1/8/2024: Power of Rationality
Happy New Year! My kids’ school started today and I can finally get back to my routine. During the break I read A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market by Edward Thorp. Dr. Thorp is a super cool guy. I actually listened to the audio format of this book. The audio book was published in 2017 and he read his own audio book at age 85!! As shown above, he had an amazing interview with Tim Ferris last year when he was 90 . I hope I will have the same mental clarity and be as articulate at age 90.
I first knew about Dr. Thorp more than 20 years ago when I read Beat the Dealer as a graduate student at UC Berkeley’s IEOR department. When I finished the book, I was like wow I hope one day I could be a successful nerd like Dr. Thorp. Although Dr. Thorp is known for his work in gambling strategy and market neutral trading, he is not a money hungry guy. He is a very typical math nerd who likes problem solving. He did make a lot of money from his work but he didn’t maximize his profits or status by expanding his hedge fund empire or raising gazillions from investors. He could have done both but he valued his time more than making more money. In essence, he was wise enough to know and stick to his priorities. Many people in his position would have been consumed by greed and pursued more money blindly. But Dr. Thorp knows what he wants from life. I found that very refreshing.
One thing I noticed from this book is that Dr. Thorp didn’t have the savior complex many ultra successful people ended up having. Many successful people started to spew out all the change-the-world lingos after they made it. I used to admire those people but after being heavily involved in the philanthropic world for a few years, I realized most of it is just PR junk and as Taylor Swift said a lot of it is “narcissism disguised as altruism”. It’s very hard to solve hard problems. Someone who succeeded in one domain like finance and tech shouldn’t assume they are well equipped to succeed in making public education or the healthcare system better. Mr. Thorp didn’t have any kind of philanthropic posturing or try to tell people what they should do with their money to make more impact. He only nerdily told in his book how he endowed a professorship in the UC Irvine math department that will generate very positive ROI in the long run. It’s so cool.
In this book, he also expressed various views that I fully agree with but are probably too conservative in today’s environment. The professorship he endowed is fully merit based and is race and gender blind. I think this is what most people want but these days many people wouldn’t say this publicly. Most rational thinkers would think we shall focus on lifting the bottom and applying the same merit-based standard for faculty recruiting and college admissions. But now we are in an era where people have to meet certain gender and racial requirements to even be considered for a spot. I applaud his stance on merit-based hiring for the professorship he endowed. Dr. Thorp was a professor at UC Irvine and he expressed his worry on the privatization of UC. The tuition is too expensive for middle class students and it’s going to hurt America’s competitiveness in the long run if middle-class kids couldn’t get an affordable high quality college education. I totally agree and I hope people heed his advice.
Dr. Thorp made many interesting points and observations in this book. Two points made a strong impression on me. One is that the market is not efficient. He gave an example of market inefficiency on the arbitrage opportunity of 3 COM and Palm. I found it amusing that he tried so hard to convince people why the market is inefficient but I don’t actually need to be convinced because I am in agreement. Stock prices are based on market demand and supply and can easily deviate from its intrinsic value. The efficient market hypothesis people had a hypothesis and tried to shove it down everyone’s throat. But if you ever trade any low volume stocks, you know the market is very inefficient. The other point he made was on the retirement portfolio strategy. He gave an example about how a retired couple over indexed on bonds because they want the income. He pointed out that they could sell equity to obtain income. He used mathematics to come up with a strategy that will maximize return with basically zero opportunity for the money to run out. But the retired couple still decided not to use the improved strategy. It was very interesting but I am totally going to listen to Dr. Thorp’s advice on this.
This is an amazing book for nerds like me. Dr. Thorp is a wise man living a long fulfilling life and shared with us a few important lessons he learned backed by mathematical proofs and empirical data. I highly recommend reading this book. You will be showered with wisdom and great investment insights.