Blackjack Pioneer Ed Thorp Writes Investment Book

Edward Thorp made a fortune in the late 1950s, when he figured out how to beat casino blackjack with card counting. He even shared his secrets through the 1962 book Beat the Dealer. Thorp is still alive and well these days. And the 84-year-old recently wrote an investment book called A Man for All Markets. […]

edward-throp-blackjack-investingEdward Thorp made a fortune in the late 1950s, when he figured out how to beat casino blackjack with card counting. He even shared his secrets through the 1962 book Beat the Dealer.

Thorp is still alive and well these days. And the 84-year-old recently wrote an investment book called A Man for All Markets. This work discusses what blackjack taught Thorp about the investing world.

Here are a few of the lessons that he learned.

Blackjack and the Market can be Analyzed

Thorp believes that blackjack is a simpler version of the stock market. Going further, you can analyze it to see what cards have and haven’t been played to get a better outcome. But the main difference is that blackjack is a closed system, meaning there are only so many factors that can affect the outcome.

Compare this to investing, which requires more complex analysis. And the more factors you can pick out during this analysis, the more successful you’ll be in the long run. Two of these aspects include data mining the internet for trends, and using this data to rank key performance indicators.

Bankroll Management is Key in Blackjack and Investing

edward-thorp-investingThorp used the Kelly Criterion to determine risk vs. return when playing blackjack. Even the best card counters only have around a 1.5% advantage, making risk management especially important. The best investors might have a larger edge, but they deal with more-volatile swings.

“When the Noble Prize winners running the giant hedge fund in Long-Term Capital Management made a mistake, its collapse in 1998 almost destabilized the U.S. financial system,” writes Thorp. Of course, investors don’t want to be too cautious either because they could leave lots of money on the table.

Blackjack and Investments Need Proper Strategy

One more lesson we want to touch on is the parallels between strategy and investing. Thorp used a multi-part strategy for blackjack, which includes the basics that lower the house edge, along with the counting that helped him profit.

As for investing, Thorp had to properly evaluate the stocks, figure out the pricing anomalies, and decide whether a stock was over or under-valued. And if you’re wondering how this strategy has gone for Thorp, he’s made a 20% return over the last three decades!

 

 

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