Lessons from “A Man for All Markets”

Dave Lishego
3 min readApr 18, 2017

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Recently finished Edward O. Thorp’s A Man for All Markets. I had never heard of Thorp before someone recommended this book to me, but he’s a pretty fascinating guy. The structure of the book was roughly 2/3 autobiography and 1/3 investment advice. Both portions were entertaining and thought provoking.

Thorp recounts his life starting from childhood. He was a precocious kid who like to build contraptions and play pranks and regularly got himself into trouble. He always had an inclination towards science eventually gravitated towards mathematics. He applied math to a variety of domains with tremendous success.

He literally wrote the book (Beat the Dealer) on card counting in blackjack; collaborated with Claude Shannon (who may be the most underappreciated scientist of the 20th Century) to build a wearable computer to beat roulette, developed an options pricing formula before Fischer Black and Myron Scholes, and successfully operated one of the first quantitative hedge funds. He wrote a book on that too (Beat the Market.)

Thorp’s story is entertaining and provides some valuable lessons about gambling and investing.

An imperfect solution that can be used in practice is better than a perfect one that can’t

Thorp walks through several of his card counting formulas for blackjack. His preferred formula is a very simple one. It’s not the ideal solution, but it’s simple enough to be used in practice in a noisy, stressful, casino environment. The more complicated systems — while theoretically better— are difficult to use in practice and prone to error. Better to have an imperfect, but user-friendly system.

The importance of temperament

Thorp knew what Buffett and Graham have both preached repeatedly: temperament is more important to successful investing (and gambling) than pure brainpower or brilliant strategy. When testing his card counting strategies, Thorp started on tables with low minimum bets. This was obviously helpful to avoid losing too much money before proving the strategy, but he also wanted to condition his nerves and temperament before moving up to larger bets.

Exploiting a small edge repeatedly can be extremely profitable

Thorp’s strategies for successful gambling and investing shared similarities. In both cases, he was able to gain a small edge and exploit it repeatedly so that he profited in the long-run. Card counting doesn’t guarantee that you’ll win every hand, but it tips the odds in your favor. If you have the temperament (and a big enough bankroll) to weather the inevitable losses, probability dictates that you will profit in the long run. Thorp applied the same basic strategy to his investing. Every year he made thousands of small arbitrage bets where he held a small edge and generated millions in profits in the process.

Thorp exploited the Kelly Criterion to size his bets appropriately:

% of Capital Wagered = Expected Net Winnings / Net Winnings if You Win

When you have a greater edge (greater expected net winnings) place a larger bet. Since you’re betting a percentage of your total capital with each bet, you’re very unlikely to run out of money even if you fall into a prolonged losing streak because the absolute sizes of your investments decrease with your capital base. This is easier to apply to gambling games where you know definitive probabilities than it is to investing, but a worthwhile formula to know. William Poundstone’s Fortune’s Formula tells the story of John Kelly’s formula. I’m going to read (and post about) it soon.

Innovation is crucial

Competitors adapt and markets change. The casinos adapted to Thorp’s card counting by banning him from casinos, cheating, using multiple decks, reshuffling after every hand, and even resorted to drugging him in on instance. Markets adapt to trading strategies when copycats enter the market and advantages evaporate. It’s important to keep innovating and making sure that strategies are still relevant.

Final thoughts

It’s not a new concept, but Thorp introduced me to what he calls Sharpe’s Principle: the idea that the sum of all market participants, by definition, must equal the market. Some investors can beat the market index, but that means, by definition, that others cannot. This is a simple, but powerful, framework to keep in mind.

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Dave Lishego

Investment team @iwpgh. Writing about venture capital, startups, books, and other random things that interest me. Opinions are my own.