Beat the Market. A Scientific Stock-Market System. One of the most influential books of all time on Wall Street, whose methods launched “the quant” revolution of modern quantitative finance. The book offers step-by-step instructions, with explanatory, charts and tables, whereby anyone with $2000.00 brokerage account can conduct his own investment. He is best known as the author of Beat the Dealer (1962). This was the first book to prove that the house advantage in blackjack could be overcome by card counting. As part of this work he collaborated with Claude Shannon in creating the first wearable computer in 1961.
![Edward Edward](https://thumbs.worthpoint.com/wpimages/images/images1/1/0410/19/1_23b985c478d8c4b98f696797b54531dd.jpg)
Pysh: [11:50] How do you see the market today? Considering that we may be at the top of the credit cycle, how do you think through position sizes and what are your expectations?
Thorp: I think it might have been J. P. Morgan that asked me if he should sell because how high the market is. The advice I gave was this: sell down to the sleeping point. As far as asset classes go, it is hard to know when you are in a bubble, and if you are in one, when it will pop. You never know when it is exactly going to pop but you know it will at some point. Right now, we have an attack on regulations that are reining in the banks from levering up and the derivatives industry from taking too much risk. The more the regulations are removed, the more chance we have at a rerun of 2008. Last time, the taxpayers bailed almost everyone, and we will probably have to depend on that again. Heads, the risk takers win, and tails, the public loses.
Pysh: [17:45] One of the narratives we hear a lot of very intelligent people talk about is the idea that the next financial event will be induced by central bankers and the distrust of central banking. Do you personally see the next cycle being induced by central banks?
Thorp: I do not know the answer to that.
![Thorp Thorp](/uploads/1/2/5/7/125718524/555167980.jpg)
Pysh: [18:55] I love that response, that is something I can learn a lot from. I immediately thought about how Warren Buffett often says to have a strong understanding of what you know versus what you do not know.
Thorp: Well, I read a good book recently, Superforecasting by Dan Gardner and Philip Tetlock. They wanted to see whether people can forecast better than chance. What they found is that experts often do not have much to tell us things of value. Experts receive a lot of media attention because they make strong, definite claims. But definitive claims are usually not accurate predictions; we can only see the future fuzzily. People that tend to weigh different possibilities can make somewhat better predictions than chance. On most things, we can speculate about a lot of possibilities. But it is difficult to get enough of an edge to actually make a bet and expect to make a profit. Regardless, it is still worth speculating because you can be ready psychologically.
Stig Brodersen: [21:48] You were successful in the blackjack scene, but you also have had an annual return of 20% for 30 years. Could you talk about your career transition?
Thorp: I became interested in investing because I had made some money through gambling and royalties. This meant that for the first time in my life, I had enough money in savings. After doing poorly in my early investments, I was determined to take it more seriously. By chance, I got a book called Common Stock Purchase Warrants As soon as I read about them, I realized that I could get rid of almost all risk in investing and still get some return if those loans were priced incorrectly. In a telephone market, there was every reason to believe that they were not priced correctly quite often. That summer, I met a professor at UC Irvine who wrote a thesis about common stock purchase warrants. We hit it off on our ideas, and we decided to meet every week to improve the theory as well as his investment returns. We made about 20 to 25% a year. The dean of the graduate admission had become one of the investors, and he introduced me to Warren Buffett. I saw that Buffett was very intelligent and dedicated. He really understands long-term compounding. I learned from Buffett that a more official way to operate was to have a limited partnership, so I set up the first quantitative market neutral hedge fund.