Ed Thorp’s journey to investing began in a casino. It started by questioning the conventional wisdom that the game couldn’t be beaten. Thorp proved it could.
The game was blackjack. His strategy for counting cards gave the player an edge over the house. He published the strategy in Beat the Dealer, which became a best seller. It was proof that a tiny edge can compound a small bankroll into a fortune over time.
Less well-known is that Thorp beat the game of roulette too. With the help of Claude Shannon, Thorp created a wearable computer that predicted where the ball would land. It gave them a 44% expected gain playing roulette.
Thorp’s proclivity to question conventional wisdom pushed him toward markets. His early foray into investing was a hedging strategy using warrants, options, and convertible bonds and preferreds, which was written about in Beat the Market. He averaged 25% mostly investing for himself and friends and family.
He started Princeton/Newport Partners in 1969. He continued his warrant strategy while adding an options formula — basically, Black-Scholes before Black and Scholes figured it out — along with a third strategy he could use depending on the situation. It became a race to stay ahead of academia until he closed up shop in 1989. Continue Reading…