Edward O. Thorp

I was talking to my friend, and 60-year stock market veteran, Jim Rivenes (Raymond James) last week and somehow, we got on the subject about Edward Thorp an individual Jim use to have as a client. It reminded me of a report I wrote in 2005. I like this report.

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. According to 25iq:

“Edward O Thorp is the author of Beat the Dealer, which was the first book to prove mathematically that blackjack could be beaten by card counting, and Beat the Market, which showed how warrant option markets could be priced and beaten. He also was the co-inventor of the first wearable computer along with Claude Shannon. Thorp also pioneered the use of quantitative investment techniques in the financial markets (Option Arbitrage, Warrant Modeling, Convertible Arbitrage, Index Arbitrage and Statistical Arbitrage).”

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. As written in the book: “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.