Ed Thorp at lunch with the FT

This is a superb “Lunch with the FT”. John Authers, FT Senior Investment Commentator, interviews Ed Thorp, the famous mathematician, hedge fund manager and blackjack player. Here are excerpts from an exceptionally long, informative and entertaining column. Click on the link below to read the full column (highly recommended).

Thorp … worked out how to “beat the dealer” at blackjack while a postdoctoral student at MIT. After he published a book in 1962 revealing how to count cards, he became so famous that casinos banned him from playing — he says one even resorted to drugging him. Many changed their rules to thwart people using his counting system.

Next came an attempt to beat roulette, using a contraption tied to his foot that is now described as the world’s first wearable computer; after that, an expedition into Wall Street that netted hundreds of millions of dollars. ….

He no longer gambles. “…. If you are used to betting millions in the market, betting a few thousand in the blackjack tables doesn’t mean anything.” ….

As for hedge funds, he says they are now “a mature asset class, and the risk-adjusted returns for hedge funds are inferior to other asset classes”. So many people are now using quant methods that they are no longer so profitable.

…. … I ask what he suggests we do about it? “The banks who are too big to fail should have been allowed to fail. Their shareholders should have had to pay the price. Big companies go through organised bankruptcies. Why is it that we couldn’t afford for the banks to go bankrupt? It’s that they are so influential. They can persuade the government not to let them go bankrupt.”

He also holds that banks’ speculative arms should be broken off — essentially a return to the Depression-era Glass-Steagall law that was controversially repealed by President Clinton in 1999. The newly elected President Trump — we are lunching on the first Monday of his presidency — was elected on a platform of bringing back Glass-Steagall, but now appears intent on deregulation. Thorp winces at the mention of Trump’s name, saying he is as negative about him as it is possible to be. [Emphasis added.]

John Authers, “Ed Thorp: the man who beat the casinos, then the markets“, Financial Times, 4 February 2017 (gated paywall).

Since the late 1960s, Thorp (born 1932) has made a fortune in the stock market, running the hedge fund Princeton/Newport Partners. He is also an accomplished academic, with a PhD in mathematics that he received from UCLA in 1958. After a post-doc at MIT (1959-61), he taught mathematics at New Mexico State University (1961-65) and the University of California, Irvine (1965-82). From 1977, he was a professor of both finance and mathematics.

Random House last month published Thorp’s autobiography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market .

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