Investing lessons from Edward Thorp, quant pioneer and card counter

Edward O. Thorp pioneered the use of quantitative investment techniques in the financial markets. He is the author of “Beat the Dealer,” which was the first book to prove mathematically that blackjack could be beaten by card counting, and “Beat the Market,” which showed how warrant option markets could be priced and beaten.

Thorp speaks clearly and from the heart. He reminds me of that other ultra-rational decision-maker, Charlie Munger. Despite his prodigious intellectual gifts, Thorp remains grounded and approachable. A few sentences reveals his gift for communication:

“Chance can be thought of as the cards you are dealt in life. Choice is how you play them.” “A lot of big choices that you make at some point or other, and then there are things that you can’t control like who your parents were, and what kind of economic circumstances you were brought up in, where you started. Did you start 20 yards behind the start line or 20 yards ahead of it, or right on it? People start in different places. Those are cards that are dealt.”

Set out below are lessons I have learned from Thorp:

1. “Try to figure out what your skill set is and apply that to the markets. If you are really good at accounting, you might be good as a value investor. If you are strong in computers and math, you might do best with a quantitative approach.” “If you aren’t going to be a professional investor, just index.”

Thorp likes to stay within his circle of competence. This is a hallmark of people who are rational. In that sense, Thorp reminds me of Warren Buffett. But unlike Buffett, Thorp…

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