Here I summarise Dr Ed Thorp’s practical wisdom and valuable life lessons given in his book “A man for all markets1. I reviewed his book earlier and I discuss his lessons on investing in a subsequent post.

The topics covered below are those which I find particularly interesting as a Philosophical Investor. Dr Thorp often repeats and expands on the same ideas as they relate to various events of his colourful life.

Personal Philosophy of Life

I was intrigued by the power of abstract thinking to understand and direct the natural world.” – Ed Thorp.

Dr Thorp believes that his education formed the basis for his successful life. Even of more value to him was that, at an early age, he learned how to teach himself. Mathematics taught him to reason and to understand numbers. The physical sciences taught him how to build models and theories to describe and predict.

Throughout his life, Dr Thorp was always more than willing to share his knowledge as is evident from his books  “Beat the dealer2 and “Beat the market3. This is because of his view that scientific research ought to be a public good. In any case, he believed that he always would have more new ideas. He also knew that sooner or later others will make the same discoveries.  

Dr Thorp refers to the quote of Greek philosopher Heraclitus  “Character is destiny” when explaining why he became a hedge fund manager instead of an academic. Befitting, given his interest in gambling, is Dr Thorp’s view that life is a mixture of chance and choice. Chance is the cards you are dealt in life, while choice is how you play them.

When discussing life goals, he asks the question: ”Is the winner really the one who dies with the most toys?” He then refers to J. Paul Getty. When Mr Getty was the richest man in the world, he was not fulfilled, saying that, instead, the happiest time of his life was when he was surfing as a 16-year-old. Dr Thorp also quotes the author Joseph Heller who said he has something a rich man could never have: “The knowledge that I have got enough”.

Dr Thorp sees life as similar to reading a novel or running a marathon (he still ran marathons until quite recently). It’s not about reaching a goal but rather about the journey and the experiences. He then quotes Benjamin Franklin: “Time is the stuff life is made off”.

Dr Thorp admits that  “acknowledgement, applause and honor are welcome and add zest to life, but they are not ends to be pursued“ and “What matters is what you do and how you do it, the quality of time you spend, and the people you share it with.”

Strategies for a fulfilled life

Dr Thorp believes that to lead a fulfilled live one has to deal effectively with the trade offs between health, wealth and time. You can trade time and health, due to stress, poor diet, lack of sleep or exercise, to accumulate wealth. He thinks of each hour spent on fitness as one day less in a hospital. Furthermore, we often do not appreciate the monetary value of our time: instead of doing a job yourself, rather hire somebody else.

Dr Thorp defines satisfiers and maximisers as two extremes on a continuum of personality types. Maximisers search for the best possible deal without considering the time and effort involved. Rather be a satisfier who is happy with a near-optimal result, taking into account factors such as the searching cost, decision making as well as the risk of forgoing a near optimal opportunity. For example, he does not like the idea of trying to save cents to get a better price when trading a share or concluding a deal, because the small extra gain is usually not worth the substantial risk of a failed transaction.

Dr Thorp got into trouble after behaving disrespectfully to one of his University lecturers. After that experience, he used the following two questions as valuable guides before embarking on something:  (1) If you do this what do you want to happen? And (2) If you do this what do you think will happen?

He also realised early on that it is “an absolute no-no in human relationships” to damage somebody’s self-esteem.

Managing a successful business

Dr Thorp explained some of the strategies he used to manage his hedge fund partnerships as successful businesses.

He recruited smart young people from University because they were not yet set in their ways through previous job experiences. To determine whether a new staff member is suitable newcomers were given six-month contracts.

Dr Thorp was also happy to pay well above market compensation to keep his best employees, as this saved money and the time required for recruiting and training new hires.

A problem he experienced with large bureaucracies and companies is that many people believe it is better not to cross people than to stand on principles.

On human nature and the society

“… human beings and the way they interact aren’t covered by broad, unchanging theories and may never be.” – Ed Thorp

Instead, Dr Thorp uses particular concepts to aid his understanding. For example, always take account of incentives, or who gains. He learned early on rather to look out for himself, as the interests of salespeople and promoters differ from clients. This is the well-known agency problem in economics.

He is of the opinion that a self-serving group called the “the politically connected rich” is the dominant political and economic power in the US. He believes this is key to understanding what happens in society and why.

As an illustration of this, he mentions the “witch hunt” against Michael Milken and Drexel Burnham as they were challenging the corporate establishment who was delivering poor shareholder returns. Also, the government bail-out of financial institutions in 2008-2009 is given as another example.

Dr Thorp objects to the accumulation of wealth through political connections rather than merit and divides the rich simplistically into two groups: those who gain their wealth through political networking and those who do not.

Protecting wealth and creating endowments

One of the keys to reaching … great wealth is … compound growth.“ – Ed Thorp

Dr Thorp considers listed securities as an appealing store of wealth relative to, say, property. Listed securities are highly liquid, and they are cheap to trade.

You should not own your home with the primary reason to make a profit as one can do just as well by renting. However, the advantage is that one can make changes and improvements to your home according to your taste.

So how much wealth is required to retire comfortably? According to Dr Thorp’s computer simulations, with investments in stocks and real estate, annual withdrawals should be limited to an inflation adjusted level of 2% of the initial investment.

This is also the withdrawal rate he stipulated for the charitable endowment fund he set up to support the research activities of a mathematics chair at the University of California, Irvine. (He prefers to support projects that otherwise would not have happened.)

Dr Thorp hopes that the endowment will grow forever, through the power of compounding and due to the longevity of Universities. Since 1520, only about 85 institutions survived, and about 70 of these are Universities. This would fulfil Dr Thorp’s wish that the gift should be transformative, with an impact well beyond what you would expect from its monetary value. He makes reference to two endowments from Benjamin Franklin that are still running today, thanks to their low withdrawal rates.

I will discuss the lessons he learned from the financial markets in a following post.

1Thorp, Edward O. (2017). A Man for All Markets. One World Publications.
2Thorp, Edward O. (1966). Beat the dealer. Vintage Books.
3Thorp, Edward O, Kassouf, Sheen T. (1967). Beat the Market: A Scientific Stock Market System.