Market Wizard Edward Thorp

market wizards

market wizardsJack Schwager’s interview with Edward Thorp from Hedge Fund Market Wizards was interesting on a number of different levels. It was interesting for me personal because Travis Pavlik referenced Thorp in the podcast interview I did with him a few weeks ago. It was also interesting because Thorp discussed his blackjack experience that led to him writing Beat the Dealer. I’m a huge sucker for those “beating vegas” types of books, so this dude had me hooked.

Top Five Quotes From Market Wizard Edward Thorp:

I started out by betting $1 on the bad hands and a maximum of $10 on the good hands. It drove them crazy because they were looking to make some big money. I discipline and paced myself. It was a lesson about managing money that stuck with me forever after. – Edward Thorp

I like that you can actually picture the frustration that must have been on these guys’ faces watching Thorp bet between $1 and $10 per hand when they were trying to make money. His points about pacing yourself and discipline are key.

I have to keep reminding myself that the goal here is to make money over the long run, not this week. In order to make that a reality, I need to relax and focus on learning something today. Of course, I can’t let myself get complacent either. It’s a fine line.

If we lost 5 percent, we would shrink our positions. If we lost another few percent, we would shrink our positions more. The program would therefore gradually shut itself down, as we got deeper in the hole, and then it had to earn its way out. – Edward Thorp

I’ve always admired traders who have the discipline to scale back their position sizes and even stop trading during rough periods. I am pretty much certain that I would not be able to do that. For that reason, I will have to built some aspect of that idea into whatever system I eventually develop.

Trading smaller position sizes when things aren’t working makes a lot of sense, but I am thinking that it would be much harder to do in practice than it would be in theory.

You have to decide ahead of time how much of a drawdown would imply that the system is not as good as you thought it was, and therefore shouldn’t be traded. – Edward Thorp

This is an interesting concept that I’ve seen pop up in a few different places lately. At what point do you conclude that markets have fundamentally changed and that your system is no longer likely to be profitable?

Thorp’s point is that you must identify this point before you start trading. That makes sense, because after you spend time trading a system your views on that system will obviously be skewed.

I think inefficiencies are there for the finding, but they are fairly hard to find. – Edward Thorp

Motivating and discouraging at the same time. I think more motivating though. I tend to believe that I am willing to work much harder than most people. That extra effort should eventually lead me to uncover inefficiencies like what Thorp is talking about. I am starting to think it will be a bit more complicated than I originally believed though.

Try to figure out what your skill set is and apply that to the markets. If you are really good at accounting, you might be good as a value investor. If you are strong in computers and math, you might do best with a quantitative approach. – Edward Thorp

This is a great quote for anyone that is still confused as to what type of approach they should consider. That includes me. The trouble for me is that I am really good at accounting, computers, and math….so that doesn’t help.

What does help is that I have already identified that my self-conscious nature led me to constantly second guess myself when I tried a discretionary approach. That is what led me towards a more systematic style. Then, I realized that I won’t likely have enough capital to trade futures any time soon, so I niched down and focused on mechanical systems that trade equities and ETFs.