expected profits would be realized, and the extra investments made at bargain prices would yield a fortune. Yes, he would rather do it himself . . .
. . . Beat The Market, by Edward O. Thorp & Sheen T. Kassouf