Join us as we learn about Edward Thorp a groundbreaking mathematician who used intense thinking and math to beat blackjack, invented the first wearable computer for roulette, and later pioneered quantitative investing on Wall Street. His story is a testament to the power of independent thinking, rigorous analysis, and staying true to one's principles.
In this episode, we dive deep into the remarkable life and mind of Edward O. Thorp, the mathematician, investor, and author behind the classic autobiography A Man for All Markets. Thorp’s story reads like a financial thriller—complete with wearable computers, Las Vegas takedowns, Wall Street innovation, and a lifetime of thinking independently against the grain.
From his earliest memories during the Great Depression, Thorp displayed traits that would shape his career: intellectual curiosity, self-reliance, and an unrelenting drive to test conventional wisdom. As a boy, he taught himself math and science, created at home laboratories, and devoured literature—often finding refuge in books while navigating a fractured family life. These formative experiences built the foundation for a lifelong obsession with experimentation, data, and learning by doing.
Thorp’s breakthrough came when he used self-built computer simulations to beat blackjack. His strategy, later published in the seminal book Beat the Dealer, stunned casinos and revolutionized the gambling world. Working alongside legendary mathematician Claude Shannon, Thorp also created the world’s first wearable computer to gain an edge at roulette—decades ahead of the tech curve.
But Thorp’s real triumph came when he turned his mathematical prowess to Wall Street. Frustrated with dishonest casinos and rigged games, he began studying the stock market, searching for edges hidden in plain sight. He pioneered quantitative investing long before it became mainstream—hedging convertible bonds and warrants with mathematical precision. This strategy formed the basis for his first investment fund, Princeton/Newport Partners, which delivered exceptional, market-beating returns for nearly two decades with minimal risk.
Thorp was also a shrewd judge of character and ideas. He foresaw the rise of Warren Buffett and invested early in Berkshire Hathaway. Later, he would uncover the dangers of Bernie Madoff’s too-good-to-be-true fund long before it collapsed. He wasn’t just a numbers guy—he was a principled thinker who sought fairness, integrity, and long-term outcomes.
What makes Thorp's story so compelling isn’t just his intellectual feats, but how he used his gifts with humility and purpose. He avoided the greed and ego traps that often accompany success. He valued health, family, and ethics just as much as financial returns. His decision-making framework—questioning everything, verifying for yourself, and never accepting dogma—offers timeless lessons for entrepreneurs, investors, and thinkers alike.
Whether you’re a fan of finance, probability, entrepreneurship, or simply the power of unconventional thinking, this episode reveals how Edward Thorp mastered both life and markets by relying on reason, research, and relentless curiosity. His journey proves that with the right mindset, we can beat the odds—no matter the game.
Tune in to learn:
A brilliant mind. A humble life. An unforgettable story.
Referenced Books
A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
Sam Walton: Made In America
Grinding It Out: The Making of McDonald's
Beat the Dealer: A Winning Strategy for the Game of Twenty-One
Beat the Market: A Scientific Stock Market System
Becoming Trader Joe: How I Did Business My Way and Still Beat the Big Guys
#2 Edward Thorp - A Man For All Markets
[00:00:00]
I was at a point then in life where I could choose between two very different futures. I could roam the world as a professional gambler, winning millions per year. Switching between blackjack and roulette, I could spend some of the winnings as perfect camouflage by also betting on other games, offering a small casino edge like craps or baccarat.
My other choice was to continue my academic life. The path I would take was determined by my character. Namely what makes me tick. As the Greek philosopher Heraclitus said, character's destiny ion frees time and watch his head for the roulette tables. This election is from the book A Man for All markets, an autobiography written by Edward O Thorpe, and right there, we can learn a valuable lesson at the start, my friend, that in life we should stop to reflect on our choices and see the crossroads in our path. Take a moment to savor them and let your character [00:01:00] choose your destiny.
Today I'd like to share with you a few things I learned by reading this book, A Man for All Markets. Before we get started, I have to acknowledge the excellent work of the Founder's podcasts and David Senra. If it weren't for him, I never would've heard of this particular book. David's a big fan of Thorpe saying that Ed's path in life is one that he admires and strives to achieve, and I can certainly see why this would be the case.
A big thanks.
Ed Thorpe is a deeply driven individual who has a love of learning, curiosity, self-discovery, investing a deep passion for fitness, and most of all, spending time with loved ones. Since I was a kid, I always had this curiosity and admiration for those men and women who have deeply embedded drives to follow their passions in life.
And we often see them build great things. So we must ask what makes them tick in the forward or the book. Nassim [00:02:00] Nicholas Taleb opens with Thorpe’s memoir reads like a thriller mixing wearable computers that would've made James Bond proud, shady characters, great scientists, and poisoning attempts in addition to the sabotage of Ed's car, so he would have an accident in the desert.
The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and not least of all fun. Thorpe is also known to be a generous man, intellectually speaking, eager to share his discoveries with random strangers in print, but also in person. Something you hope to find in scientists but usually don't.
He is humble. He might qualify as the only humble traitor on planet earth. And that is 100% the case. This is an excellent read. I'm quite confident that given enough time I've could have read this book cover to [00:03:00] cover. The first time I picked up the book, I clipped off like 75 pages and I didn't even really realize the time and I had to put it down and move on to some other things.
But this is an excellent, excellent read and I'll leave a link in the show notes if you're interested in picking up the book. I highly recommend it, for any other books or podcasts that I mentioned today. I'll also leave links for those in the show notes so you can check them out. Let's get started and jump into the early years of Ed Thorpe.
My first memory is of standing with my parents on an outdoor landing at the top of some wooden and dirty wooden steps. It was a gloomy Chicago Day in December 1934 when I was two years and four months old. Now, at this time, his parents are looking for a place to live and he goes on to say, from inside the house, a woman was telling my parents, no, we don't rent with children. Their faces fell and turned away. Had I done something [00:04:00] wrong? Was I a problem? This image from the depths of the Great Depression has always stayed with me. And it'll be this very early memory that would shape the rest of Thorpe's life, especially when it comes to dealing with people in a fair and honest manner.
We really see this as a core value and add throughout the duration of the book.
Now around the age of two and a half, his parents would start to grow, concerned that he's not yet talking. And they would take him to a doctor who would conduct some tests asking Ed to point to a ball or chart or a poster in the room. And he is able to do that just fine. So the doctor says, you know, he'll talk when he is ready.
So they continue forward. And then finally on his third birthday, his mom and a few of their friends take him to a Montgomery Ward department store. And a chuckle there a little bit. 'cause I remember going to Montgomery Ward as a kid as well. They took him to the store and some of his mom's friends asked Ed, you know, what are those people over there doing?
[00:05:00] And he says, clearly and distinctly, the man is going to buy something, and the two women are going to the bathroom to do pee pee. And his mother's friends are a little bit embarrassed right there. And it says, you know, from that point on, he generally would speak in complete sentences. And I think early on here, we're starting to see the brilliance of Ed in the fact that he has a vivid memory from his early years.
And then also he's starting to speak in complete sentences, which I think is pretty rare for a 3-year-old. I mean, I remember back to the days of my son when he was three, and while there were no complete sentences at that time,
so it would be around this point that his father would introduce him to numbers, and he quickly learns that if I had one to one, the numbers go up. So we learns what the names of the numbers are, a thousand, 10,000, a hundred thousand, so on, so that he can quickly learn how to count to 1 million, which is quite impressive.
And he also observes that [00:06:00] his father has a deep love for learning in the book, he says, but his hunger and respect for education endured, and the reason that it endured was because his father didn't have the funds to complete college. But even though he wasn't formally in school, he would instill them in Ed along with his unspoken.
Hope that I achieve more sensing this and hoping it would bring us closer. I welcomed his efforts to teach me.
for those of us with children, I think this is an important concept. We should show our kids that we love learning. We should let them catch us reading. And if we have younger kids, we should read to them. If they'll allow it, we should do it daily. reading the kids just enhances their language learning improves cognitive development, improves academic performance and imagination, and it strengthens parent child bonds.
So during these early years, we would see another trait start to develop that would be [00:07:00] prevalent during the course of Ed's life. Actually. It would be the driving force for many things to come. A trait that showed up about this time was my tendency not to accept anything I was told until I had checked it for myself.
This had consequences. When I was three, my mother told me not to touch the hot stove because it would burn me. I brought my finger close enough to feel the warmth and then pressed the stove with my hand burned, but never again. And I was somewhat the same way, always wanting to explore things on my own and discover my own path, even burning my hand on the stove when I was a young age, but never again.
And
Thorpe would say, I love learning through experimentation and exploring how my world worked.
next Ed's father would teach him how to read. And by the age of five, he's reading at a 10th grade level, simply devouring everything that he could get his hands on. Around this time that his brother would be born. , he said that he would mainly be left alone except [00:08:00] for the books that he had in his world.
So he would just dive deeply into works like Gulliver's Travel, treasure Island, Stanley and the Livingston's in Africa.
And in this passage, I think that you and I can relate to, ed says, when I was reading or just thinking my concentration was so complete. That I lost all awareness of my surroundings. My mother would call me with no response. Only when she appeared in my visual field that I snapped back into the here and now and respond.
Though we were poor, my parents valued books and managed to buy me one. Occasionally the books helped establish lifelong values of fair play, a level playing field for everyone, and treating others as I myself wish to be treated.
It's through these books that Ed would develop his sense of values. And he says, especially growing up as the depression permeated every facet of our lives, living on my father's $25 a week salary. We [00:09:00] never wasted food and we wore our clothes until they fell apart. I treasured objects such as the Smith Corona typewriter.
My father had won in a writing contest, the military binoculars he used in World War I. Eventually both became part of my tiny collection of possessions that followed me for the next 30 years. Money was scarce and no one scorned pennies.
From this as a way to make money as a young boy, Edwin, go out and shovel snow in the driveway with his father, giving him a nickel. So this gave him an idea to go around all the neighbors. And he was excited because he could make a few dollars in one day and he would come home all sweaty and dirty, but he would have a couple of dollars in his pocket.
And this made him feel really proud because that was about half of what his father made in one day. So he thought he was doing a great thing here, but he would quickly learn a fast lesson
when all the other kids started doing the same thing. and Ed says [00:10:00] that was an early lesson in how competition can drive down profits. And right there we are
starting to see a lot of early lessons here that Edward used throughout his life,
such as discovering things on your own, not what someone tells you, treating people fairly, the love of self-education and reading, and early lessons in competition in the marketplace.
Now, the next lesson I think you and I can learn here and in my notes, I called this resourcefulness to learn in any setting. When Ed was eight or nine, he gets the measles and he's confined to his shaded room, and all his books would be removed, so he doesn't strain his eyes in the dark room, but he discovers a world atlas that was left behind.
So he spends the next two weeks giving himself a geography lesson and then using all of those maps to track the battles in World War ii. 'cause he was intently listening to the radio and trying to figure out all the things that were happening. So he would track those on the map as everything was [00:11:00] unfolding.
and just as a sneak peek, we're gonna see Ed do a lot of this over the course of his life, diving into subjects and educating themselves.
Picking up books to master chemistry, physics, computer programming and math. This is a, just a foreshadowing for things to come. So during this time, uh, the Pearl Harbor bombing would have a major impact in Ed's life. While the kids in school would be outside playing and having fun, he remained silent and gravely concerned about what was going on.
Our immediate concern was for my family in the Philippine Islands. My mother's father had left Germany and gone to work as an accountant for the Rockefellers in the Philippines. There he met and married my grandmother. They, along with six of my mother's siblings and their children were trapped in the Manila area when the Japanese invaded the islands just 10 hours after the attack on Pearl Harbor, we heard nothing more from them.
We would not learn their varied fates for more than three [00:12:00] years until after the islands were liberated near the end of the war in the Pacific. Meanwhile, my 9-year-old eyes followed in detail the battle of baton reports of the horrors of the Baton death march, and the heroic resistance by the island fortress of Corrigo in Manila Bay.
And I can only imagine how horrific that would've been, especially as a nine or a 10-year-old, wondering what had becoming your family and what was happening. Now, it's around this time that Ed's family would move to California and his mother would get a job working the swing shift at Douglas Aircraft, and she'd be named Rosie the Riveter by her coworkers after the famous, uh, world War II posters that I'm sure we've all seen.
And his father would work the graveyard shift in the shipyards as a security guard
He would say my parents were usually gone, or sleeping, seldom seeing each other. They left my brother and me to raise ourselves. We served [00:13:00] ourselves cereal in the mornings. I stuffed peanut butter and grape jelly sandwiches into brown bags for our lunches. More resourcefulness from Ed right here, mainly out of the necessity to survive during this time.
and what we don't know yet, is that his mother would be carrying on an affair with a man that she knew from the Philippines who she had met during their first trip to California prior to officially moving there. Now, once they do arrive in California, ed would enroll in the sixth grade, and he found out pretty quickly that his classmates were several grades behind him.
He was doomed to face extreme boredom and he complained. So he was given a test, which he didn't know at the time, was an IQ test. after answering 130 questions, the last 20 were true or false. And he is like, well, I want to get outta here.
So he just marked a line through all of the truths and left the test later he would learn about the nature of the test, that it was an IQ test [00:14:00] and he would become quite upset at that point. And he said the following about the test, it was the highest score they'd ever seen.
One that a high school I would enter could statistically expect from a student less than once in a hundred years.
Right here you can see that amazing things are about to happen. And when you're reading the book at this point, you don't wanna put it down. The pages are like magnets and you just wanna keep turning and turning and turning to see what's gonna happen next.
Needless to say, the school let him jump to grade seven. It's during this time, he would meet a teacher named Jack Chazen, and Ed would say He was my first grade teacher and we would remain friends for life.
right there is a super valuable lesson in life that when we run across those people who inspire us, who are kind, respectful, and help us learn
that we should have a deep level of respect for them in return. 'cause we never know how life's gonna unfold. So as Ed's advancing his parents encourage him to save money for college
because they explained [00:15:00] to him that we don't have anything to offer and this is gonna be on you and you really need to work to save this money. And he says, at age 11, I signed up to become a newspaper boy. I rose every morning between two 30 and three and paddled my used bike. One speed was all we had then about two miles to an alley behind a strip of stores.
Each newspaper route had 100 stops, for which we were paid about $25 a month. This was an astonishing amount of money for an 11-year-old. I gave most of what I earned to my mother so she could buy savings stamps for me at the post office by booklets when they reached $18 and 75 cents. We were exchange for war bonds that would mature in several years to $25 each.
As my pile of bonds grew, college began to seem possible getting about five hours of sleep each night. I was perpetually tired
and I know that feeling also. Well, having [00:16:00] had a paper route for several years as a kid, and I think it's interesting to note that Sam Walton and Ray Crock both had paper routes and in the book Made in America, Sam says that the paper route allowed him to develop business responsibility early on. It taught him to collect money directly from customers as it was easier to collect in person.
And he often woke at 4:30 AM to deliver his papers in the book, grinding it Out, which is excellent, by the way. that's Ray Kroc's book. He says, delivering papers taught me that if you took care of your customers, they'd take care of you. It wasn't glamorous, but it was honest work and it taught me habits that I never forgot.
think those are interesting parallels between these three entrepreneurs
as these early business lessons would help shape their characters. All right, uh, let's keep advancing forward here in the book. Around age 12, ed gets [00:17:00] interested in radio and electronics, and he would take the amateur radio operators test and he would ultimately pass what was considered a very difficult test for anyone at the time.
It would become the youngest licensed radio amateur in the state of California, and maybe even in the United States for that matter.
And these early lessons in building electronics are gonna have a major impact for him in the future when he starts getting into building his roulette computer.
But on the home front, things were about to change for Ed. Meanwhile, American troops had liberated the survivors of my mother's family from a Japanese prison camp in the Philippines. now my grandmother, my mother's youngest brother. And two of her sisters and their families came over from the Philippines to stay with us, and that would take their small house size from four to 14 overnight.
What a jump one phrase stood out. In particular for me,
seeing what World War II had done to my relatives and how World War I [00:18:00] plus the Great Depression had limited my father's future, I was determined to do better for myself and the children I hope to have. And right there it reminds me of that saying, standing on the shoulder of giants were the giants, are all of Ed's relatives and his father who sacrificed so much and thatenabled Ed to stand on top of their shoulders to have a better view of what his future look like.
So with this determination and his love of science, he would develop quite rapidly.
Ed would use some of his paper route money to buy science equipment and chemicals to conduct experiments and listen to a few of the things that he experimented with.
He sets up an amateur radio station in his bedroom that had a six foot antenna that rotated. He created a laboratory in his home. Yes, the one with 14 people living there, in which he made large amounts of gunpowder. Those would go into shell casings that he put in the back of model cars. [00:19:00] He would rocket those down the street with all of the neighborhood kids watching on
that I thought was awesome. He made nitrocellulose in which he would blast craters on the sidewalk, and then he moved into nitroglycerin, which blew even bigger craters in the sidewalk, and he eventually abandoned, blowing things up out of fear of danger for himself and others around him. So all of these experiments would lead him to what is critically foundational in the rest of ed's life.
Pranks and experiments were part of learning science. My way, as I came to understand the theory, I tested it by doing experiments, many of which were fun things I invented. I was learning to work things out for myself, not limited by prompting from teachers, parents, or school curriculum. I relished the power of pure thought combined with the logic and predictability of science.
I love visualizing an idea and making it [00:20:00] happen.
So we're gonna see this is core Ned's life. He is a deeply driven individual who would defy the odds on so many instances. This is something that you and I can certainly learn from Ed to work things out for ourselves. We don't need to be told what to do. Take life by the horns and make it yours.
Explore the things you're curious about
and dig in deeply. It's okay to be deeply driven. Let those things inspire you and bring you forward and do great things in life. another critical point that I learned from Ed and I've been putting into my own practice, he says, I read a high school chemistry book from cover to cover. I fell asleep at night, mentally reviewing the material. A habit that proved both then and later, remarkably effective for understanding and permanently remembering what I had learned.
And for me personally, each night as I fall asleep, I reflect back on the books that I've been reading and I find that it allows me to recall the context much quicker. And it [00:21:00] gives me a springboard from the conscious to the subconscious. And many times I'll also dream about those things that I'm reading.
So I would highly encourage you to give this practice a try. It'll strengthen your reading and your comprehension. Uh, so around this time, ed would participate in a chemistry competition and he would place forth, which was impressive as he only had a couple of months to prepare. Plus, he was in the 11th grade and most of the students were in 12th grade plus remember at this time, and had skipped a few grades.
So he was quite a bit younger than everyone else, but he would be, disappointed with his results because the top three placers would get scholarships. And he saw that as a path forward towards his college education.
But not to fail because the following year he would learn about a physics contest of a similar nature. And before touching on that, I just wanted to read you something that I found quite [00:22:00] gripping.
In the summer of 1948, following my junior year, I sat on the beach and read my way through a list of about 60 great novels, mostly from American literature by authors such as Thomas Wolf, John Steinbeck, Theodore Dressier,
John dos Pasos, Upton Sinclair, Sinclair Lewis, Ernest Hemingway, and f Scott Fitzgerald. There were foreign authors as well, such as Doki and Stenden Hall. Jack Chasm, that's his teacher and friend from earlier when he met him in the seventh grade, had given me a list and me, the books from his personal library.
I punctuated my hours of reading with body surfing and thoughts about who I was and where I was going. That summer was especially difficult for me. My parents filed for divorce,
he thought that they had just drifted apart. He wouldn't learn for many, many years later that his mother had [00:23:00] actually been having an affair. And that was the real cause of the split. But I can imagine out on the beach not quite knowing how to process his parents' divorce and just getting lost in all of this classic literature,
letting the books take his mind off of these difficult times and trying to figure out who he was, where he wanted to go in life. I would've loved to have been a passerby one day and just catch him on the beach and talk to him. Maybe even just sit and read and share a good conversation over a classic book.
At this rate, his father would move to LA and they would see each other on the weekends. And this is certainly a very sad time in Ed's life, but he would continue to drive forward. And if we jump back to that physics test, I mentioned just a little bit ago, ed would study on his own with some old tests to help guide him along.
And I think it comes as no surprise to you or I that he ended up placing first on that test. And this results in a uc, Berkeley scholarship in the amount of, uh, [00:24:00] $300 a year. at age 17, ed would start at Berkeley in the August of 1949. Now in another blow by his mother, ed would learn.
shortly before leaving for college, I learned that my mother had cashed the war bonds I had paid for with my paper route and spent the money. Her unexpected betrayal was an emotional blow that estr us for years, and whether I could support myself at the university was now in doubt.
I survived with scholarships, part-time jobs, and $40 a month for my first year from my father. I got by on less than $100 a month, including everything, books, tuition, food, shelter, and clothes. Man, what a horrible thing. The person you trust most steals your money that you work so hard for all those years of getting up early and being sleep deprived.
That's terrible. I can never imagine being a parent doing that to your child, especially seeing them [00:25:00] work that whole time. What a rotten thing.
All right. Uh, let's see thankfully there's a brighter future for Ed. He would focus his education at Berkeley. And at the end of his first year, he would choose to move to UCLA and he also changed his major so that he could focus on math and physics. And it's this choice that would ultimately change his life forever.
one of the first people I met that fall of 1950 was Vivian Sein tar. She was slim blonde and pretty majoring in English literature. Best of all, she was a very smart,
I'll let the cat outta the bag early here. Vivian and Ed would eventually marry many years later. And I have to say that Vivian is quite an amazing woman.
As we move along, I'll try to highlight the many ways that she helped to support Ed. I actually took a few minutes to see if I could find a biography on Vivian, and I didn't quite find one, but I'm [00:26:00] thinking in the future, maybe even to make. A bonus episode highlighting the many, many, many ways that Vivian influenced Ed's life and all the things that she did.
She has a very long, impressive resume that Ed talks about in the book.
I find her quite fascinating myself. I believe that she was honestly, deeply driven in her life and the things that she cared about in this greatly impacted how Ed's life evolved over a long period of time.
When they first meet, they would spend a lot of time together, but due to their age differences at this time, they would just remain friends. Ed had started college when he was 17 and he was now 18, and Vivian one's like 21.
So that big gap in age was kind of a big deal at that time. So they just were friends. Ed would progress forward nicely, uh, with his studies at UCLA Until he runs into a physics professor who doesn't quite live up to his expectations. [00:27:00] This particular professor would write on the chalkboard at the time and he would never face the students.
And that quite annoyed Ed. And he wouldn't really answer questions. He didn't wanna be challenged. This professor, and let's see how this would unfold. I began to read UCLA's student newspaper, the Daily Brew, and in class, this damaged his self-esteem, which as I came to understand later, is an absolute no-no in human relationships, unless you don't mind creating an enemy,
matters came to a head. One Saturday morning I rushed down the stairs of a lecture hall to turn in an assignment, and as I handed it in to the professor, the first of eight chimes marking the hour reverberated, he looked at me and said, Uhhuh. I threw my work on the table and shouted, what do you mean Uhhuh?
I went on to tell him why thought of his teaching while a frightened class looked on. This would almost turn [00:28:00] disastrous for Ed's academic career and, and his life. Uh, for that matter, , a week later, he'd be called to the dean's office and informed that disciplinary actions were being reviewed against him also, including expulsion.
, and if he had been expelled at that time, this would've changed his draft status. He was a student, and he would've been changed over to eligible for draft. And Ed says that more than likely he would've been in the military within a week. So I would've imagine that his academic career would've been done at that point.
And who knows, , what direction would've resulted past that. but Ed would come out by the skin of his teeth here. He was placed on academic probation for a year and forced to apologize to his professor.
at this point, ed would put some guidelines in place for himself. And I think these are extremely critical for you and I. And he says, if you do this, what do you want to happen? If you do this, what do you think will happen? [00:29:00] And I'm just gonna repeat those. If you do this, what do you want to happen? If you do this, what do you think will happen?
I think these are super critical questions. It's important that we stop and ask ourselves these questions. It can be easy to act irrational, intense situations. We've all been there, including myself. And if we take a moment and process these basic questions, our decision making will improve dramatically.
Actually, in my book, I put a tab marker so that I can quickly flip to the section for a quick reminder because I don't wanna forget them.
Super valuable. .
Alright, continuing forward my friend, along with developing his mind. Edward, discover. That it was just as important to take care of his body, and I love this next section. It started one evening when as I was walking by the basement furnace room behind the co-op, I heard the sound of iron clanking, [00:30:00] curious.
I ventured inside and found three muscular residents, hoisting barbells. When I suggested this seemed like a lot of work for who knew how much gain. They built me a milkshake that if I worked out with them for one hour, three times a week for a year, it would double my strength.
I accepted their challenge. When the year ended, I had more than doubled what I could lift and gladly paid off the bet. This was the beginning of a lifelong interest in fitness and health and perhaps one of my favorite quotes for the entire book. For decades, I spent six to eight hours a week running, hiking, walking, playing tennis, and working out at a gym.
I thought of each hour spent on fitness as one day less than I'll spend in a hospital. Amen, and I cannot agree more. It's important for you and I to have a balance in life. When we're physically fit, we're also mentally [00:31:00] fit. This physical activity can quickly help us dissolve stress and free our minds to think.
I have a personal goal to be a runner at the age of 90,
but I'll never reach that goal if I just start running when I'm 88 or 69, or even 55. So for the last 25 years, I've been focusing on running at least 20 miles a week. I still have over 40 years to reach age 90. but I believe through hard work and healthy diet, I have the confidence that I'm gonna make it to that goal.
let fitness be your friend and embrace it. Keep yourself healthy, my friend. So if we skip forward just a little bit, ed is heavily engaged in his graduate level of physics work when the next great opportunity presents itself.
I had drifted out of touch with Vivian, then Vivian sent me a Christmas card with a note. Don't be such a stranger. I called Vivian and our first date a few weeks later was at a little art theater in Hollywood where we [00:32:00] saw Jean Renoir's film the River. Vivian was still single because she would have the right person or no one.
Such a smart woman. There's no need to settle. Ed would say we had a lot in common. We were both avid readers and enjoyed plays, movies and music as we both very much wanted children. We also agreed on the principles for raising them. We planned to give them all the education they wanted, teach them to think for themselves rather than simply accept, receive wisdom from experts and authority and encourage them to choose their own calling in life.
Vivian and Ed would go on to be married in January of 1956,
and at this point, Vivian would go on to work to support Ed through his graduate level studies and providing Im moral support that sustained him to dig in deeper to his mathematics during this time.
Shortly after this time, ed and Vivian would be invited to a house [00:33:00] party and at this party he would meet Richard Feinman, who was a well-respected physicist at the time. And Ed would ask Richard the following,
if anyone knew whether physical prediction at roulette was possible, it should be Richard Feineman. I asked him, is there any way to beat the game of roulette when he said there wasn't, I was relieved and encouraged. This suggested that no one had yet worked out what I believe was possible
with this incentive. I began a series of experiments it's interesting to note that Feineman would later go on to win the Nobel in 1965 for his work in physics. If you recall earlier in the episode, we had learned that Thorpe doesn't accept answers from others. Instead, he is gotta go investigate for himself and draw his own conclusions, and he would begin experimenting with the roulette wheel with the help of Vivian.
With Vivian's help, I made movies of the spinning ball and included a stopwatch. Graduated in hundreds of a second [00:34:00] in each film to provide an accurate time for every frame.
Vivian was remarkably tolerant of my roulette experiments, seeing as they diverted time from finishing my thesis and getting a full-time job. Yet, for me it was science play. Just when I was younger, . It was relaxing much as others might find a book or a movie,
I certainly wasn't motivated by the hope of making big money. What drew me was the chance of doing something people thought wasn't possible to be a bit prankish. The fun of just pulling it off.
I think that puts Ed in a unique position right here, and that when you see your work as just play, that you're truly doing something that you love. Doesn't feel like work. You're just out there playing, having a good time. Now, these experiments would continue for Ed and he would become more curious about beating the casino, and this just adds fuel to the fire.
Ed would discover that there were many attempts by [00:35:00] previous mathematicians to beat gambling, but as we know, he's not gonna quite accept the results and he needs to check things out for himself. And he says, I did know that the theory of probability had began more than 400 years earlier with a book on Games of Chance, attempts to find winning systems over the following centuries, stimulated the development of theory, eventually leading to proofs that winning systems for casino gambling games were, under most circumstances impossible.
Now, I benefited from my habit of checking it out for myself, I love the habit he has here of checking things out for himself. He's gonna go against 400 years of mathematics,
and this core belief has worked itself so deeply as part of Ed's character that he proceeds to move forward with his discovery.
I realized that the odds as the game progressed actually depended [00:36:00] on which cards were still left in the deck
and that the
edge would shift as play continue, sometimes favoring the casino. And sometimes the player, the player who kept track could vary his bets accordingly.
This would be the major focus of his work in blackjack, that of counting cards and would ultimately lead him to his book that he publishes called Beat the Dealer.
Now around this time, Edward reach out to a gentleman by the name of Roger Baldwin, who would undertake a lot of mathematical analysis on the game of blackjack. And just a few weeks later, Edward receive several boxes of mathematical calculations that Richard had done, and Ed sets out to master all of the details.
And I think this man is pure genius. First, he's not afraid to reach out to others to ask for help, especially when he doesn't know something. And that's something that we should be doing in our lives. we shouldn't be afraid to reach out and ask questions And dig deep into those topics that give you the most [00:37:00] interest.
I think you'll be amazed at what we discover along the way.
Now, another thing that Ed would put into practice around this time was the use of the computer at MIT.
According to ed,
My hand calculations were going to take hundreds, perhaps thousands of years. At that point, I learned that MIT had an IBM 7 0 4 computer and being a faculty member, I could use it using a book from the computer center. I taught myself to program the machine in its language for Tran, and that's extremely interesting because I just listened to the acquired podcast on.
Epic systems and the founder, Judith Faulkner, taught herself four chanin a week. And I think that's an interesting parallel between these two deeply driven individuals
This will teach ad that by removing certain cards, he would have an edge
Over the game in the casino.
And these are the results that he was looking for his mathematical model. And as an academic, he knew that it was important to publish his work [00:38:00] quickly so that someone else didn't discover his work and publish before him and take credit. ' cause he had had that happen once before with some other mathematical work.
And he didn't want that to happen again. What he needed at this time was a professor to support and sponsor his work into a national publication. So what he did is he set up a meeting with Claude Shannon, who was a professor at MIT. And Shannon was already famous for the creation of the information theory.
Ed saw this as his quickest path to get sponsorship for his publication.
And I'll just note quickly that the creation of the Information Theory by Claude Shannon is super critical as the baseline theory for all of our modern computing and communications that we use today. And I believe that Shannon is someone that I'm gonna be checking out and exploring more about here in the near future.
Now, check this out. He was warned that Shannon would only give him a few minutes of time and that he shouldn't really expect anything more. But that's [00:39:00] not gonna quite play out, uh, for Ed. Let's see how this unfolds.
A few minutes turned into an hour and a half of animated dialogue during which we grabbed lunch in the MIT cafeteria. He pointed out in closing, that I appeared to have made a big , theoretical breakthrough on the subject, and that what remained to be discovered would be more in the way of details and elaboration.
As we returned to the office, he asked, are you working on anything else in the gambling area? I hesitated for a moment.
And then decided to spill my other big secret, explaining why roulette was predictable and that I was planning to build a small computer to make the predictions wearing, hitting under my clothing. As I outlined my progress ideas flew between us several hours later as the Cambridge sky turned dusky, we finally parted ways excited by our plans to work together to beat the game.
So two critical things happen right [00:40:00] there. First, he gains the support of Shannon to help him publish his blackjack paper in a national publication. and then second, they start formulating the next steps in the progress of Ed's idea to wear wearable computer to beat roulette.
so around this time, there would be a reporter from the Washington Post by the name of Tom Wolf, who would run an article about Ed in his blackjack system. And this caused a lot of feedback that would lead Ed into a situation where he wanted to test the system with real life play. He wanted to prove that his mathematical model would yield the same results at the table.
And one statement that I found extremely interesting.
I wondered how much my research into mathematical theory of a game might change my life In the abstract. Life is a mixture of chance and choice. Chance can be thought of as the cards you were dealt in life. Choice is how you play them. I choose to investigate blackjack. As a [00:41:00] result, chance offered me a new set of unexpected opportunities.
And this is so true for you and I. Each day we're dealt a wide mix of cards in business and in life. And how we play those cards makes all the difference in the world. By studying entrepreneurs like Ed, we can understand how they play their cards
and we can have a better understanding about how that can impact our choices in life for the better. For we should always be learning about the cards we're dealt and how we can play them wisely.
I really feel that even just one or two ideas from this book can have a major impact on our choices for the positive.
. Let's keep moving forward here in the book.
So Ed would go on to find a couple of backers for his first Las Vegas test of his blackjack system
and these particular backers. Ed didn't really know the true depth of these two quote unquote businessmen, and he was quite suspicious, but he had confidence in his system, so he decided to [00:42:00] move forward with these two gentlemen at the time. And I just love how Thorpe describes his casino competition.
Even though the Goliath I was challenging had always won, I knew something no one else did. he was nearsighted, clumsy, slow, stupid. and we're going to fight on my terms, not his And even more than that, ed adds the cherry on top right here.
The clincher was Vivian, despite her reservations and her preference that I play it safe. Thought I could do it. There's nothing better in life than having the support of your spouse, your partner, or your loved one. I think it's so important that we let those around us know what's happening in our lives and keep them informed.
It's amazing how far a little support from your loved one will take you. So when life deals you those amazing people, keep them close and let them give you inspiration. So Ed would fly to Las Vegas to test the system and on the first day he would start [00:43:00] off betting small so that he could get a feel of the game.
And after the first day he was up something like a thousand bucks or somewhere around there. And then during the second day, he would start gradually increasing his bets 'cause he was winning. And what happened around this time was that the casinos started to shuffle the decks a lot more. And when the casinos shuffled the decks, he loses his advantage because he can't keep count on the cards.
So he doesn't know whether to increase his bedor pull back. So when this starts happening, they start jumping from casino to casino, but by the end of the second day he's playing $500 limit games. Which I mean, geez, that's just impressive. You started off at the $1 table and then by the end of the second day you're playing, you know, $500 limit games.
ed would say that his play would become quite smooth and very natural over the course of a couple days.
And also during this time, he was counting cards not only for himself but his backers because those guys would jump onto the table too, and he was trying to help them bet and they were [00:44:00] kind of going against the system, betting large amounts and getting a little unhinged there. But ed keeps his focus and he moves forward.
And then he says after the end of the second day, they were up like 250 bucks. Ed had suffered, uh, like a $1,700 setback, I believe it was, and then late in the second day had made all that back and then that actually put them in the positive at the end of the second day. But day three would find them up really big.
After 30 minutes, we emptied the table's money tray, the blackjack version of breaking the bank, no longer smiling. The pit boss was scared while the money tray was being restocked. The crowd swelled. They begin to cheer on their David against the casino Goliath. We played another two hours and broke the bank.
Again. The great heaps of chips in front of us included more than $17,000 in profits. And that is quite impressive. So at the end of the fourth day, they would leave Las Vegas and Ed would go on to say the following, , our experiment was a [00:45:00] success.
Future blackjack trips, if any would have to fit around my academic schedule and my family life. I made no plans for another trip with Manny and Eddie. Those were his backers, and simply left the possibility open now, 30 years later, ed would find out about his backer.
Manny, he had made his money from bootlegging during the twenties and the thirties. And was connected to a powerful mobster at that time, known as Abner Longman, who was the second most powerful man in the mob in 1935. So I think that was a good choice by Ed to part ways at the time and just focus on things that come.
But he certainly wouldn't be done with gambling by any stretch of the imagination. Ed would spend a lot of his time with Claude Shannon working on their wearable, uh, roulette computer. And at the time he was also writing the book Beat the Dealer. And so Ed feels that he has an obligation to the readers to educate them about the various ways that casinos might prevent [00:46:00] them from winning, and then also to educate them on cheating.
So this would result in several more trips to Las Vegas to learn about cheating mostly.
I just wanted to read for you some of the highlights about what Ed learns from his experiences. First training, and I love this part. Vivian helped me train for the trips by dealing hands at high speed, blowing cigarette smoke at me, and engaging me in complicated conversations.
So right there we can see that his wife saw Lynn helping to build him up Tolay Goliath.
Now, at this time, counting cards had become second nature for him,
and he had met two individuals, uh, by the name of Mickey and Russell. And these guys were experts in spotting card dealing cheats. And I think the next lesson here that we learn is extremely valuable. And this is one that I also learned, , from Tony Robbins, and I'll explain my thinking here in just a moment.
Let me read you the following. There was so much crooked dealing that I worried about playing on [00:47:00] my own in the future without an expert to watch for it and warn me off. When Mickey and Russell signaled that I had been cheated, I quit and went off with them for a lesson and how it was done. Mickey would demonstrate first slowly.
Then at casino speed when I could see it or more typically infer
it from what poker players called tells we would return to the same dealer and resume play briefly for low stakes so I could get better at spotting the crooked dealing at the table. I saw this was done with great skill at what had become my favorite strip hotel casino. and right there we can see the value at working with an expert and how quickly we can learn from someone just by reaching out to them.
And Tony Robbins says that success leaves clues, and I think this is pure gold. He says, instead of reinventing the wheel, find someone who is already achieving the results you want and model their strategies, mindset, and behaviors. Experts can save you [00:48:00] years of trial and error. Learning from someone who has already made mistakes and succeeded helps you move faster.
I think right there is an incredible lesson for us. So when we're building our businesses. we shouldn't hesitate to reach out to others who've had success. Most people are willing to talk to us and share their insights, and we can save countless hours of frustration and even possibly years of time just by spending a few hours with someone and learning from them.
And that's what Ed did right here. he learned from an expert and understood the many ways that the casinos were cheating,
one of which was to peek at the cards to be dealt the so-called top card. Then if that card was good for the player deal, the card just below it, instead the second card, and the likelihood it was worse. On the other hand, if the dealer was giving himself a card, he would take the top card if it was good for him, and otherwise deal himself to second.
the dealer who does [00:49:00] this is a heavy favorite to beat the player and expert, cheat or magician does this so well that even when you're told in advance and are watching close up, you can't see it. It's also nearly impossible to prove that it ever happened.
Ed understands cheating is quite pervasive, and at this point they go to the Nevada Gaming Control Board, who agrees to send out an agent with them on their next visit to help them detect cheating,
What happens next just adds to the context of the thriller aspect of this book. Let me read this for you.
my protector, pretending not to know me, wandered in a minute later and sat down our dealer, a young woman with a low cut blouse and heavily freckled skin, won the first few hands against each of us. On the next hand, I was dealt a stiff, a ten six versus the dealer's up card of nine or 10.
I hit into my amazement. The card meant for me emerged from the deck and was stuck. Twanging held by its edge [00:50:00] between the top card and the rest of the deck. The dealer froze and blushed bright red from cheeks to her chest. The pit boss watching the action from the end of the table to my left. Literally asked me if I wanted the top card or the second card.
I could see that the second card was a face card, which would bust me like it was supposed to. So the gaming control board agent could hear me. even if he were nearly deaf and blind as well. I said loudly and distinctly. The second bust me, I'll take the top card. It was an eight and busted me.
Anyhow, I cashed in my chips and left as my protector followed me outside. I said, did you ever see a second card like that before? He replied, second. What? Second? The agent had been sitting just three feet from the dealer. He saw everything and pretended to see [00:51:00] nothing realizing he was there to finger me for the casinos.
I used the restroom excuse to lose him and went to play at another casino.
Now this is an important point. Ed realized that his protector was in bed with the establishment. What more can he do at this point? So he makes the smart move to distance himself quickly, and we're gonna see this happen in the future. When he would discover that Bernie Madoff is running a Ponzi scheme, but Madoff is also the establishment at that time.
And I'll have more on this coming up soon. So armed with all of this research beat, the dealer would come out in November of 1962 and it would sell briskly. Ed says, with good reviews. And then in January of 64, sports Illustrated would run a story on the book and overnight it was sold out everywhere and became a New York Times bestseller.
Now as we wrap up with blackjack, I just wanted to read a summary from Ed at the end of chapter seven from a mathematical [00:52:00] idea in my head, I forged a system for beating the game. Then I was ridiculed by the Casino Beast, which set cabs for fools like me, thinking they played fair and that I was taking my secret weapon, a brain to a sporting event.
I found myself barred, cheated, betrayed by a representative of the gaming control board, and generally PSA, non grata at the tables. I felt satisfaction and vindication when the great beast panicked. It felt good to know that just by sitting in a room using pure math, I could change the world around me.
And that reminds me of a great Einstein quote that I love. It's not that I'm so smart, it's just that I stay with problems longer. Now, up to this point, ed had put thousands of hours, maybe tens of thousands of hours into developing the math and learning how to play, how to wager properly and discover cheats and build winning models for himself.
So I really admire [00:53:00] how he stuck with the problem and dug in deep. Now, ed would also go on to have success in roulette and baccarat, and I'm just gonna summarize a few of the highlights from these sections of the book because I really wanna move us into his investing days.
And it's important to note that while all of this learning was going on with blackjack, ed was also spending a lot of time working with Claude Shannon on the wearable roulette computer. And they had purchased a full size, uh, roulette table for like 1500 bucks. And they would use this to predict with a high degree of confidence where the ball would fall from the upper circular track and travel to the spinning rotor below.
And then that rotor was divided into sections of eight with each section containing five numbers. So based upon their math, they had derived that they would have as much as a 44% edge over the house, which is quite amazing. and then they would use [00:54:00] all of this information to program. The computer data was input with switches hidden in the wear shoes and operated by his big toes.
The computer's forecast was transmitted by radio using a modification of the inexpensive, widely available equipment ordinarily used to remotely control model airplanes. The other person the better, would wear a radio receiver, which played musical tones, telling him on which group of numbers to bet. We too, Confederates would act like strangers.
The person placing the bets heard musical output through a tiny, loudspeaker push into one of your canal
once they had this computer developed and programmed, they would take the next steps and try it in Las Vegas.
And it's at this point in the book, before they head out into the casino. that Shannon would famously ask Ed, what makes you tick? And now that was just a joke about the computers that they were wearing at the time. But [00:55:00] for Ed, it was something much deeper. One of those moments in life where we can sit and look at our choices.
And I think it's important that we stop occasionally and we take inventory of the things that we're doing in life. it's a strong reminder from Thorpe to you and I.
now they would begin their play and it becomes apparent that the computer is gonna work extremely well within a few spins. The computer works its magic, turning a few dimes into a heap as yet another bet scores, each time on a group of five numbers that are adjacent on the rotor.
And that really makes me smile. They were able to turn their love of play into the world's first wearable computer.
Now in another admirable move, they chose not to exploit the system. Their goal was to prove that their ideas worked.
In the end, this was more impactful for them versus trying to make loads of money off the game and let it consume their lives.
Then next up would move on and study Bacca [00:56:00] Rat. And he determined that by betting, um, the side action of the eights and the nines, that he could have a major edge over the casino. And he would take a trip with his wife, Vivian, and several of their friends to test the system.
And once they arrived, , for the first three days, he was on a winning streak and everything was going very well. But what comes next after this point just gets super crazy. Listened to this. When I sat down to play on the fourth night, the atmosphere had changed again drastically. The pit boss and his minions were smiling and relaxed.
They seemed pleased to see me. Then they volunteered coffee with cream and sugar, just the way you like it. I was deep into the first shoe, happily winning and drinking my coffee when suddenly I couldn't think. I could no longer keep the count. I was shocked because I had managed well enough through noise, smoke, conversation, the pressure of high speed play, the excitement of losing and [00:57:00] winning, and the impact of alcoholic beverages.
Something unexpected had taken place. I took my chips and left the wives, said that my pupils were hugely dilated. Bellamy Hatton, who was a nurse, said that she had often seen this when people came into her hospital who had used drugs. I wanted to collapse into sleep, but Vivian, Isabelle Crouch and Bellamy plied me with black coffee and walk me for several hours until the effects begin to wear off.
And then Ed would make the decision to play again on the fifth night. Now, on this night, he was offered coffee again, and Ed says, no, I'll just have water. And Ed says, I expected it to have something extra to find out. I carefully put a single drop on my tongue. Ah, it tasted as if a box of baking soda had been emptied into the glass.
but that single job was enough to flatten me. Again, I wondered what a swallow would've done. And that's just crazy to even think about a major [00:58:00] casino drugging their customer. I mean, imagine if that happened today. Holy smokes. They'd probably be shut down definitely in a lot of serious hot water.
Plus, I would imagine people would certainly stop going to that casino. That's crazy. So after this, uh, ed would decide to head home and the thriller continues. Listen to this. I can't believe this next part either.
The six of us left Las Vegas the next morning to drive to Las Cruces. I was at the wheel as we went down a mountain road in northern Arizona. We were going 65 miles an hour when the accelerator pedal suddenly jammed the steep downhill and the wide open throttle were too much for the brakes. the car sped up to 80 miles an hour, and the turns in the road were becoming unmanageable with little time to think, and my foot pressing as hard as I could on the brake.
I also set the emergency brake downshift, so the engine would help slow the car and cut off power by turning off the ignition, I finally managed to [00:59:00] stop in a turnout. A good Samaritan who understood cars pulled over to help us opening the hood to see why the accelerator jammed.
He found a part that had come unscrewed from a long threaded rod, something he had never seen before happened, and found it quite baffling. He fixed it and we continued on our way.
So not only is add poison, the casinos mess with his car so that the accelerator becomes stuck and the brakes fail.
So they weren't only after just him, they were after everyone in the car.
But thankfully, better things are about to come for Mr. Ed Thorpe here
and after this point, he would shift his focus towards investing.
And he would take some of his gambling winnings and his royalties from his book, and he would start investing those into various stocks.
And at the time, he was just kind of picking randomly.
And this leads us to Wall Street, the greatest casino on Earth that would say, and it's during this time that he would [01:00:00] self-educate himself by reading lots of books and different periodicals.
And the first investment that he made was actually a loss for a long time, and he held it until it came back. But during this time, he asked Vivian a question, what were my mistakes? And without hesitation, she said, one, you bought something you didn't really understand. So it was no better or worse than throwing a dart into the stock market list.
And that was true because he had heard some speculation about a company who was supposed to go up. They were selling batteries to Ford at the time, and there was hopes that the stock price would go up. So he jumped in and then she said, secondly,
my plan for getting out, which was to wait until I was even again, . What I had done, was focus on price that was of unique historical significance to me, only me, namely my purchase price. And that stock he had purchased [01:01:00] for four grand went down to two grand, and it took several years to go back to four grand.
So the second mistake is called anchoring. Ed was tying himself to the purchase price and not thinking about economic fundamentals, such as, would it be better just to take the cash or possibly use it to invest in some alternative form of investment that might serve him better?
Then we would see his next lesson comes from being over leveraged in silver, which in this transaction, he would lose a couple thousand dollars, but that's a small price to pay for what he eventually learns. And he says that he would use this knowledge for the next 50 years,
Ed also explains a valuable point for his loss in the silver. He says, when the interest of the salesman and the promoters differ from those of the client, the client had better look out for himself it's with these newly learned lessons, ed would proceed [01:02:00] forward to see if he could indeed investigate for himself the possibilities of beating the market. Ed would further develop a concept of what's called hedging. And this happens when you short sell warrants and you buy stock of the same company. So these two risks cancel one another out as the market goes up or down. So Ed would determine that with this strategy, he could have a return of around 25% a year with very minimal risk in the market.
This would lead him to write his second book, called Beat the Market. That came out in 1967.
And then past this point, he would start managing portfolios for his friends and acquaintances. And one of these early clients would be the dean of the University of California Irvine. And this gentleman's name was Ralph Waldo Gerard. And this was gonna lead to some interesting times.
Gerard had met Warren Buffet and was an early investor in one [01:03:00] of his investment vehicles. Buffet Partnership Limited during the 12 years from 1956 to 1968. These funds, buffet manage compounded at a rate of 29.5% before he took a fee of one fourth of the gain in excess of 6%. So after the fees, the Girards made around 24% a year.
But why did the Girards want to move their funds over to Thorpe? Well, let's find out. So in 67, the stock market would spike, and it's during this time that Warren and Buffet believed that it would be difficult to find undervalued companies in which he could invest. And this was kind of his secret formula for growth.
What he would be doing is he would be liquid liquidating his partnership. Over the next several years, and he gave investors a couple of options. One, they could pull their cash out, or two, they could put some of their earnings into a struggling textile [01:04:00] company
that Warren had controlled called Berkshire Hathaway. what the Girards had decided to do was move their funds out and they liked Ed's strategy that he outlined and beat the market. And the Girards had asked Buffet to vet Ed. In the summer of 68, ed and Vivian, along with the ARDS would meet with Warren at his home.
Let's hear what Ed has to say about that meeting.
Warren was a high speed talker with a Nebraska twang and a stream of jokes, antidotes, and clever sayings. He loved to play bridge and had a natural liking for the logical, the quantitative, and the mathematical. As the evening went on, I learned that he focused on finding and buying into undervalued companies over a period of several years.
He expected each of these investments to substantially outperform the market as represented by an index such as the Dow Jones Industrial Average, or the Standards and [01:05:00] Poor 500 as his mentor Ben Graham did before him. Warren also invested in warrant and convertible hedging and merger arbitrage. It was in this area that his and my interest overlapped, and where Buffet unknown to me was vetting me as a possible successor to manage investments for the ards.
Now, ed would go on and tell Vivian impressed by Warren's mind and his methods. As well as his record as an investor. I told Vivian that I believed he would eventually become the richest man in America, which he did. Buffett was an extraordinarily smart evaluator of underpriced companies, so he could compound money much faster than the average investor.
he could also continue to rely mainly on his own talent, even as his capital grew to an enormous amount now.
from these meetings, it would have two major effects on Ed. One, [01:06:00] it helped to motivate him along a path where he wanted to formally develop his own hedge fund business. And then two, he started to invest in Berkshire Hathaway , and at the time it was like $900 a share or something like that.
Ed would say, this goes back to that concept of surrounding yourself with experts and learning from what they have to teach you. Ed was already a brilliant person, and then you add buffet on top. And you just have a springboard for something great. around this time, he would get a call from a trader in New York by the name of Jay Reagan.
Reagan was impressed by the book, Beat the Market. , and had reached out to propose a partnership. After evaluating Reagan, ed decided to move forward and they set up their first company, it would be called Convertible Hedge Associates. And shortly after that,
They would change it to Princeton, Newport Partners, or p and p. This would find Ed working from [01:07:00] the West Coast, Newport Beach that is, and he would be responsible for the big ideas, the analysis, all the computers that would be set up and all the various mathematical models. And then Reagan would go off and execute the trades, handle taxes, accounting, and all the regulatory and legal things.
Basically all the things that Ed didn't like to do. So this was a good partnership that they both were able to focus on their areas of interest. When they started the partnership, they were trying to go out and raise $5 million. They didn't quite make it. They got like 1.4 million, which I think is incredibly respectable.
For 1969, and it would say PMP was a revolutionary idea when we set it up in 1969. We specialize in the hedging of convertible securities warrants, options, convertible bonds, and preferreds and other types of derivative securities as they were [01:08:00] introduced into the markets. Hedging risk was not new, but we took it to an extreme never before tried.
We managed this with mathematical formulas, economic models, and computers. This nearly total reliance on quantitative methods was unique, making us the earliest of a new breed of investors who would later be called Quants and who would radically transform Wall Street.
And this is quite amazing. Uh, ed would start running the business from his home in 69, but that wouldn't last too long. Vivian would ultimately make him, , go get an office, uh, where he would install computers and hire his first staff. And then it's past this point in his career, Where he would now have to manage employees, and this was a lot different him.
You know, he's used to sitting in a room developing models and going to the casinos and testing them. Ed now has to hire people and train them and develop them. And Ed would say the [01:09:00] following, I found talent at the nearby University of California Irvine, where I was still a professor of mathematics.
Now I had to learn how to choose and manage employees, figuring this out for myself. I evolved into a style later dubbed management by walking around instead of endless schedules of formal meetings I abhorred in academia. I talked directly to each employee and ask them to do the same with their colleagues.
I explained our general plan and direction and indicated what I wanted done by each person revising roles and task based upon their feedback. For this to work, I needed people who could follow up without being led by the hand. As management time was in short supply since much of what we were doing was being invented as we went along.
And our investment approach was new. I had to teach a unique set of skills. I chose young, smart people just [01:10:00] out of university because they were not set in their ways from previous jobs. Better to teach a young athlete who comes fresh to his sport than one who has learned bad form, especially in a small organization.
It was important that everyone worked well together. As I was unable to tell from an interview how a new hire would mesh with our corporate culture, I told everyone that they were temporary for the first six months as we were for them. Sometime during that period, if we mutually agreed they would become regular employees.
I think this is brilliant for several reasons, and I wrote three of them down. One, you hire fresh talent who's eager to learn, and you can mold them, especially in a small company where you're still figuring stuff out. If you have someone who's super rigid from a previous job, they may not survive or it may be difficult for them to change or adapt.
, the second point I [01:11:00] had was management by walking around. So you have direct communication and that's what gets shit done. You get immediate feedback. And you can adjust on the fly. You don't have to wait till the next meeting. Let's just figure it out now and get it done. And then third, everyone is temp.
I think this is a great philosophy. It gives everyone breathing room to figure one another out. If someone didn't like the position, they could leave. No hard feelings. Same for ed. If an employee wasn't quite cutting it, he could let them go. But after a six month period, you really knew who those solid performers were and you can start building those A players into your organization.
And then to top things off, I guess this would be maybe bullet point number four. I didn't write it as four, but I really love this. And we've seen this on past episodes, ed would pay higher wages and bonuses that were well above market rates we reflect back to the first episode we did, [01:12:00] we talked about Henry Ford, he did the same thing here.
He raised the daily rate to $5 an hour in 1914, and what he saw was that this slashed his turnover from 375% down to five or 6%. And then he also said as the pay was increased, it cut his costs because he had highly proficient men that could go produce large amounts of cars. Versus paying a lot lower rate in having to have a large quantity of men who would just be inefficient in getting in the way of one another.
And as a side note,
I am also reading Joe Kilo's autobiography right now called The Becoming Trader Joe, I hope to cover that for you on the next episode. But as a sneak peek, Joe has the same philosophy here and he says, the most important single decision I ever made to pay people. Well, trader Joe's had the highest paid, [01:13:00] highest benefited people in retailing.
And Joe would go on to maintain that position for over 30 years. We're starting to see a theme here that paying people well and treating them fairly has a big dividends for our businesses.
Ed would see the same thing and says, this actually saved money because my employees were far more productive than average. The higher compensation, limited turnover, which saved time and money otherwise used to teach my one of a kind investment methodology at the higher levels. It kept people from breaking off and going into business for themselves.
I think that's a valuable lesson to learn right there. Paying people higher wages, bringing in the top talent you can find. You actually save money on your bottom line and you grow at the same time. We've seen history prove this over and over,
so Ed's business would perform very well. , let's take a quick look at the first five years. I'm just gonna run down a quick summary of how [01:14:00] they performed. So in 1970, the first full year, they're up 13% versus the s and p 3.7%. The next year in 71, they're up 26% versus the s and p at 13.9.
In 72, uh, the s and p is up 18 and a half versus their 12. So the s and p outperforms a little bit, ,
in 73 they would be up six point a half percent, but the s and p would be down 15%. And this was due to the Arab oil embargo that was going on during that time. And then to round out their fifth year, they were up nine, but the s and p was down 27.
Holy smokes, that's a lot. So what is that? A 36% difference. So they were doing quite well. That's very impressive. And it's important to note, , during this time, ed is still teaching mathematics at the university. So I mean, Ed's very deeply driven right here. He is running his business, he's still teaching at the university, [01:15:00] but after running his company for a while, he's gonna start to see his views shift on his university position.
And let's take a look at how those views started to change.
But I found factionalism and backstabbing as bad there as it had been in the math department. , and he makes that statement shortly after he had moved over to be a professor in the graduate school. Both had endless committee meetings. Petty squabbles over benefits people who wouldn't pull their weight and couldn't be dislodged and the dictum of publish or Parish.
I decided it was time to leave academia even so, it was not an entirely easy decision. I had heard more than one person say that what they wanted most in life was to be a tenured professor at the University of California. It had been my dream too. Over those years. I hired students and former staff from uc, Irvine, but only one faculty member, one without tenure, was willing to take the [01:16:00] chance and join my operation.
The others found it, a very scary notion. Of course, a few had regrets later, gradually reducing my teaching load from full time. I finally resigned my UCI full professorship in 1982, and I'm sure that had to be a difficult decision for ed. He had put a large portion of his life into it at that point, and for those professors that passed on working for Ed, well, they gotta be certainly kicking themselves as they look back in their rear view mirror.
But after leaving his teaching position. Ed would say, I intensified my focus on competing with the wave of mathematicians, physicists, and financial economists who were now flocking to Wall Street from academia. And so at the end of 10 years, PMP would be up 14.1% for their clients,
and they had grown their base from that original 1.4 million to 28 million. [01:17:00] Now, ed and his team would continue to grow, and by 1988, their base had expanded to 273 million, and their limited partners would see returns of 18.2% compared to the s and p at 11.5%. During that timeframe,
they would go on to have no losing years or even losing quarters. And that's quite an impressive track record. But unfortunately things are about to take a dramatic change right here. And
this just adds to the thriller nostalgia of the entire book
in the middle of the day on Thursday, December 17th. 1987, about 50 armed men and women burst out of the third floor elevators to radar office in Princeton, New Jersey. They were from the IRS, the FBI, and the postal authorities. our employees were searched. Before they were free to leave the building.
They were not allowed to return. The invaders impounded several boxes of books and [01:18:00] records, including Rolodexes. They dug through contents of waste baskets and crawled through the ceiling spaces. Man, that's quite intense.
So at the time, the US attorney for the Southern District of New York was Rudy Giuliani, and he was on a hunt against information for a gentleman by the name of Michael Milken. He believed that milk's junk bond empire was riddled with security violations, insider trading and market manipulation, and lots of fraud.
So since Ed's partner, Jay Reagan knew Milken well, Giuliani thought that he could shake him down for information in Reagan would refuse to talk. So it's important to note that during this time. Ed nor anyone from the Newport Beach office were ever charged with anything, and sadly they wouldn't be able to recover, uh, from this shutdown.
Let me read for you what Ed says. The return for PMP during this traumatic year was [01:19:00] mediocre at 4%, reduced only by the millions in legal costs from the case,
but also because the team in Princeton consumed by defending themselves couldn't devote their usual time to partnership business as 1988 drew to a close. I saw no good way forward for p and p. I said I was leaving. Limited partners followed, and the partnership wound down.
Something great would still come from all of Ed's work at p and p.
Shortly thereafter, he would meet with a gentleman named Frank Meyer and another gentleman named Ken Griffith, and they would review the p and p model, and this would serve as the foundation for Citadel Investment Group. Citadel grew from a humble start in 1990 when I became its first limited partner with a few million dollars and one employee.
Griffin grew to a collection of businesses managing $20 billion [01:20:00] in capital, and having more than a thousand employees 25 years later. Annualizing at about 20% net to limited partners. Ken's net worth in 2015 was estimated at $5.6 billion.
And then what happens next after this is one of the reasons I admire Mr. Ed Thorpe. he takes some time for reflection and he gives us a few examples of founders who didn't quite stop knowing how to work.
As Princeton Newport Partners close. I reflected on the proposition that what matters in life is how you spend your time. So very true. When Jay Paul Getty was the richest man in the world and manifestly not fulfilled, he said the happiest time of his life was at age 16, riding the waves off the beach in Malibu, California.
Ed just reflects and uses his examples like this as a way not to live [01:21:00] his life, He just wants to focus on the important things, which are his relationships. When Princeton, Newport Partners closed, Vivian and I had enough money for the rest of our lives.
It freed us to do more of what we enjoyed most. Spending time with each other and family and friends. We loved travel and pursue our interest. Vivian and I would make the most of one thing. We could never have enough of time together. Success on Wall Street was getting the most money. Success for us was having the best life.
Right here we can see that life had dealt, add thecards of having to shut his business down and he could have went and just started another firm and built it all back up again. But in this instance, I think he played his cards perfectly. Spend time with his family and friends and doing things that they loved.
Now, in an interesting twist in 2008, Ed's son, Jeff is gonna call him on [01:22:00] the phone and tell him that Bernie Madoff had confessed to running a $50 billion Ponzi scheme. I'm gonna do my best to summarize Ed's findings for you.
Keep in mind that story many years ago about the gambling control board representative who was part of the establishment. Because we are gonna see this here again with Bernie Madoff.
in 1991. Ed had been hired by an investment committee as an independent auditor to review their hedge funds ' cause they had some suspicions that something strange was going on. And after reviewing, their documentation, ed had requested a meeting with Madoff. And let me just read for you here how this works out.
The returns Madoff reported were too large to be believed. Moreover, in months when stocks were down, the strategy should have produced a loss. But Madoff wasn't reporting any losses. After checking the client's account statements, [01:23:00] I found that losing months for the strategy were magically converted to winners by short sales of s and p index futures.
in the same way months that should have produced a very large windswere smoothed out. Suspecting fraud. I asked my client to arrange for me to visit the Madoff operation on the 17th floor of the famous lipstick building on Third Avenue in Manhattan. Bernie was in Europe that week,
as we know now, likely raising more money. His brother, Peter, head of compliance and computer operations said that I would not be allowed through the front door.
. The client then hired my firm to conduct a detailed analysis of their individual transactions to prove or disprove my suspicions that they were fake. After analyzing about 160 individual options trades, we found out that for half of them, no trades occurred on the exchange where [01:24:00] Madoff said that they supposedly took place for many of the remaining half that did trade the quantity reported by Madoff just for my client's.
Two accounts exceeded the entire volume reported for everyone. I told my client that the trades were fake and that Madoff's investment operations were a fraud. My client's dilemma,
if I was right and he closed his accounts with Madoff, he would protect his money, save his reputation, and avoid a legal mess. He argued that if I was wrong, he would needlessly sacrifice his best investment. I answered that I could not be wrong. I had proven from public records that the trades never happened.
He was being sent make believe, trade slips. I made the point that to ignore this could put his job at risk. That clinched it. He closed his accounts with Madoff and got his money [01:25:00] back then Ed would go on to say the following about Bernie. At this time, Madoff was a major figure in the securities industry serving as chairman of the nasdaq, running one of the largest third market off the exchange stock trading firms in the country.
Consulted by government and routinely checked out by the SEC, would the establishment have believed charges of wrongdoing? And that is an excellent question. And there was a gentleman by the name of Harry Markopoulos who would ultimately help take Madoff down and had reported him many times to the SEC.
And in the book it says, for the next 10 years, Markopoulos attempted to get the SEC to investigate, but it brushed him aside, repeatedly cleared Madoff after superficial investigations and quashed a request from the [01:26:00] Boston office prompted by Markopoulos to investigate Madoff's investment as a possible Ponzi scheme.
Like the gambling control board, all those years before Madoff was the establishment. And Ed saw this, so we informed his friends, those he cared about not to have any dealings with Madoff. And I think the lesson here that we can learn is
We should let the things we learn help guide us along and give us strength, trust, our gut, and our intuition to do the right things. Now, past this point, in the book, ed goes into statistical arbitrage operations and there's chapters that talk about hedging, indexing, asset allocation the financial crisis and giving back.
And these are really means for serious consideration. And I would highly recommend picking up the book for all of the details around this. It's really a very [01:27:00] valuable tool to have. If you want to understand these concepts in more detail, ed puts 'em very straightforward so that you can understand what he's trying to say.
And what I'll do here is summarize some of the key items that I thought you might like before we wrap up the book.
In 92, we would see Ed spin up a statistical arbitrage group, which he would name ridgeline partners. And it's during this time, they have a heavy reliance on computers and running a streamlined operation. Ed really balances his work and his outside life let me read for you how this unfolded for them.
Since our statistical arbitrage method was mostly computerized, Steve, that was his partner, and I could run the managed accounting
With the help of our small office staff, it would let me have time to enjoy life. We decided to go ahead. The venture began auspiciously. Our software ran smoothly first in [01:28:00] simulation, and then with real money starting in August of 92. I also wanted to invest my own money.
I could do this efficiently and profitably by creating a new investment partnership. This led to launching of Ridgeline Partners in August of 94 to trade alongside our institutional account. Limited partners gain 18% per year over its eight and one quarter year of operations between Ridgeline and X, Y, Z.
We managed as much as 400 million in statistical arbitrage and another 70 million in our other strategies , whereas PMPs Peak was 272 million compared with PMPs, maximum of 80 employees, only six of us at Ridgeline faced our formidable competitors. Several of those had hundreds of employees, including scores of PhDs in mathematics, statistics, computer science, physics, [01:29:00] finance, and economics.
We were a highly automated, lean and profitable operation. We decided to close down in the fall of 2002,
and it's important to note at this time that there were a lot of hedge fund operations in the market and it had become oversaturated and Ed didn't really see a lot of path forward , instead of just consuming his time over and over and over, he decides to go ahead and close down for what is the best reason.
The most important reason to wind down the operation was that time was worth more to me than the extra money Vivian and I wanted to enjoy our children and their families and to travel, read and learn. It was time, once again to change course in life.
we see this twice in Ed's career. It's an important reminder for us that it's okay to work hard and build our companies, but we can't forget about the loved ones that we have in our lives and also our physical health. It's important to remain balanced [01:30:00] and spend that time away from work so that we can build those real human connections.
as Ed reflects back, he makes a powerful statement around education that I think is very valuable for both of us. Education has made all the difference. For me. Mathematics taught me a reason logically, and to understand numbers, tables, charts, and calculations as second nature. Physics, chemistry, astronomy, and biology revealed wonders of the world and showed me how to build models and theories to describe and predict.
This paid off for me in both gambling and investing. Education builds software for your brain. When you're born, think of yourself as a computer with a basic operating system and not much else. Learning is like adding programs big and small to this computer.
From drawing a face to riding a bicycle, to reading, to mastering calculus you'll use these programs to make your way in the [01:31:00] world. Much of what I've learned came from schools and teachers. Even more valuable. I learned at an early age to teach myself this paid off later on because there weren't any courses in how to beat blackjack, build a computer for roulette, or launch a market neutral hedge fund.
The key point here is believe in yourself and you can accomplish anything. My friend. This is a valuable lesson for us right here. As we close down the episode, I wanna share the final two paragraphs that are found at the end of the epilogue. life is like reading a novel or running a marathon.
It's not so much about reaching a goal, but rather about the journey itself and the experiences along the way. As Benjamin Franklin famously said, Time is the stuff life is made of and how you spend it makes all the difference. Best of all is the time I've spent with the people in my [01:32:00] life that I care about, my wife, my family, my friends, and my associates.
Whatever you do Enjoy your life and the people who share it with you and leave something good for yourself and for the generations to follow. With those wise words we'll end.
Remember to take some time today and reflect on the things that you've learned. This'll yield deeper connections, or perhaps as Ed did when he was a young man and still probably does today, fall asleep. Reflecting on all those new educational topics in life, it'll improve your thinking dramatically. I enjoyed spending this time with you.
I hope that you enjoyed the episode and learned a few things along the way. Until next time, make it a beautiful day in the neighborhood, my friend. Peace out.