Ed Thorp & Over-betting

In today’s Wall Street Journal, there’s a great interview with Edward Thorp and Bill Gross.

Both investors are asked about current market conditions and their thoughts on investing in general.

Ed Thorp is a hedge fund manager who ran Princton-Newport Partners and has returns of 20% over a 28-year period (ending 1998). In addition to his investing skills, Thorp is best known for his work at the Blackjack tables. In 1962, he authored the book Beat the Dealer, which explained the methods he used to win at Blackjack.

For more information on Ed Thorp, check out the book Fortune’s Formula. It’s a great read that details the evolution of information theory, the Kelly Criterion, gambling strategies, hedge funds, and the mob’s involvement in all of the above. Math, gambling, the mafia, and investing. Who could ask for anything more? Also, if you’re interested in Thorp’s Blackjack strategies (card counting), the book Bringing Down the House is another great read. But I’ll stick to the subject of investing for this post.

Over-betting

Below is a section from the WSJ article where Gross and Thorp discuss hedge funds: Continue reading “Ed Thorp & Over-betting”

Quants, charts and trends, oh my!


Photo by saibotregeel

Tariq Ali writes a great post about the follies of our fellow investing clan. I disagree with a few of the specific points he brings up but think the overall message is right on.

It’s wrong to judge the quant and technical analysis firms without knowing exactly how they work. If an investor who was just starting out asked me what style I suggested, value investing would be my answer, hands down. It’s much easier to grasp, and anyone can do it—you don’t need a PhD or any extraordinary skills. But that doesn’t mean that the other forms of investing aren’t valid.

Some traders are just lucky. Some value investors are just lucky. Both styles have practitioners who are phenomenal at what they do, and who have proved it over time. Until you’ve practiced all of these forms of investing, it’s hard to judge which is more valid.

The Headcount

Using the number of employees at a firm to judge success is misleading. Again, I don’t know much about them, but many don’t just run a single fund. Citadel for example has a wide range of investment-related activities (much like investment banks like Goldman Sachs). Also, it’s hard to get an idea of exactly how many of those employees are the actual decision makers for the portfolio (what really matters).

Warren Buffett has 1.5 employees (himself plus half of a Munger) on the investing side, and manages over $100 billion. I’d say he has done just fine over the years. There are three clear advantages to having a limited headcount. One, it avoids group-think when making decisions. Two, there’s no need to worry about “one-employee disasters”, Amaranth Advisors and Brain Hunter. And three, more obviously, it lowers overhead for small firms.

Eddie Lampert has a few dozen employees. Mohnish Pabrai has 1.7 employees. Neither is the “correct” amount as it all depends on your investing style. From what I’ve heard, Pabrai does little to no scuttlebutt. Lampert sends his analysts out on research and fact gathering missions and is constantly analyzing mountains of data regarding his positions. Both investors have proven they are highly capable and successful. Continue reading “Quants, charts and trends, oh my!”