Founders - #222 Ed Thorp (My personal blueprint)

Episode Date: December 20, 2021

What I learned from rereading A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market by Ed Thorp. ----Get access to the World’s Most Valuable Notebook for Founders at Founders Notes.com----1. The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and, not least of all, fun. 2. I learned at an early age to teach myself. This paid off later on because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund.3. Even though the Goliath I was challenging had always won, I knew something no one else did: He was nearsighted, clumsy, slow, and stupid, and we were going to fight on my terms, not his.4. I admired the heroes who, through extraordinary abilities and resourcefulness, achieved great things. I may have been inspired to mirror this in the future by using my mind to overcome intellectual obstacles.5. Rather than subscribing to widely accepted views—such as you can’t beat the casinos—I checked for myself. 6. What matters in life is how you spend your time.7.  Life is like reading a novel or running a marathon. It’s not so much about reaching a goal but rather about the journey itself and the experiences along the way. As Benjamin Franklin famously said, “Time is the stuff life is made of,” and how you spend it makes all the difference.8. I also believed then, as I do now after more than fifty years as a money manager, that the surest way to get rich is to play only those gambling games or make those investments where I have an edge.9. Since much of what we were doing was being invented as we went along, and our investment approach was new, I had to teach a unique set of skills. I chose young smart people just out of university because they were not set in their ways from previous jobs. Better to teach a young athlete who comes fresh to his sport than to retrain one who has learned bad form.10. Whatever you do, enjoy your life and the people who share it with you, and leave something good of yourself for the generations to follow.----Get access to the World’s Most Valuable Notebook for Founders at Founders Notes.com----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

Ed Thorpe's memoir reads like a thriller, mixing wearable computers that would have made James Bond proud, shady characters, great scientists, and poisoning attempts. The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and not least of all, fun. Thorpe is also known to be a generous man, intellectually speaking, eager to share his discoveries with random strangers. Yet he is humble. He might qualify as the only humble trader on planet earth. So unless the reader can reinterpret what's between the lines, he or she won't notice that Thorpe's contributions are vastly more momentous than he reveals. Why? Because of their simplicity. Their sheer simplicity. For it is the straightforward character of his contributions and insights that made them both invisible in academia and useful for practitioners. My purpose here is not to explain or summarize the book. Thorpe, not

surprisingly, writes in a direct, clear, and engaging way. I am here as a trader and a practitioner of mathematical finance to show its importance and put it in context for my community of real-world risk-takers. That context is as follows. Ed Thorpe is the first modern mathematician who successfully used quantitative methods for risk-taking, and most certainly the first mathematician who met financial success doing it. Thorpe's method is as follows. He cuts to the chase in identifying a clear edge. That is something that in the long run puts the odds in his favor. The edge has to be obvious and uncomplicated.

For instance, calculating the momentum of a roulette wheel, which he did with the first wearable computer, and with no less a co-conspirator than the great Claude Shannon, father of information theory. He estimated a typical edge of roughly 40% per bet. But that part is easy, very easy. It is capturing the edge, converting it into dollars in the bank, restaurant meals, interesting cruises, and Christmas gifts to friends and family. That is the hard part.

It is the dosage of your betting, not too little, not too much, that matters in the end. For that, Ed did great work on his own, before the theoretical refinement that came from a third member of the information trio, John Kelly, the originator of the famous Kelly Criterion, which is a formula for placing bets that we discussed today because Ed Thorpe made it operational. A bit more about simplicity before we discuss dosing. For an academic judged by his colleagues, rather than the bank manager of his local branch or by his tax accountant, a mountain giving birth to a mouse

after huge labor is not a very good thing. They prefer the mouse to give birth to a mountain. It is the perception of sophistication that matters. The more complicated the better. The simple doesn't get you citations that bring the respect of university administrators as they can understand that stuff but not the substance of real work. Ed was initially an academic, but he favored learning by doing, with his skin in the game. When you reincarnate as a practitioner, you want the mountain to give birth to the simplest possible strategy, and one that has the smallest number of side effects, the minimum possible hidden complications. Ed's genius is demonstrated in the way he came up with very

simple rules in blackjack. Instead of engaging in memory-challenging card counting, something that requires one to be a savant, he crystallizes all of his sophisticated research into simple rules. Go to the blackjack table. Keep a tally. Start with zero. Add one for some strong cards, minus one for weak ones, and nothing for others. It is mentally easy to just bet incrementally up and down. Bet larger when the number is high, smaller when it is low. And such a strategy is immediately applicable by anyone with the ability to tie his shoes or find a casino on a map. Now, money management. Something central for those who learn from being exposed to their own profits and losses.

Having an edge and surviving are two different things. The first requires the second. As Warren Buffett said, in order to succeed, you must first survive. You need to avoid ruin at all costs. Thorpe's ideas were rejected by economists in spite of their practical appeal because of economists' love of general theories for all asset prices, dynamics of the world, etc. The famous patriarch of modern economics, Paul Samuelson, was supposedly on a vendetta against Thorpe.

Not a single one of the works of these economists will ultimately survive. Strategies that allow you to survive are not the same thing as the ability to impress colleagues. So the world today is divided into two groups using distinct methods. The first method isme of financial economists and blew up spectacularly in 1998, losing a multiple of what they thought the worst-case scenario was. The second method, that of the information theorist as pioneered by Ed, is practiced by traders and scientist-traders. Every surviving speculator uses explicitly or implicitly this second method.

I said every, because those who don't will eventually go bust. Some additional wisdom I personally learned from Thorpe. Many successful speculators, after their first break in life, get involved in large-scale structures with multiple offices, morning meetings, coffee, corporate intrigues, building more wealth while losing control of their lives. Not Ed. After the separation from his partners and the closing of his firm, for reasons that had nothing to do with him, he did not start a new megafund. He limited his involvement in managing other people's money. But such restraint requires some intuition, some self-knowledge. It is vastly less stressful to be independent.

And one is never independent when involved in a large structure with powerful clients. It is hard enough to deal with the intricacies of probabilities you need to avoid the vagaries of exposure to human moods. True success is exiting some rat race to modulate one's activities for peace of mind. Thorpe certainly learned a lesson. The most stressful job he ever had was running the math department of the University of California, Irvine. You can detect that this man is in control of his life. This explains why he looked younger the second time I saw him in 2016 than he did the first time in 2005. That was Nassim Taleb writing in the foreword of the book that I just re-read and the one I'm going to talk to you about today,

which is A Man for All Markets, From Las Vegas to Wall Street, How I Beat the Dealer and the Market. And it was written by Ed Thorpe. This is the autobiography of Ed Thorpe. And I just mentioned that I just re-read the book Stephen King, actually reading the autobiography of Stephen King about a month or maybe two months ago, something like that, helped me realize that I needed to reread this book. He says something, Stephen King says something in his autobiography where he talks about, listen, when you're making something, in his case, he's creating novels, creating books. Not only are you the creator, but you're he's like, I'm the creator, but I'm also the first reader. And so I always listen to every single podcast

all the way through before I publish it. And I've noticed on the last several episodes, I just keep mentioning Ed Thorpe over and over again, this idea that everybody has some kind of blueprint, some kind of inspiration that they're trying to copy, they're trying to emulate. And so out of the 229, I think this is actually the 230th episode, if you count the bonus episodes. So, you know, maybe 215, 220 people that I've actually studied because I know I've done multiple episodes on a bunch of different people. Out of every single person I've studied so far for the podcast,

Ed Thorpe is my personal blueprint. He is the single person, if I only had to pick one, of who do I want to most be like? Who do I want to copy? Who do I want to most be like, who do I want to copy? Who do, who do I want to emulate? It's him. He is the person, in my opinion, that has come close to mastering life. Every single person that we've studied in the podcast has mastered their professional life. They're the best in the world in many cases, or one of the best in the world at what they do. But the mistake, almost a lot of them make almost all of them make is the fact that they overemphasize or over

optimize for their professional life at the detriment to everything else and just as Taleb said in the forward he says you can detect that the man is in control of his life and there's five main areas that I think Ed focused on first is is lifetime learning. He's largely self-taught. He's curious about the world around him. And he's constantly seeking, up until this day, constantly seeking knowledge and information that will help him in life. The second thing, he's really rich. And he didn't start out that way. His parents were really poor. But the difference between Ed and most really, really rich people is he realized, like Ben Franklin realized before him a couple hundred years before Ed Thorpe was even born, that time is the stuff that life is made of.

And so Ed wouldn't chase more money at the expense of other areas in his life after he was already really wealthy and had more money than he could ever spend. Number three, he took care of his health. He developed simple systems, and we'll talk about this today because that's part of his genius. That's what Taleb was just hinting at, the fact that he just developed simple systems for everything. One of the things he developed simple systems for is how to be healthy to be physically fit. So he took care of his health, he developed simple systems, and he made it a priority. And he looks when, if you watch an interview, there's a bunch of interviews on YouTube of him, especially when this book was coming out a couple years ago. He did a bunch of interviews to promote it.

He looks 20 years younger. He's almost 90 years old years old he's giving interviews i think he's 85 at the time and if you look at this he looks like he's in his mid-60s he talks about what he figured out at a young age he's like every every hour i spent exercising i thought of as one less day that i'll spend in the hospital at the end of my life number four he was a he was he had good relationships he was a good father he was was a good husband. He made spending time with his family and friends a priority. He got the most joy out of his life from the times he spent with the people he loved. He talks a lot about this in the book. And number five, just like what Nassim was mentioning in the foreword, he treated life

like the adventure it is. He had fun. And part of the way he had fun was he actually followed his genuine intellectual curiosity. There's a great quote by Naval Ravikant, the founder of AngelList, and he said that following your genuine intellectual curiosity is a better foundation for a career than following whatever is making money right now. Ed Thorpe, if he had heard that quote, would definitely agree with it. The fact that Thorpe followed his genuine intellectual curiosity led him to this life of adventure. It also leads to several intersections of his life with, you just can't believe the stories that are in this book. The very first sentence in the foreword, if I'm not mistaken, is Ed Thorpe's memoir reads like a thriller. And so Ed's idea of just following my own intellectual, like genuine intellectual curiosity winds up intersecting with all these other, you know, soon, which would be soon to be famous people.

So he winds up knowing Richard Feynman, the legendary physicist. He winds up being invited to dinner and invited to a Warren Buffett's house when Warren's in like his late 30s, right? As he's dissolving the Buffett partnership and starting Berkshire Hathaway Ed Thorpe's life intersects with Claude Shannon after Shannon had published his legendary information theory Thorpe winds up discovering the Bernie Madoff Ponzi scheme like 17 years before Madoff winds up I think he discovered in like 1991 he's like no this guy's clearly a fraud he wound up checking his realizing that Madoff was uh making up uh like he's saying these are the trades that happened thorpe went and looked and it's like those trades never happened so anyways that that

winds up happening like 17 years before madoff finally admits to i think it was the largest ponzi scheme in history so there's just a ton to learn from him but the five things that i think are interesting he's smart he's rich he's physically he's got good relationships, and he had fun. So let's jump into his early life. This is the first chapter. It's called Loving to Learn, and he talks a lot about the importance of developing a love of reading from a very early age. By the time I turned five, I was reading at the level of a 10-year-old, gobbling up everything I could find. My parents left me very much on my own, and I responded by exploring endless worlds, both real and imagined to be found in the books that my father gave me. So he's reading,

some of these are fiction books like Gulliver's Travels, Treasure Island, and they inspire him to develop extraordinary abilities and to have and to achieve great things. So he says, I enjoyed the vivid pictures I created in my mind and the fantastical notions that spurred me to imagine for myself further wonders than that might be. I admired the heroes who, through extraordinary abilities and resourcefulness, achieved great things. I was introverted and thoughtful, and I may have been inspired to mirror this in my future by using my mind to overcome intellectual obstacles. And so one thing he benefited from was the fact that his father pushed him. His father didn't push him on purpose. They just didn't have a lot of money. And so he says, though we were poor, my parents valued books and managed to buy me one occasionally.

My father made challenging choices. As a result, between the ages of five and seven, I carried around adult looking books. So his father's buying books that he'd actually want to read. And Ed's just going to have up this is uh ed grew up during the depression has a major effect on him and his family um it says the depression permeated every facet of our lives living on my father's 25 a week salary we never wasted food and we wore our clothes until they fell apart a couple years later during world war two his mom actually um get has to get a job as well. It was very common. Obviously, a lot of the men went off to combat. The women would work in factories.

There's like this famous meme. I guess they don't call it memes back then, but like this poster, this propaganda poster, I guess, or advertisement, whatever it is. It's like Rosie the Riveter. So that was based on, you know, actual generation of women that had to construct these machines of war. His mom being one of them. My mother was a riveter on the swing shift. She worked from 4 p.m. until midnight at Douglas Aircraft. My father worked a graveyard shift at Todd's Shipyards. The reason I'm telling you this is because that means he essentially was just left to his own devices, left to raise himself. My parents were usually gone or they were sleeping. They would seldom see us or each other.

This left me and my brother, or excuse other. This left me and my brother, or excuse me, they left me and my brother to raise ourselves. So they never had money. It gets even worse after World War II. His mother is Filipino. Her family winds up escaping and coming to America and they wind up living with them. So you have 14 people in a small house, Ed's around high school age at this point. He says, American troops had liberated the survivors of my mother's family from a Japanese prison camp in the Philippines. Now my grandmother and my mother's youngest brother and two of her sisters and their families came over from the Philippines to stay with us. And there's just

these tragic, crazy stories from World War II. This is one of them. They told us that my aunt Nona and her husband had been beheaded in front of their children. My grandfather had died painfully of prostate cancer in the camp just a week before liberation. Having 10 extra residents packed into a house along with our family of four brought difficulties in addition to overcrowding and the economic burden of supporting them. So a personality trait that Ed had even in high school is the fact that he liked to upset the status quo. He thought of himself as he's definitely a misfit. And he didn't like unfair like institutional advantages, which he actually talks a lot about towards the end of

the book. But in this case, he's in high school, he realizes, hey, the student government's corrupt. It's just a bunch of the popular kids. Popular kids are not doing anything to actually help. He is probably the smartest kid in school i mean ed's no doubt a genius so he figures out a way uh he's the one leading the charge and he winds up uh installing people that think like him in like 13 of the 15 positions so this made him an enemy it says a couple of candidates realized i must be behind uh the change that they're doing advertising they're doing basically a bunch of bunch of things to remove people he felt were in unjust positions. A couple of the candidates realized I must be behind it and spent their campaign speech time attacking me personally.

The social clique had always run the student government. They were entitled. Change meant I was a troublemaker, a radical, a threat to the status quo. And so the reason I'm reading this to you is because he winds up running into these people at a high school reunion many years, and he gives us some advice here. 46 years later, when I stopped by our high school reunion for a couple of hours, the ends, which he's going to talk about the social clique, the popular kids, okay, let me put that. The popular kids seem the same as they had so long ago, only older and mellower. High school had been the apex of their lives.

Many had married one another and lived locally ever since, whereas for me, high school was a launching pad for life's great adventure. And so at this point as a high school senior, he's doing all these things. He's taking math competitions, physics competitions, I think chemistry competitions. His parents don't have any money. He thinks at this point, I guess until he had a large success in both gambling and he starts the first quantitative hedge fund, he thought he was just going to live his life as an academic. He's like, I'll be able to do experiments.

I'll be able to learn. I won't have a lot of money, but I'll enjoy myself. And so he's got to do all these things to try to scrounge up money. The reason I'm telling you this is he's got to scrounge up money to pay for college. And so at the very same time, his parents are going to wind up getting divorced and his mom is going to wind up betraying him. So it says that summer was especially difficult for me because my parents filed for divorce. Our house was often filled with conflict during the three years it took for the last of our 10 guests to move out. My father moved to Los Angeles during my senior

year in high school. I saw him only on Sunday mornings. He drove 20 miles from Los Angeles and parked a block or so away. I'd come out and spend several hours with him, practicing for my driving test, going to lunch, talking, whatever. The situation with the divorce was confusing as neither parent offered any explanation. What was going on only became clear years later. My mother had been carrying on an affair with the husband of the family with whom we had originally stayed when we visited California for the first time. So I think that was like five years. It was quite a long time before they were in Chicago. They came out to check out Southern California.

They wound up living in Orange County, Newport Beach area. And so his wife, you wife, friends and family, the husband of that family, and then Ed's mom wind up carrying on this affair. Her dad's obviously going to find out, so that's going to lead to the dissolution of their marriage and also to some really poor decision-making by his mom here. In August 1949, as I was turning 17,

I went off to the Berkeley campus of the University of California. Now divorced, my mother sold our house, moved away, and installed my 12-year-old brother in military school. It would be several years before I saw much of either parent again. I was on my own from then on. Shortly before leaving for college, I learned that my mother had cashed the war bonds I had paid for with my paper route and spent the money. So he spent years of being sleep deprived because he had to get up really early, have this rather robust paper route that he expanded, and then he'd have to spend all day at school. So it says her unexpected betrayal was an emotional blow that estranged us for years. And whether I could support myself at the university

was now in doubt. I survived with scholarships, part-time jobs, and $40 a month from my father. I got by on less than $100 a month, including everything, books, tuition, food, shelter, and clothes. On Sundays, when the boarding house I lived in did not provide meals, I visited church open houses where I consumed large quantities of free hot chocolate and donuts. Interesting parallel that I just put together now as I'm rereading that section where he's like, okay, I have no money to feed myself, so I got to rely on the church or some religious institution to feed me. Steve Jobs, when he was in college, he did the same thing. I think he had to walk like six miles or eight miles across town.

He didn't go to a church. He went to like the Harry Kushner and had like this gigantic, he said he had like the biggest, he had one big meal a week. And it was on, I think it was on Sunday, same thing, where he actually went and walked and was fed by the benevolence of somebody else. And so we see Ed's in similar circumstances here. So I want to talk about what he learns when he gets into an argument with his professor. His professor is being real petty. I think Ed's still sleep deprived. He's got to work a lot in college. And so he winds up turning in a paper and there's like a bell.

And it was like the bell starts ringing. Ed turns it in like the last ring of the bell and the professor won't take it. And Ed's tired and just pissed off. And so he just starts yelling. And he yells at the professor and tells him he's a mediocre teacher. And then he realizes this is a mistake. And the reason I want to bring this to your attention is because this is a first example of Ed just developing simple systems and simple guidelines as a way to get through and to excel through life. And this has to do with relationships with other human beings, right?

This damage to self-esteem, which I came to understand later, is an absolute no-no in human relationships unless you don't mind creating an enemy. Looking back, I realized that I had always been irritated by what I viewed as petty, rigid mediocrities. Later, this is, there's so much wisdom in what he's about to say here. Later, I would understand the stupidity of butting heads with them. He's talking about mediocre people, right? I would learn to avoid them when I could and finesse them when I couldn't. That's one of the most important sentences in the entire book. I would learn to avoid them when I could and finesse them when I couldn't. That's one of the most important sentences in the entire book. I would learn to avoid them when I could and finesse them when I couldn't. And so he winds up apologizing, doing all this other stuff because he winds up getting a complaint, getting put on probation, could have been kicked out of school because of this. So it says, by this time, the full consequences of my immaturity and bad behavior was becoming evident to me.

And so this is where he comes up with a simple system. And it's just by pausing for a minute and asking yourself some questions. None of this would have happened if, as I wish I had done, I had asked myself beforehand, beforehand, if you do this, what do you want to happen? And if you do this, what do you think will happen? I wouldn't have liked either answer. These two questions became valuable guides for me in the future. So before you make a decision, especially reacting in anger, he's sleep deprived, you know, this is an emotional response. If I do this, what do I want to happen? And if I do this, what do I think will happen? So those two questions became valuable guides for me in the future.

Okay, so there is a lot going on in this section. I have crazy amount of notes and this is the first time he's going to introduce two things that change his life one this is when he goes to las vegas for the first time this is like in the 1950s so it's definitely different it's all mobbed up and he winds up getting poisoned his brakes get um they mess with his brakes in his car they try to kill him essentially um and then the second thing is he discovers his he's going to have a lifelong addiction to physical fitness. And so he says, this was the first time I'd seen Las Vegas and it left me with

conflicting but vivid images. So he winds up there. They're really poor. They're doing a road trip with him and some college friends. One of the stops is Vegas. They don't have money for hotels. They end up sleeping in the car. And then they wind up having a shower in areas where there's a ton of homeless people. And these homeless wind up being former like degenerate gamblers that lost everything and so this experience is actually really important because one thing I learned from Ed that I've repeated I know probably a dozen times on past podcasts is the fact that you need a good offense is how you make money and then you also need a good defense and the defense is how you how that how you stop other people from taking your money.

And a large part of this, the fact that he was one of the most successful investors of all if there's a way to make money, the larger the stakes, the more corruption you will find. So he's like, I cannot believe how mobbed up Las Vegas is, how corrupt all these gamblers are. I'm going to move on to investing. And then he gets to what he calls the largest casino in the world, which is Wall Street. And he's like, oh, my God, this is so much more corrupt. And so he talks a lot about that in the book and then there's just tons of interesting stories in fact and and hopefully i'm encouraging you to read the book um i would say the last like i don't know maybe 75 pages is really how he thinks

about money he talks about how he thinks about investing all kinds like just everything from mortgages to debt to portfolio construction to just, I mean, it's very fascinating because he just sits down. You know, you got this, how often are you going to have the chance to sit down and have a conversation with an 85-year-old genius that has lived multiple lives, that's had multiple lifetimes of experience? And he says, here, this is what I've learned, not only from studying. This guy has deep historical knowledge. He's like, yeah, this is very similar to this one financial scam that happened in you know 1600s or some nonsense like that that's how he talks um but just the idea of like why he's giving us billions of dollars worth of game for what i think i paid 16 bucks for the paperback version of this book like it's it's a no-brainer so anyways let's go

back to ed um to ed as a young uh as a young man he's's probably like 19, 20 years old, something like that. This is the first time I'd seen Las Vegas and left me with conflicting but vivid images. The glitter and glamour of the strip with its promise of easy, unearned riches contrasted with the crowd of homeless in the park, victims of the dark side of the dream.

It was a memory that stuck. And this is so important, I double underline the sentence. A glitzy playground where suckers were induced to gamble at games that i knew from mathematics they must collectively lose and so a glitzy playground where suckers were induced to gamble at games they must collectively lose who is paying for the giant hotels and the beautiful pools and all the shows. And so I want to read a quote that he actually came from some notes I took when he was actually promoting the book. And this talk can be found on YouTube if you just put in Ed Thorpe,

a man for all markets. And he says, investing is like the Super Bowl. If you want a good Super Bowl team, you need a good offense and a good defense. A good defense keeps other people from taking your money. And so when he talks about, like, how do you do that, he'll mention a lot of things. There's a lot of times he quotes, actually, Charlie Munger and Warren Buffett in the book just about the fact that, you know, and they talk about this extensively in their talks and their shareholder letters. You know, there's a lot of shenanigans, shall we say, in the world of any kind of market. So it says, the friend traveling with me was one of the group of weightlifters with whom I'd begun exercising a year earlier.

It says, it started one evening when, as I walked by the basement furnace room, I heard the sound of iron clanking. Curiously, I ventured inside and found three muscular residents hoisting barbells. And so remember, he's like this nerd, super smart kid, academic. A lot of people would look at something like this like oh you're just a big waste of time and you can think about this is almost the exact opposite experience arnold schwarzenegger has when he's younger so he's like 15 he's in austria he's lifting weights all the time and the one of his first blueprints before he discovers reg park is this other guy that's like a locally famous guy got locally famous

from winning like local bodybuilding competitions in austria and arnold becomes friendly with his dad and his dad becomes like a mentor to him and he's like arnold you can't spend all your time just exercising your body and he said this is a quote from a total recall uh i did i did you can check this in the archive i think it's like around like episode 140 or something like that so it says uh the idea of balancing the body and the mind was like a religion for him you have to build the ultimate physical machine but also the ultimate mind he would say read plato the greeks started the olympics but they also gave us the great philosophers you need to take care of both and so ed thorpe arrives at the same conclusion through taking this bet first so he says uh

ventured inside found these muscular guys hoisting barbells. When I suggested it, this seemed like a lot of work for who knew how much gain. They bet me a milkshake that if I worked out with them for one hour, three times a week for a year, it would double my strength. I accepted their challenge. When the year ended, I had more than doubled what I could lift and gladly paid off the bet. This was the beginning of a lifelong interest in fitness and health. And so he'll talk about that a lot. I'll just more highlights. But the two of the best things he said about that was the fact that, hey, think about one hour spent exercising now is one less day in a hospital bed when you're old. There's some other notes I took on another talk of his, and it says you're 84 years old. You are amazingly fit. Do you have a secret to that too? And this

is what I mean about just really simple systems. We can't all be geniuses like him, but it's not like we can copy his simple systems. This is something that I took, I learned from him and I still do to this day. I'll get to it in a minute. So he says, I try to stay aerobically fit. I try to keep good muscular strength. I get frequent checkups at the doctor. I try to eat fairly well. And this is what I, this is what I copied from right here. I weigh myself every morning and I write it down. That automatically changes my behavior. Awareness leads to change. If my weight starts creeping up, I find myself eating less without even thinking about it. And I don't write it down. I put it in my phone, but that I'm telling you that works. It is so easy to see when you're falling off and

correct immediately before it gets out of hand. So at this point, he's in graduate school. I'm going to read you my notes about everything going on because I got a ton of highlights. Some of them I've already read to you on this page. So he's talking about the fact that there's a playground for suckers. I wrote down, this is why you must constantly strive to get better at entrepreneurship. It has very real downsides. Then it says health and fitness is mandatory.

You have to take care of both. I already read that to you. And everyone said said it was impossible this peaked at its interest so he's in graduate school people are constantly traveling from um southern california to vegas at this at this point and so there's just a lot of talk about you know like and they're all math and physics oriented people he's around and so says i was taking a break from studying along with a few others someone who had been to las vegas was explaining how no one could beat the casinos this was the consensus view of the group that is extremely important because ed talks over and over again don't accept consensus you've got to check things out for yourself i've since i was self-taught

talks about you know basically i had to teach myself everything uh teach teach everything to myself rather and as a result i wind up just questioning everything i need to prove for myself what you're telling me is true so he says it was also the view of the world in general backed up by the painful experience of generations of gamblers so you can't you can't beat these games he's going to wind up i don't know if i've mentioned this to you already yeah i guess this fits into his life he treated life like an adventure he winds up coming up with uh wait it's uh what taleb was explaining to us earlier how to count cards using that one

up and one down system and winds up selling or writing a book i think it was like 1964 called beat the dealer okay this book sells millions of copies people still buy it to this day then he winds up doing a follow-up when he takes a lot of the same methods of experimentation that he used on gambling in Las Vegas and applying it to financial markets. Then he writes a book called Beat the Market. A ton of super influential people that are now billionaires to this day, in the present day, wind up reading his book. And so this is the importance of putting your work out there, putting your thoughts out there and sharing them, because it leads to all these unexpected opportunities, right? And he winds up being like the first LP and like Citadel as a result of this. Just I'll go into more detail. I think I go into more detail later. Just the point is,

his thoughts were one extremely influential and to open up real very real positive financial opportunities for him in the future, just the fact that he spent all his time learning and then sharing what he learned. And so the people that are interested in learning what you've learned also happen to be people that are lifelong learners. And those are the kind of people that get themselves involved in very interesting activities in the future. Many of those interesting activities can can have a financial benefit to them. So it's just wild. Anyways, I agree with the others at the table that despite all the math to the contrary, you could beat roulette. Using what I had learned from six additional years of physics, I argued with the others at the table that despite all the math to the contrary, you could beat roulette. Using what I had learned from six additional years of physics,

I explained that friction would gradually slow the orbiting ball in the circular track until the gravity would be enough to cause it to spiral down and in towards the center. I argued that an equation could forecast the ball's position during this process. Limiting the predictive power of my equations were random irregularities that cannot be forecast, with mathematicians and physicists called noise. Conventional wisdom said, this is the main crux of his argument, okay? Conventional wisdom said the noise was enough to ruin the prediction. I didn't think so, and I decided to find out.

He didn't write for myself, but that's what, and I decided to find out. He didn't write for myself, but that's what he meant, decided to find out for myself. Fortunately, I didn't know at the time that one of the greatest mathematicians of the previous hundred years, Henri Poncar, I don't pronounce English correctly, there's no way I'm pronouncing French name correctly, so he says, he's talking about the fact that naivete was beneficial. I didn't know that at the time one of the greatest mathematicians of the previous hundred years had, quote-unquote, proven that physical prediction at roulette was impossible. So he also meets his wife around this time. And this is what I meant about it.

A lot of what happened in his life, he did not – one, he couldn't have predicted. There's no way he could predict it. And number two, he was fine with just pursuing his genuine intellectual curiosity. And so they were both very similar like-minded. So they agreed, hey, we're going to pursue this academic life. We won't have a lot of money, but we're going to enjoy ourselves. So he talks about what he has in common with his wife. We were both avid readers. We enjoyed plays, movies, and music. As we both very much wanted children, we also agreed on the principles

for raising them. We planned to give them all the education they wanted, teach them to think for themselves rather than simply accept received wisdom from experts and authority, and encourage them to choose their own calling in life. Both somewhat introverted, we look forward to an academic life with its collection of smart, educated people, teaching, research, and travel. There would not be a lot of money, but it would be enough. What was important to us, and this is really, I think, hits at why I want to copy him more so than anybody else, because of this balance of identifying the handful of key things

that you think you're going to enjoy in life and focusing on that and balancing that. And really, it's how you spend your time, right? What was important to us was how we spent our time and the people, family, friends, and colleagues with whom we shared it. So this is where he winds up meeting Richard Feynman. And then he finds work that feels like play, which we've talked about a bunch on this podcast. And so it says, Vivian and I were invited to a house party. We were introduced to Richard Feynman, who was playing the bongo drums. A 38-year-old professor at Caltech, he was already regarded as one of the world's most brilliant physicists. If anyone knew whether

physical prediction at roulette was possible, it would be Richard Feynman. You know, this is going to be hilarious. I asked him, is there any way to beat the game of roulette? When he said there wasn't, this is the funny part, I was relieved and encouraged. This suggested that no one had yet worked it out or had no one had yet worked out what I believed was possible. And so he starts becoming obsessed, running experiments to try to prove everybody says this is impossible. I believe it is. Let me see if I can figure this out. My roulette experiments diverted time from finishing my thesis and getting a full-time job. Yet for me, it was play. So I want to read Founders No. 191. I did the book, The Almanac of Naval Ravikant, A Guide to Wealth and Happiness. And that's one of the main ideas in that book. I also talked to Michael. You see this a lot

throughout the history of entrepreneurship. So Naval really picked up on something very foundational. Michael Jordan talks about this. I hate working, but people didn't understand that playing basketball, I was playing. And so it's work and hard work to everybody else, but I was so obsessed. I found work that felt like play. So two quotes from the book. I'm always working.

It looks like work to others, but it feels like play to me. That's Naval, not Michael, although Michael said the same thing. And that's how I know no one can compete with me on it. Second quote from Naval, the almanac of Naval Ravikant. Specific knowledge is found by pursuing your genuine curiosity and passion than whatever is hot right now. Is that not a description of where we are in the book? It is. Building specific knowledge will feel like play to you, but will look like work to others. Yeah, for me, it was play. It was relaxing, much as others might find a book or a movie. I certainly wasn't motivated by the hopes of making big money. What drew me was the chance of doing something people thought wasn't possible.

Finding an edge, finding your advantage is something that Ed talks about a lot in the book. He mentions it multiple times. I'm just going to read you the short paragraph because I think this is the most concise reason why. I also believe then, as I do now, after more than 50 years as a bits uh businesses all the different games in a casino and trying to figure out okay which one has the greatest mathematical advantage uh for the player obviously they're going to all be tilted towards the house or else the game wouldn't exist if over a long period of time the house lost right and so he realizes blackjack and i think baccarat was the other one but he's going to focus on blackjack where he realizes okay this how can I develop an even greater edge and actually put the, switch the, the odds.

So instead of them being in like a developer system, so the odds are switched in favor from, from in favor of the casino to favor of me. I'm going to read this section to you. This is the, the note I wrote to myself. Let's see if this makes any sense. I may not be right, but I know that you were wrong. So I will use that as a starting point to find a system that is right. Your conventional wisdom is flawed. I need to think for myself. So that is the note I left to myself while I got to the section. Let's see what this was about. I was hooked on blackjack, though not in the usual sense. The atmosphere of ignorance and superstition surrounding the

blackjack table that day had convinced me that even good players didn't understand the mathematics underlying the game. I returned home intending to find a way to win. The belief that casinos must come out ahead in the long run was supported by conventional wisdom, which argued that if blackjack could be beaten, the casinos would either have to change the rules or drop the game. Neither had happened. But confident from my experiments that I could predict roulette, I wasn't willing to accept these claims about blackjack. See that same thing. I'm not going to just you can't I have to check for myself. I have to think for myself. I have to develop these skills or my life is going to suck. It's a way

to think about why Ed is so intent. And he's right about that. Why he's so intent. I'm like, I'm just going to test all these assumptions that you think are true, that you're assuming are true. And I'm not actually sure. I decided to check for myself if the player could systematically win. And then he makes a very interesting observation. He says, it wasn't the money that drew me to Blackjack. What intrigued me was the possibility that merely by sitting in a room and thinking, I could figure out how to win. And if you think about it, that is more true now than any other time in history.

At any other time in history that is more true now, you could sit in a room and think, obviously with the access to technology, internet, and all the world's knowledge that we have, and figure out a way to win. And so he starts heading for the library. This is at UCLA. And this is going to be very interesting because I got to this section and it made me think of something that I learned from Steve Jobs. I'm going to read a fantastic quote that I think Steve Jobs has a lot of knowledge in. I left the library almost at once.

I wrote to Roger Baldwin, one of the four authors of the Blackjack article. So he's doing all this research on – there's a huge – like a lot of people had studied, obviously, like in the history of games and gambling games, like can we beat them so we can make money? So he says he finds an article, identifies one of the authors, and he's going to contact this guy. Okay. So he says, I wrote him asking for details about his calculationss filled with thousands of pages of calculations done by the authors. During the spring of 1959, wedged in between my teaching duties, I mastered every detail. My excitement mounting as I strove to speed up the enormous number of calculations that lay between me and a winning system. And so this idea, Ed's like, okay, I'm going to ask.

I'm going to, I have no, like, there's no downside. I'm going to ask for help. The author could ignore me. Maybe I never get a response back to my letter, my email. I guess it's no email this time. My call, whatever it is. Or he could actually be really beneficial. He sends me giant boxes of thousands of calculations that I can then use for my research

to try to build a winning system on Blackjack. This is exactly what Steve Jobs did. Direct quote from Steve. I've never found anybody that didn't want to help me if I asked them for help. I called up Bill Hewlett when I was 12 years old. He answered the phone himself. I told him I wanted to build a frequency counter.

I asked him if he had any spare parts I could have. He laughed. He gave me the parts. And then he gave me a summer job at HP working on an assembly line putting together frequency counters. And this is the most important part. This is the punchline of what Steve Jobs is telling us. I have never found anyone who said no or hung up the phone. I just ask. Most people So he winds up wanting to, he does all this research. He finds out, he winds up developing a system that works in blackjack, okay? It's going to lead to a bunch of other opportunities in life. This might be the turning point of his life if you think about it but this is where he starts to meet claude shannon so claude shannon shannon is one of the most legendary people in history uh the the father of information theory i did his uh his uh biography uh all the way back on

founders number 95 it's called a mind at play if you haven't listened to that i'd read the book too in fact the author of that book sent me a really nice email somebody i guess had sent him the podcast and he's like thanks for doing that but i bring that up because he's one of the authors of that book uh his name is jimmy sony he's actually writing a book it's going to be released in like two months three months something like that and it's's about the history of PayPal. I think it's the company history of PayPal. And he actually winds up interviewing all of like the important people. So that'll wind up being a future episode of Founders, you know, sometime next like three, four months, something like that. So anyways, he meets Claude Shannon because he needs somebody,

he's at MIT, and he needs somebody to like co-sponsor so he could publish this paper in like an academic or science journal. There's only one person that could and it's called shannon this is fantastic this required a member of the academy to approve and forward my work so i sought out the only mathematics mathematics member of the academy at mit claude shannon claude was famous for the creation of information theory which is crucial for the modern computing communications and much more essentially the entire world that we live in the. The department secretary arranged a short appointment with a reluctant Shannon. However, she warned me that Shannon was going to be in for only a few minutes, that I shouldn't expect more, and that he didn't spend time on topics or people that didn't interest him. A little in awe, but feeling lucky, I arrived

at Shannon's office. Shannon cross-examined me in detail, both to understand the way I analyze the game and to find possible flaws. My few minutes turned into an hour and a half of animated dialogue, during which we grab lunch in the MIT cafeteria, and they're going to develop this partnership in developing the world's first wearable computer. As we returned to his office, he asked me, are you working on anything else in the gambling area? I hesitated for a moment, then decided to spill my other big secret, explaining why roulette was predictable, and that I planned to build a small computer to make predictions, wearing it hidden under my clothing. Ideas flew between us. Several hours later, we finally parted, excited by our plans

to work together to beat the game. Meanwhile, I was planning to present my blackjack system at an annual meeting of the American Mathematical Society in Washington, D.C. I submitted an abstract of my talk titled, Fortune's Formula, The Game of Blackjack. Also, there's a very famous book of the same name called Fortune's Formula, the untold story of the scientific betting system that beat the casinos and wall street i did that on uh number 92 you could think of i've actually done i guess a it was a three-part series on ed ed thorpe and uh claude shannon 92 number 92 talks about their their partnership and some other interesting things in the book number 93 was this book that i'm redoing right now and number 95 was uh claude shannon but the reason i'm bringing this to your point is because this gets published that hey

there's a winning blackjack system so a ton of people some of which might have been mobsters and gangsters show up to this talk and then a bunch of degenerate gamblers you normally just have like 40 or 50 academics it's like standing room only and so he becomes quite known this is going to lead him to writing beat the dealer and really it's it's just the reason i'm bringing this attention because there's just uh some great thoughts on life that because he's at a turning point in his life like where what is happening here and he's just got good advice reason i i want to be clear here i'm not being clear i'm stuttering this is just some great thoughts on life so let me just read that to you. During the long ride back, this is after the talk,

during the long ride back, I wondered how my research into the mathematical theory of a game might change my life. In the abstract, life is a mixture of chance and choice. Chance can be thought of as the card you're dealt in life. Choice is how you play them i chose to investigate blackjack as a result chance offered me a new set of unexpected opportunities and one of those is obviously going to be working with claude shannon he talks about like what he's they're having a conversation they want to have being of like mine so it says ever since my first meeting with claude shannon we've been working on the roulette project approximately 20 hours a week following a roulette work session at the Shannons' house, Claude asked me at dinner if I thought anything would ever top this in my life.

Another important point of life here. My thoughts were much like I expected his to have been, that acknowledgement, applause, and honor are welcome and add zest to life, but they are not ends to be pursued. I felt then, as I do now, that what matters in life is what you do and how you do it, the quality of the time you spend and the people you share it with. So because of this talk, he's got a bunch of people saying, hey, I'm willing to put up a lot of money to back this.

Let's see if we can actually win some money in Vegas together. This winds up getting involved with some gangsters. These are like the nice gangsters. of money to back this let's see if we can actually like win some money in vegas together this winds up he wants to getting involved with some some gangsters these are like the nice gangsters these are not the gangsters i want to try to kill them later all these mobsters so this guy wants to say hey you know i'll put a hundred grand behind you he wasn't sure if he wanted to do this but then one of the reasons he's just like i finally decided to go to nevada partly to silence that irritating jeer often leveled at academics. Well, if you're so smart, why aren't you rich? So this older guy pulls up at his house in a Cadillac with

two young, he says, two good looking young blondes. He's got a long cashmere overcoat on. And he says that he introduced himself as Manny Kimmel, then about 65. And he said he was a wealthy businessman who knew his way around the gambling world. He explained that the two mink-coated beauties were his nieces. That's obviously not true. And then we're going to get – so he's going to accept Manny's offer. Manny and another guy I'm going to get to in a minute wind up back in Ed, and they're going to wind up going to Vegas. They first – those are some funny lines in the book here.

First, they're going to do a lot of practice to make sure, hey, I'm not just going to let, like you got to come to my penthouse in New York and we're going to play these games and make sure like simulate the environment that we're going to be in, okay? But this is one of my favorite sentences in the book. I was certain I was right.

Even though, and he's talking about the difference between like Las Vegas casinos with all the resources in the world and little Ed Thorpe just locking himself in the library and using his mind to try to get rich, right? This is one of my favorite sentences of the book.

Even though the Goliath I was challenging had always won, I knew something no one else did. He was nearsighted, clumsy, slow, and stupid, and we were going to fight on my terms, not his. And so then we get into some funny sentences in the book. In preparation, I flew from Boston to New York every Wednesday. I would arrive in Manny's Manhattan penthouse while he would deal, he dealt while I played the 10 count. The 10 count is one of the systems for counting cards and developing an edge in blackjack. This is the funny part. After a few hours, Manny's butler served lunch, and we continued playing.

At the end of each session, Kimmel would give me $100 or $150 to cover expenses and, curiously, a salami. These salamis added an unmistakable aroma to the cabin during my return flight. So something that Shannon also helped him was, remember they talk about dosing, like the size of the bet, whether it's investing or gambling is really important. When they're doing the roulette experiment and he's talking about, and Shannon's helping him publish the paper on blackjack, he's like, hey, when you're doing this, you should check out a

paper. I think it was published in 1956 by this guy named John Kelly. And that paper is famous for something people still use to this day called the Kelly Criterion, which is a way to figure out the dosing in your bets so you never go broke, because that's a huge thing like Claude Shannon. What's interesting is when I was when I was doing that multiple part series with Claude Shannon, Ed Thorpe, I was reading all of Warren Buffett's shareholders. I was reading Charlie Munger. I was studying Henry Singleton. This is all in like the 80s and 90s in the episode numbers in the in the archive. This idea all kind of relates to each other is because in the talks and in the books, they talked about the fact that there was entire generations of business school students that were being brainwashed with bad information. This idea that the market was

efficient. Efficient market theory, efficient market hypothesis. And Ed talks a little about it a lot actually in this book. I'm not going to talk about it today. But what I found interesting is you have all these super smart people arriving at the realization that the theory that you're teaching them is not accurate. Like in the grand scheme of things, like if I have lined up on one side, Ed Thorpe, Henry Singleton, Warren Buffett, Charlie Munger, Claude Shannon, and on the other side, some people that were never successful in the real world and just spent all their time in academia. I'm going with the Singleton, the Buffetts, the Mungers and the rest of these guys. But the point I'm making is like, I thought it was very interesting how they took like theories from academia and found a way to

make them valuable. Some of these theories valuable in like making in entrepreneurship, investing, blackjack, whatever it was i don't know if john kelly actually i think he died if i know in the books i think he had like a heart attack on he's really young he had like a heart attack on the side of the road manhattan if i remember something like that um but my point being is i don't know if he ever used his own theory to make money i think in the foreword of this book telep said that thorpe's the first one to actually monetize his idea so i guess he didn't and so that's a long preamble to the paragraph that I want to read you here. And really, this is just a lesson that learned from Blackjack that he learned from Blackjack that

were useful for investing. And I think Ed credits Claude Shannon with the one point putting him on to this idea. That's that long preamble. Okay. This plan of betting only at a level with which I was emotionally comfortable and not advancing until i was ready enabled me to play my system with a calm and disciplined accuracy this lesson from the blackjack table would prove invaluable throughout my investment lifetime as the stakes grew ever larger and that's another thing about ed like there's no wasted experience he takes lessons from everything remembers, and pushes them forward as he moves to different areas of life. The experiment winds up working.

They wind up making a good bit of money. And this is before. He'll go back a bunch of times before he winds up getting poisoned, and then they take the brakes out of his car. But what's fascinating to me is that the two people that were bankrolling him, they wind up being mobsters. They wanted laundering money into legitimate businesses and then selling some of those businesses. But it was interesting because, you know, usually here there's only two ways to end up in that kind of life. You're going to end up dead or in jail.

Well, not Manny and Eddie. They got away with everything. So it says Manny Kimmel died in Florida in 1982 at the age of 86, leaving a young widow named Ivy, who was the older of the two nieces, quote unquote, who had visited us so long ago on that dreary winter afternoon in Boston. So he wound up never getting caught and dying rich. Eddie Hand was prospering in the wealthy enclave of Montecito in Southern California. Later, he retired to the south of France. And so this is when he gets into the idea that you need a great defense because everything is corrupt. He's going to talk about this in the terms of the casinos. So he says an expert cheat

does this so well that even when you're told in advance and are watching close up, you can't see. And so dealers are actually cheating. They would actually peek so fast at what the card is, and they would deal the card underneath it. So there's just one cheat. There's a bunch in the book, but this is what he happens to be talking about at this particular time. So it says, they do this so fast that even when you were told in advance and you're watching up close, you can't see. It's also nearly impossible to prove it happened. Cheating was so relentless during those days in Las Vegas that I spent as much time learning about the many ways it was being done as I did playing. Everywhere we went, we reached a point where we were cheated, barred from play, or the dealer reshuffled the cards after every hand. And so he's going in with people that know the system. And he essentially hired these people to say, hey, teach me how everybody's cheating and these people also have relationships with the regulatory body and so they go they wind up taking notes and

identifying all these ways that regular people are getting cheated by the system so they go to the gaming control board like oh these guys are going to want to know and not realizing that no they don't want to know they're in on it so it says as they assigned one of the gaming control boards agents to watch over me mickey thought this was a good idea and had told me earlier and this is important the important important point and it told me earlier that the dealers knew all the people the board used so whenever they showed up the cheating stopped until they left that is a like this is where this guy made a mistake he's like okay if you don't want to get cheated let's bring all these agents because the agents of the gaming board they're known entities in vegas so if if i'm a dealer i'm not going to cheat you right in front of essentially what's like their version of like a

cop right but that's the problem if they know who these people are they can get to them and corrupt them so if you ever watch um there's a great documentary called Cocaine Cowboys. And in it, they talk about how corrupt like 1980s in the 80s Miami was. You have a cocaine boom. You have the richest person in the world at that time was considered to be Pablo Escobar. They're just printing money. The local Federal Reserve branch in Miami was taking in more in cash than all the other federal reserve branches in the United States combined. And so you have this huge economic incentive. If you're

a drug dealer selling a ton of cocaine, these pesky cops keep catching your guys. They wind up pulling them over, taking drugs, money, essentially costing you an expense. Like, I'm losing my product, I'm losing money. So what do you do? You fill the entire police force up with your people. So from the outside, it looks like, oh, these cops are there against me, and they're actually on my team. And in that documentary, it talks about there's at least one graduating class in the 80s, if not more, where every single person, every single new graduate from the police academy was eventually

tied to the drug dealers, the cartels, whatever you want to call them. They owned every single cop. And why did they do that? Because they were making tons of money and money corrupts, right? Well, what is happening here? How much money do you think mobsters in the 60s in Las Vegas were making? So this is what's going to happen. Okay, yeah. Hey, all the dealers know who the board used. So let's send a guy that they know. And if he's sitting next to you, no one's going to cheat. They're not going to cheat you. Wrong. My protector, quote unquote, pretending not to know me wandered in a minute later and sat down to play. So they wind up doing the same trick where it's like, oh, they checked a card, except she did it,

the dealer did it kind of like sloppy. And so both cards came up and they're like hey which one do you want so obviously very cheating i'm skipping over this part to get you to the punchline as my protector followed me outside i said did you see did you ever see a second card like that before he replied second what second this agent had been sitting just three feet from the dealer. He saw everything and pretended to see nothing. Realizing he was there to finger me for the casinos, I used the restroom excuse to lose him and went to play at another casino. And so then he tells us what's happening at this point. When I played in the early 1960s, tens of millions of dollars in cash were being taken from the counting rooms without being tallied.

The hidden profit avoided taxes and funded mob operations throughout the nation. So there's a great book that I also read that he – and it's also a movie. I love the movie and the book. He recommends The Casino by Nicholas Pelleggi or whatever. Robert De Niro is in the movie. Joe Pesci. It's a fantastic movie. It's like three hours long though. But that around the same time that that he's there he says beat the dealer the book he's writing at this point came out in 19 in november 1962 it sold

briskly and then he's just wrapping up this this section and the note of myself is just this is just cool uh from a mathematical idea in my head, I forged a system for beating the game. Then I was ridiculed by the casino, which said that it sent cabs for fools like me. Thinking they played fair and that I was taking my secret weapon, a brain, to a sporting event, I found myself barred, cheated, betrayed by a representative of the gaming control board, and generally persona non grata at the tables. This is the cool part. I felt satisfaction and vindication when the great

beast panicked it felt good to know that just by sitting in a room and using pure math i could change the world around me so after this he winds up this he spends a lot of time with claude shannon they're going to wind up developing the first wearable computer so this is i want to go into a little bit detail about testing the computer the computer in vegas with claude shannon because this is also when i love these like intersections in life like there's these alternate futures that are in front of you like what path am i going to take and so at this point he's 20 this is 19 around 1961 1962 he is 29 years old. Claude is 45. And so they set up the computer, the wearable computer, which is a way to, it's very complicated. And I don't really understand it honestly about all these, these formulas on how to measure the distance to where they think the roulette,

the roulette ball is going to end up. And it winds up working out. So it says, one of us wore the computer, which had 12 transistors and was the size of a pack of cigarettes. Data was input with switches hidden in the wearer's shoes and operated by his big toe. The computer forecast was transmitted by radio. The other person, the better, would wear a radio receiver, which played musical tones telling him on which group of numbers to bet. We two Confederates would act like strangers. And so they're about to go down and test it it says as i stood ready to leave for the casino claude cocks his head and with an elfish smile asked what makes you tick claude was jokingly referring to the strange sounds he would be sending from the

computer he was wearing to my ear canal as i look back now from the future seeing myself wired up with our equipment i stop that moment in time and I think about a deeper meaning to the question of what makes me tick. I was at a point then in my life where I could choose between two very different futures. I could roam the world as a professional gambler winning millions of dollars per year, switching between blackjack and roulette. My other choice was to continue my academic life. The path I would take was determined by my character, namely what makes me tick. As the Greek philosopher Heraclitus said, character is destiny. I unfreeze time and watch his head for the roulette tables.

Before moving on to the casinos drugging him and trying to kill him. I just want to give you the results of their experiment together. The roulette had a 5.3% disadvantage. However, using our computer, it would give us a 44% edge. So he's going to do quite well, Blackjack. As you can imagine, they're not going to like that, and so they're going to find ways to send him a message that if you keep taking money from us, we're going to like that and so they're going to find ways to to send him a message that if you keep taking money from us we're going to kill you when i sat down to play the atmosphere heard again

changed drastically the pit boss and his minions were smiling and relaxed they seemed pleased to see me then they volunteered coffee with cream and sugar just like the way you like it because he would refuse to drink alcohol while he's gambling i was deep into my first game happily winning and drinking my coffee when suddenly I couldn't think. I could no longer keep count. I was shocked because I'd managed well through noise, smoke, conversation, and the pressure of high-speed play. Something unexpected had taken place. My pupils were hugely dilated. He's with some friends. One of them was a nurse who was a nurse said that she had seen this often when people who had used drugs were admitted to

her hospital. I wanted to collapse into sleep, but they plied me with black coffee and walked me for several hours until the effects began to wear off. He's talking about his friends. And so that's not enough. After this, they're going to still, even when he's leaving, they try to kill him. During our nights of play, we had proven the system at the tables. We validated the theoretical mathematical calculations and demonstrated yet another application of the Kelly system. The Kelly criterion I mentioned earlier for betting and investing. But our trip would have an unnerving postscript. The six of us left Las Vegas the next morning to drive back.

I was at the wheel and we went down a mountain road. We were going 65 miles an hour when the accelerator pedal suddenly jammed. With little time to think and my foot pressing as hard as I could on the brakes, I also set the emergency emergency brake downshifted so the engine would help slow the car so that essentially the accelerator stuck it's only going forward and cut off the power by turning off the ignition i finally managed to stop the car in a turnout and so this is where he's thinking about his path in life he's like well i can't be a professional gambler if i'm gonna be if i'm not alive right so it says i invested money from book royalties and my gambling winnings in stocks, but I was ignorant of the market.

The results were poor. I wanted to do better. Investments presented a new type of uncertainty, but the theory of probability might help me make good choices. Things came together when I realized that there was a far greater casino than all of Nevada. Could my methods for beating games of chance give me an edge in the greatest gambling arena on earth, Wall Street? This is what's going to make him wealthy. Ever curious, I decided to find out.

I began to teach myself about the financial markets, lighting my way with an unusual lamp, the knowledge I had gained from gambling games. And so he starts out trying to learn something new the way he does every time learning something new. He just reads a an insane amount of information. And I like his his, his metaphor, this whale metaphor, where he talks about like, a lot of stuff you're going to read is not useful, but it's all the little bits that you pick up that lay the foundation that are actually useful in the future. relishing the intellectual challenge and the fun of exploring the markets. I spent the summer of 1964 educating myself about them i read stock market classics like graham and dodd security analysis and scores of other books and periodicals ranging from fundamental to technical theoretical

to practical and simple to abstruse remember he does nothing about them at this point much of what i read was dross but like a whale filtering the tiny uh nutritious krill from huge volumes of seawater. What a great metaphor for this. I came away with a foundation of knowledge. Once again, just as with casino games, I was surprised and encouraged by how little was known by so many. So I got to fast forward in the story. There's still a ton to get to here. But I want to get to the point where he winds up meeting Warren Buffett.

He's going to learn a little bit. He comes up with some ideas about Warren hedging, all this other stuff. It's all in the book if you want to go into more detail, but he went to managing other people's money. And one of the people that he manages money for just happens to be, was one of the investors in Warren Buffett's Buffett partnership. This is what he was doing right before he does Berkshire Hathaway. So it says, as my reputation as an investor quietly spread around UC Irvine, friends and members of the university community asked me to manage money for them using the techniques and beat the market.

The book I mentioned earlier, I took on several accounts with a minimum investment of $25,000. Among my new clients was Ralph Waldo Gerard, who was the dean of the graduate school at UCI. Gerard had met Warren Buffett and was an early investor in Buffett Partnerships. So at this point in the story, Warren is 38 years old and Thorpe is 36. I just love to have been at this dinner with a 38-year-old Warren and a 36-year-old Thorpe, because I was introduced to them when they're almost elderly people, right? But I just love the idea of going back in time and like, what were they like when they're in their 30s or their 40s or whatever age you want to pick? And so Ralph is

like, all right, well, Buffett's wrapping up his partnership. I need to do something with the money. Maybe I'll give it to this Thorpe guy. But I need somebody to tell me if Thorpe's not full of shit. And who better to tell me than Warren Buffett? And this is also another important point. If you can get your work out there in front of as many people as possible, it can lead to these unexpected opportunities. The fact that he wrote Beat the Dealer, or excuse me, Beat the Market, rather, is what got him in the room with Warren Buffett because Ralph read it. Ralph liked my analytical approach in Beat the Market and my other writings. He wanted not only to check me out himself, but I realized later on to get a reading from the great investor with whom he had done so well. So now he's going to describe buying into undervalued companies. Warren also invested in warrant and convertible hedging and merger arbitrage, which is some of

the stuff that Ed was doing at this time. It was in this area that his and my interest overlapped and where Buffett, unknown to me, was vetting me as a possible successor to a management investment for the Girards. As Warren and I talked, the similarities and differences in our approach to investing became clearer to me. He evaluated businesses with the aim of buying shares of them or even the entire company so cheaply that he had an ample margin of safety to allow for the unknown and the unanticipated. His objective was to outperform the market in the long run, and so he judged himself largely on the performance relative to the market. In contrast, I didn't judge the worth of various businesses. Instead, I compared different

securities of the same company with the object of finding relative mispricing, from which I would construct a hedged position, long the relatively undervalued, short the relatively overvalued, from which I could extract a positive return despite stock market ups and downs. So his entire life, he operated a market neutral hedge fund. And I'll get to more of his numbers and stuff later on. His goal was to accumulate the most money. Warren began to invest while still a child and spent his life doing it remarkably well. My discoveries fit in with my life path as a mathematician and seem much easier, leaving me largely free to enjoy my family and pursue my career in the academic world and what's crazy is he's gonna start the world's first quantitative hedge fund it's called Princeton Newport Partners he's still working as

a professor for like the first like 10 even though he's rich or he started like starts to get really rich like 10 or I have the note in the book it's like a dozen years into it he's like all right I can't do both. I got to finally give up. I'm sad to give up my academic life, but I'm clearly onto something here. It's just amazing how long he stuck with it. So this is the result of,

they wound up spending, I think they met like two or three times. And this is where he realizes that Warren Buffett is an intelligent fanatic. And so the crazy thing is not only did Ed Dort make a ton of money, but like I said, he winds up buying Berkshire, starting investing Berkshire stock. It was like $900 at the point when Ed Thorpe starts building a position. And then he

tries to get other people to buy and tell them, and he tells them, don't ever sell this. This is, this will make your family rich. He winds up being the first LP in Citadel. Like I said earlier, it's just like, it's just remarkable. It's just remarkable. So anyways, the intelligent fanatic, this is extremely important. And hopefully you are one in your own business. And if not, or you don't have a desire to, then find somebody that is and let your money ride with that person. Impressed by Warren's mind and his methods, as well as his record as an investor, I told Vivian that I believed he would eventually become the richest man in America. Buffett was an extraordinarily smart evaluator of underpriced companies, so he could compound money much faster than the average

investor. He could also continue to rely mainly on his own talent, even as his capital grew to an enormous amount. Warren furthermore understood the power of compound interest and clearly planned to apply it over a long time. So he winds up meeting Warren Buffett, understanding who he is, and winds up making an investment in Berkshire Hathaway a couple years later. That's a result because he wrote that book, right? The book brought him to the attention of Gerard. Gerard knew Buffett. He gets to meet Buffett. Now another person is going to wind up reading Beat the Market, and this is going to open up another opportunity for Ed. This winds up being his partner, Jay Regan, who they're going to operate the first hedge fund with.

When I was deciding on my next steps, I got a phone call from a young stockbroker in New York named Jay Regan, who had read Beat the Market and told me he wanted to get into the investing business using a limited partnership to implement my convertible hedging approach, thinking he might be able to handle the business aspects of running a hedge fund while I focus on choosing the investments and on doing further research into the markets I arranged to meet him. So Ed's going to live on the West Coast. Reagan's on the East Coast. They're going to run the company together.

They're going to have two separate offices, and they're both doing completely different things. We shook hands that day and agreed to create and manage together a new investment partnership based on the ideas and beat the market. Newport Beach was to be the think tank and trade generator and New York, the business office and the trading desk. Our operation was an example of what had come to be known as a hedge fund. Although hedge funds were few in number at that time, they were not a new concept. So this is where we at. I think we're on 1969, right? So this is where we at i think we're on 1969 right so this is an unknown concept buffett's mentor benjamin graham had run a hedge fund in 1936 and so he's going to tie his decision making because he's saying that's essentially what although different tactic was what buffett was doing with the buffett partnership and so he says the time i spent with buffett had two major

effects on my life it helped me move it helped move me along the path to my own hedge fund. He copies the, he gets a partnership agreement from that Buffett used. Ralph gave it to him. And so he's like, oh, this makes perfect sense. I'm going to use this similar document. So he says, help me move along the path to my own hedge fund. And later it led me to a very profitable investment in the company he transformed, Berkshire Hathaway. So he's going to talk a little bit about this hedge fund. This is going to remind me, and I'm going to use an example that, I mean, you could say a number of people we studied, but Steve Jobs comes to mind. And that is whatever you were interested in, carry it to an irrational extreme. That's what they described in one of the biographies I read of Steve Jobs. Whatever he was interested in, he carried it to an irrational

extreme. So it says Princeton Newport Partners was a revolutionary idea when we set it up in 1969. Hedging risk, this is what I mean about that. Hedging risk was not new, but we took it to an extreme never before tried. We managed this with mathematical formulas, economic models, and computers. This nearly total reliance on quantitative methods was unique, making us the earliest of a new breed of investors, which would later to be called quants and would radically transform Wall Street. I could see from the very beginning how our wealth could grow. But when I told friends and colleagues what I was up to, and you got to also, the reason I'm reading this to

you is because you have to be prepared to be misunderstood. He's got a fantastic idea, an idea that he's going to continue to use for the rest of his life. It's going to generate generational wealth and people don't understand it. But when I told friends and colleagues what I was up to, Vivian was almost the only one who got it. Remember at the beginning, Nassim said Ed might be the only humble trader on planet Earth. This is Ed's polite way of saying, I put up numbers. We modified our performance fee of 20% of the profits billed annually by including a new high water provision. This meant that if we had a losing year, we carried forward the losses and use them to offset future profits before we

were paid more fees. So he's saying, I was trying to be as fair as possible to my investors. This helped align our economic interests with those of our limited partners. As it happened, we never had a losing year, even a losing quarter. And this calculation was never invoked. It's more than that. They only lost, the hedge fund is going to run for 230 months. They only lost money in three months. 227 positive months and three negative months. And then, you know, he's new to managing,

to starting a company, new to managing people. So he's got to come up with a way to do things. And so he's got four different ideas. One, management by walking around. Two, hire for intelligence and enthusiasm over experience. Three, hire on a trial basis. And four, talent is expensive and worth every penny. Now I had to learn how to choose and manage employees.

Figuring this out for myself, I evolved into the style later dubbed management by walking around. I talked directly to each employee and asked them to do the same with their colleagues. I explained our general plan and direction and indicated what I wanted done by each person, revising roles and tasks based on their feedback. For this to work, I needed people who could follow up without being led by the hand, as management time was in short supply. Since much of what we were doing was being invented as we went along and our investment approach was new, I had to teach a unique set of skills. I chose young smart people just out of university because they were not set in their ways from previous jobs.

It is better to teach a young athlete who comes from his sport fresh than to retrain one who has learned bad form. Especially in a small organization, it was important that everyone work well together. I was unable to tell from an interview how a new hire would mesh with our corporate culture. I told everyone that they were temporary for the first six months as we were for them. Sometime during that period, if we mutually agreed, they would become regular employees. In order to attract and keep superior staff, I paid wages and bonuses well above the market rate. This actually saved money because my employees were far more productive than average. The higher compensation limited turnover, which in turn saved time and money otherwise used to teach my one-of-a-kind

investment methodology. So he's going to wind up leaving academia. I was wrong. It's 13 years after founding his hedge fund. And he just points out like how petty they can be when the stakes are so small. And really, this is an excuse to bring up one of my favorite quotes. It comes from the biography of George Lucas, and I'll get there in a minute. I transferred to the Graduate School of Management where I enjoyed teaching courses in mathematical finance, but I found fractionism and backstabbing as bad there as it had been in the math department. Both had endless committee meetings, petty squabbles, people who wouldn't pull their weight and couldn't be dislodged, and the dictum of publish or perish. I decided it was time to leave academia.

It was not an entirely easy decision. Remember, he thought he was going to do this for the rest of his life. Over the years, this is the important part. Over the years, I hired former staff from UC Irvine, but only one faculty member, one without tenure, was willing to leave and take a chance and join my operation. The others found it a very scary notion. Of course, a few had regrets later. And so he's picking up on the exact same thing that George

Lucas picked up. Ed had the ability to take this next step to take the risk. So did George. And George says it was the importance of self and being able to step out of whatever you're whatever you're in and move forward rather than being stuck in your little rut people would give and this is so important what george is about to tell us people would give anything to quit their jobs all they have to do is do it they're people in cages with open doors so eventually his hedge fund the east coast offices get gets raided by the irs rudy giuliani who is uh this is before he was the mayor of new york city he's the the lead what is it that the prosecutor of the southern district of new york

and this had nothing to do with with ed uh every single thing uh was wind up being dropped against them uh he actually has this is a summary of that rudy giuliani wanted my partner to give Ed, every single thing would wind up being dropped against him. He actually has, this is a summary of that. Rudy Giuliani wanted my partner to give him dirt on Goldman Sachs and Michael Milken. My partner wouldn't cooperate. That's Jay Reagan, who's in the East Coast, right? So Giuliani raided our office. The trial dragged on for years at a great expense.

The government ended up dropping prosecution of most people on most counts. So that's what Taleb was referencing in the foreword, that his hedge fund ended at no fault of his own. And so what was happening here? And so really, I'm going to skip over all the rating and all this stuff, because what I realized, especially on the second read through this, is there's two things that are happening here. Ed's going to give us a history lesson, and then right after that, he's going to give us a life lesson. So let's go to the history lesson first. So it says the case against this hedge fund appears to be a federal prosecution of security violators,

securities violators on superficial level, right? To understand why it really happened, you need to go back to the 1970s when first tier companies could routinely meet their financing needs from Wall Street and the banking community, whereas less established companies had to scramble. Seizing an opportunity to finance them, a young financial innovator named Michael Milken built a capital-raising machine for these companies. This is the invention of junk bonds. And I think I read Michael Milken had, I think, the record at the time for the highest income ever recorded by the irs if i'm not mistaken at this there was like four years i don't have it in front of me so i'm going off memory it's like four years he made over like 250 million dollars of taxable income

in like 80s money um i i think i'm remembering that correctly anyways so it says milk milken's group underwrote junk bonds. Let me skip over that part. Some of which were convertible. That's not important. The higher yield was the extra compensation investors required to offset the perceived risk that the bonds were default. Okay, so these are very risky. That's why you have the higher yield.

Filling a gaping need and hungry demand in the business community, Milken's group became the greatest financing engine in Wall Street history. That's a hell of a sentence. Such innovation outraged the old, this is the history lesson, such innovation outraged the old line establishment of corporate America, who were initially transfixed like deer in the headlights as a horde of entrepreneurs funded with seemingly unlimited junk bonds began a wave of unfriendly takeovers. Many old firms were vulnerable because the officers and directors had done a poor job of investing the shareholders' equity.

With subpar return on capital, the stocks were cheap. A takeover group could restructure, raise the rate of return, and make such a company considerably more valuable. But here's the thing. The people you're now attacking are the people that have all the money and the power, and they don't want you

to do this. The officers and directors of American's big corporations were happy with the way things had been. They had enjoyed their hunting lodges and their private jets. They granted themselves generous salaries, retirement plans, bonuses of cash, stock and stock options, and golden parachutes. All these things were designed by and for themselves and paid for with corporate dollars. The expenses routinely ratified by a scattered and fragmented shareholder base. Economists call this conflict of interest between management and the shareholders, who are the real owners, the agency problem. It continues today.

The newcomers were knocking the more vulnerable managers off their horses into the mud. Something had to be done. Government ought to be sympathetic. The old corporate establishment had most of the money, and they were the most politically powerful and influential group in the country. Their Wall Street subdivision might sustain some damage, but one could expect the fall of Michael Milken to release, as it did, a huge honeypot of business to be taken over by everyone

else. The old establishment financiers were lucky in that prosecutors would find numerous violations of security laws within the Milken group. So he's not saying that Michael didn't do anything wrong. His point was that the people that he was overthrowing had sway over the politicians and use their money and power to say hey go after that guy even if we're doing some of the same shady stuff okay however it's difficult to judge how relatively bad they were compared with the incessant violations that had always been and continue to be endemic in business and finance so that's ed talking about everything's corrupt right um says so this contrasts with the case of of drexel which is michael milken where the search

light of government was focused to reveal as many violations as possible. And so this is where Ed's going to give us his thinking on this with a story, a metaphor. It's like the case of the man who's been cited three times in a single year for driving while intoxicated. His neighbor would also drink and drive, but was never pulled over. Who's the greater criminal? Now suppose I tell you that the man who did it only three times and was apprehended every time, whereas his neighbor did it a hundred times and was never caught. How could this happen? What if I tell you that the two men are bitter business rivals and that the traffic cop's boss, the police chief,

gets large campaign contributions from the man who gets no traffic citations. Now, who is the greatest criminal? And so this kind of echoes Ed's experience with Bernie Madoff and the SEC when he discovered there's a ton of people, Ed just being one of them, that knew Madoff was running a Ponzi scheme, had told people about it. So he's asked the question, did you ever think you should go to the authorities with this? And then this is Ed's response. Bernie Madoff had been a chairman of NASDAQ. He was the third biggest market trader in the U.S.

He was on all types of committees. He was the establishment. The SEC checked him every year and gave him a rubber stamp of authenticity. And really, the way I think about this is Ed's schooling us not on how we think the world works or how we think it should work. He's telling us how it does work. And so now Ed provides a life lesson on the very next page. What would have Princeton-Newport Partners been worth 25 years later? How could I possibly have any idea?

Amazingly enough, a market-neutral hedge fund operation was built on the Princeton-Newport model, the Citadel Investment Group. It was started in 1990 in Chicago by a former hedge fund manager named Frank Meyer when he discovered a young quantitative investment prodigy, Ken Griffin, who was then trading options from his Harvard dorm room. I met with Frank and Ken, outlining the workings and profit centers of PNP, as well as turning over cartons of documents outlining in detail the terms and conditions of older outstanding warrants and convertible bonds. These were valuable because they were no longer available. Citadel grew from a humble start in 1990 when I became its first limited partner. That's insane, by the way, with a few million dollars and one employee, Griffin, with one employee, which was Griffin,

to a collection of businesses managing 20 billion in capital and having more than a thousand employees 25 years later. Ken's net worth in 2015 was estimated at 5.6 billion. I think today at the time I'm recording this, his net worth is over 20 estimated at $5.6 billion. I think today at the time I'm recording this, his net worth is over $20 billion, if I'm not mistaken. And so this is the life lesson, right? As Princeton News Port Partners closed, I reflected on the proposition that what matters in life is how you spend your time. When J. Paul Getty was the richest man in the world and manifestly not fulfilled. He said the happiest time of his life was when he was 16, riding waves off the beach in Malibu.

In 2000, Los Angeles Times Magazine, speaking to a new multi-billionaire, Henry T. Nichols III, of Broadcam Corporation said, It's 1.30 a.m. He just turned 40. At his desk in a dimly lit office, he hasn't seen his wife and children, my reason for living, quote unquote, he says, for several days, which is obviously bullshit, right? The last time we talked, my wife told me she missed the old days when I was at TRW and we lived in a condo. She told me she wants to go back to that life, but they can't go back because he can't let go they later divorced and before i finish the story if you google that guy they're talking about in the year 2000 about 15 20 years later he winds up getting caught in a las vegas hotel room with a hooker if

i'm not mistaken and they catch him with uh heroin methamphetamine meth i can't even pronounce it cocaine all this other stuff and i think the person was almost dead or whatever the case was um like there was like an overdose of some sort but clearly not the kind of situation you want to be in especially if you have billions of dollars right i initially thought that i might continue with my own on my own with a PNP-style partnership. But if I did that, then in addition to the fun parts, remember, he's already rich when he's making this decision. This is what Taleb was talking about, how you can tell he's in control of his own life. And he realized being independent was a lot less stressful.

And if you involve yourself in these series of this giant business, you have all these clients, you have all this other stress, you're making more money, but your quality of life goes down. That's not a smart trade. So it says, but if I did that, then in addition to the fun parts, I would be responsible for things I didn't enjoy. I changed my mind and gradually wound down our PNP office in New York Beach, finding good jobs in the securities industry for some of our key players at places like the giant hedge fund, D.E. Shaw. And I wanted to bring that to your attention because D.E. Shaw is the place that Jeff Bezos was working at. I love how this all connects. It was a place that Jeff Bezos was working at when he got the idea. He was living in Manhattan working at this quantitative hedge fund when he got the idea to start Amazon. And he packs up his

bag, comes up with that great regret minimization framework, decides, hey, I'm going to skip out early. I'm not going to worry about my bonus because I know if I'm 80, my deathbed in my 80s, I'm not going to be like, oh, I should have stayed around an extra six months to get this bonus when I was 27. So then he drives all the way to Seattle and starts Amazon. And so this is the wrapping up of the life lesson. When the hedge fund closed, Vivian and I had money enough for the rest of our lives. Though the ending of PNP was traumatic for all of us, and the future wealth destroyed was in the billions, it freed us to do more of what we enjoyed most. Spend time with each other and the family and friends we loved. Travel and pursue

our interests. Taking to heart the lyrics of the song, Enjoy Yourself, It's Later Than You Think, Vivian and I would make the most of the one thing we could never have enough of, time together. Success on Wall Street was getting the most money. Success for us was having the best life. And I think that is what this book is about. This is why I say he's my personal blueprint. It's about having the best life. Being successful in your work is extremely important, but it's only one part of. It's an extremely important part of having a great life, but it's only one part of. And I think a lot of people, especially people that would listen to something like this, has the same personality that I do it's like i would if left to my own devices like i would just work all the time i know that it's not

going at the end of my life i know i'm not i have to like find systems to avoid going back to like my natural tendencies because i know that'll be a regret for the future for like my future self and that is one of the things i most admire about ed he sat down and thought about okay what am i doing here there's a path i have a choice here like what what do i want it goes back to what he was discovering when he was um yelling at the college professor like what do i want to happen and what do i think will happen let me read it so i get it correct if you do this what do you want to happen and if you do this what do you think will happen so he's sitting there thinking it's like i can spin up another hedge fund i can can make a ton of money, but I'm already rich.

I have more money than I could spend. I have this great investment in Berkshire Hathaway. I'm the first LP in Citadel. He's got investments in all these different hedge funds. He's like, no, and he still works. And so he winds up spinning up another hedge fund, but it's completely different. It's now, I'm going to read this. He's got an entire chapter on this, but I'm just going to read one paragraph, which gives you an idea because I really feel this is the future of work. And what I mean by that is like, clearly the optimal size for a company is shrinking, right? Cause we had, we're in the age of infinite leverage. And so I think the future of work is highly automated, lean and profitable operations. And so he winds up, let me just read this here. I'm going to run over my own point.

So it's called Ridgeline and XYZ. It's like an automated hedge fund almost. It's the way to think about this. So he goes to work every day, but he's only there for a few hours, has lunch with his wife every day, spends time with his kids, working out constantly, like he's doing his thing. And so it says between Ridgeline and XYZ, we manage as much as $400 million in statistical arbitrage and another $70 million in other strategies. He's running almost $500 million here. While PNP's peak was $272 million, compared with PNP's maximum of 80 employees. So he had 80 employees and all his headaches in PNP. He only has, there's six total, him being one of them.

There's six of us. So it's him, his partner i think four employees uh of us at ridgeline who faced our formidable competitors several of the competitors had hundreds of employees including scores of phds in mathematics statistics computer science physics finance and economics we were a highly automated lean and profitable operation so i think that's the future of work, highly automated and lean and profitable. And so I want to, there's a quote from, excuse me, there's a tweet from Naval Ravikant. I want to mention him again because I think a lot of his ideas, especially in the future of work, are just dead on. And I saved this all the way back in February 16, 2017.

And I keep it on my, that folder I always talk to you about in my phone. It has these ideas that just prompt thoughts. And he talks about the future of tech entrepreneurship. And it's very similar to what we're hearing Ed teach us right now in the book. And this is what Naval says. Three employees, no investors, managing distribution for 100,000 musicians.

So you got 100,000 customers for three employees. Jobs outsourced to bots, not to Mexico or China. So again, he's saying TLDR, the future of tech entrepreneurship, three employees, no investors, managing distribution for 100,000 customers, jobs outsourced to bots, not to Mexico or China. So I mentioned this earlier.

This is the part where he talks about, hey, I started buying Berkshire at $900 a share and I continue to accumulate. So just imagine what that return on investment is now. Another example of, again, why it's like he's just really good at developing relationships with other really good people. This opens up opportunities in the future. Not long after buying Berkshire, I began putting some of my profits into other hedge funds, networking with some of the smartest and richest people on wall street sharing investment and remember the very beginning to let talks about how he's very intellectually generous he'll just tell you a bunch of things like he'll tell you his learnings he publishes papers write books that kind of thing uh sharing information investment

opportunities i also gained the benefits of diversifying my personal portfolio so he's got a ton of investments this is and this was he's made these investments you know let's see what would that be 30 years before he's writing the book this part i have to read to you because i mentioned it earlier but i think this is so wise what he did here i think of each hour spent on fitness as one less day i'll spend in the hospital so he says i apply this trade-off uh the trade-offs among health so he talks he's really the end of the book is like how he thinks about almost everything. A lot of it has to do with finance.

In this case, it's about opportunity costs and what's the value of your time. It's really, like I said earlier, like how often are you going to get a chance to talk to an 85-year-old genius who's just going to be like, hey, I'm going to give you all the game that I learned in my life. All you have to do is pick up the book and read the last couple of pages. Obviously, read the whole book, but specifically the advice he doles out on finances is like the last few chapters. So he says, I apply this trade off among health, wealth, and time. You can trade time and health to accumulate more wealth. Why health? So he's like, why are you trading your health? The most important thing for wealth. It doesn't make any sense. You may be stressed, lose sleep, have a poor diet or skip exercise. If you are like me and want better

health, you can invest time and money on medical care, diagnostic and preventative measures, and exercise and fitness. For decades, I have spent six to eight hours a week running, hiking, walking, playing tennis, and working out in a gym. I think of each hour spent on fitness as one day less I'll spend in a hospital. And as you can imagine, the whole point of writing an autobiography is so other people can learn from your experiences. They can profit from your experiences. They can avoid your mistakes. And so what he says here is exactly what Charlie Munger says.

Charlie Munger says that one way to guarantee failure is if you only learn from your own experience. Like, why would you do that? Charlie Munger has read hundreds of biographies. Why would you like that's just very simple. Like one of the smartest and wisest people you ever come across is telling you to read biographies. Why wouldn't you do that? This is not rocket science, right? Those who cannot remember the past are condemned to repeat it. Though the institutions of society have difficulty learning from history, individuals can do so. And then he gets into like why this is so important. Like why is lifelong learning so important? Education has made all the difference for me. Education builds software for your brain.

When you're born, think of yourself as a computer with a basic operating system and not much else. Learning is like adding programs, big and small, to this computer. From drawing a face to riding a bicycle to reading or to mastering calculus, you will use these programs to make your way in the world. Much of what I've learned came from schools and teachers. Even more valuable, I learned at an early age to teach myself. This paid off later on because there weren't any courses in how to beat blackjack, build a computer for roulette, or launch a market neutral hedge fund i need to repeat that super important uh much of what i learned came from schools and teachers even more valuable i learned at an early age to teach myself this paid off later because there weren't any courses

in how to beat blackjack build a computer for roulette or launch a market neutral hedge fund so let's take that idea that Ed Thorpe just explained to us. And again, I don't know why I keep mentioning the same person, but I think that idea that Ed's talking about, the fact is, hey, I had to learn to teach myself because no one could have taught me to beat Blackjack, to build computers for roulette, or to launch a market-neutral hedge fund.

Another tweet from Naval Ravikant. This is so fire fire this is so good the best jobs are neither decreed nor degreed they are creative expressions of continuous learners in free markets that is a fantastic way to think about the life of ed thorpe creative expression of a continuous learner in free market. Then he goes into some of the things that you need to teach yourself. He's like, you got to learn probability. One of the greatest quotes that Charlie Munger said, if you don't get the elementary but mildly unnatural mathematics

of elementary probability into your repertoire, then you go through life like a one-legged man in an ass-kicking contest. So Munger makes you laugh. This is Ed expressing the same idea. I found that most people don't understand the probability calculations needed to figure out gambling games or to solve problems in everyday life. I believe that simple probability and statistics should be taught in grades kindergarten through 12. And then Ed wraps everything up for us in the epilogue, and this is what he has to say.

Once we have the basic necessities of food, clothing, shelter, and health, then what we seek is wealth, power, honor, and the love of men and women. For financial titans who aggressively continue to seek tens of millions, hundreds of millions, and billions, you can ask, is the winner really the one who dies with the most toys? How much is enough? When will you be done? Often, the answer is never. To preserve the quality of my life and to spend more of it in the company of people I value and in the exploration of ideas I enjoy, I chose not to follow up on a number of business ventures, although I believe that they were nearly certain to become extremely profitable. I expected to spend my life teaching, doing research, and

talking to smart like-minded people. But from childhood, I was intrigued by the power of abstract thinking to understand and direct the natural world. When I later saw how physics could predict roulette outcomes through the fog of chance, and mathematics could tip the odds in blackjack, I was drawn into a lifetime of adventure. It was my good fortune to share most of this journey with a remarkable companion, my wife Vivian. She mastered bridge, studied art and history, learned to prepare healthy meals, completed a master's degree in library science, inspired her family to focus on personal fitness and health, and supported causes and charities.

After she died from cancer in 2011, we celebrated her life with a memorial service. When I think of our lives together, I remember what her brother said then, nobody can take away the dance you have danced. Life is like reading a novel, or running a marathon. It's not so much about reaching a goal, but rather about the journey itself and the experience along the way. As Benjamin Franklin famously said, time is the stuff life is made of, and how you spend it makes all the difference. Best of all is the time I've spent with the people in my life that I care about. My wife, my family, my friends, and my associates. Whatever you do, enjoy your life and the people who share it with you, and leave something good of yourself for the generations to follow.

And that is where I'll leave it. I can't recommend reading this book anymore. I think it's obvious. I think everybody should read this book. If you buy the book using the link to the show notes, you'll be supporting the podcast at the same time. There's also a link if you want to give a gift subscription for the holiday season now, in the future, whenever you want.

There's a link to do that. That is 222 books down, 1,000 to go. And I'll talk to you again soon.