It can pay big to think for yourself

Lots of boys go through a blowing-things-up phase in their early adolescence. Ed Thorp’s was more explosive than most. The son of a security guard (his dad) and a Douglas Aircraft riveter (his mom) growing up in a working-class town near Los Angeles during and after World War II, at age 11 Thorp found a recipe for gunpowder in an old encyclopedia and began manufacturing it in large quantities, using it to power homemade rockets and rocket cars.

Then it was on to guncotton, or nitrocellulose, which Thorp put in the family fridge with a “DON’T TOUCH” sign and then used to blow craters in the sidewalk, among other things.
Eventually, Thorp determined that “nitroglycerine’s dangerous instability worried me,” and he stopped playing with it. He lived on to study physics and then mathematics at the University of California at Los Angeles, teach math at several universities, figure out how to beat the house at blackjack, arrive at his own version of the Black-Scholes option-pricing model a couple of years before Fischer Black and Myron Scholes did, and found the first quant hedge fund, Princeton/Newport Partners – which over its 18-year life gave investors a 15-fold return (after fees) without a single down quarter.

Now he has written an autobiography, “A Man for All Markets,” from which the above anecdotes are taken. It’s pretty wonderful.

He is asked by a client to look over Bernie Madoff’s investment performance and concludes – in 1991! – that Madoff is running a Ponzi scheme.

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What sticks with me most, though, is Thorp’s manner of thinking and doing, which is an inspiration in these confused times. Thorp thinks independently, without a lot of deference to received authority. But he seldom spouts off about anything. To him, ideas are meant to be tested – even when the testing can be arduous or even a little dangerous.

Something was definitely ready to happen in the financial markets when Thorp launched his hedge fund in 1969. The increasing power of computers, the deregulation of brokerage commissions, and the rise of futures and options markets were all about to create huge new opportunities for an investor of an analytical and independent bent. You really can’t blame Ed Thorp for seizing them. •

Justin Fox is a Bloomberg View columnist.

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