A Man for All Markets
A Man for All Markets

A Man for All Markets

It is the dosage of your betting—not too little, not too much—that matters in (Location 133)

Having an “edge” and surviving are two different things: The first requires the second. As Warren Buffet said: “In order to succeed you must first survive.” You need to avoid ruin. At all costs. (Location 154)

(More technically, to implement the portfolio construction suggested by modern financial theory, one needs to know the entire joint probability distribution of all assets for the entire future, plus the exact utility function for wealth at all future times. (Location 163)

In practice, one needs the ratio of expected profit to worst-case return—dynamically adjusted (that is, one gamble at a time) to avoid ruin. That’s all. (Location 167)

The first method is that of the economists who tend to blow up routinely or get rich collecting fees for managing money, not from direct speculation. (Location 173)

Every surviving speculator uses explicitly or implicitly this second method (evidence: Ray Dalio, Paul Tudor Jones, Renaissance Technologies, even Goldman Sachs!). (Location 176)

It is vastly less stressful to be independent—and one is never independent when involved in a large structure with powerful clients. (Location 185)

True success is exiting some rat race to modulate one’s activities for peace of mind. (Location 187)

Understanding and dealing correctly with the trade-off between risk and return is a fundamental, but poorly understood, challenge faced by all gamblers and investors. (Location 1120)

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. (Location 1163)

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. (Location 1221)

What intrigued me was the possibility that merely by sitting in a room and thinking, I could figure out how to win. (Location 1239)

As my eyes gobbled up equations, suddenly I saw both why I could beat the game and how to prove it. (Location 1246)

But I realized that the odds as the game progressed actually depended on which cards were still left in the deck and that the edge would shift as play continued, sometimes favoring the casino and sometimes the player. (Location 1248)

The casino would win more of the small bets, but I would win a majority of the big wagers. (Location 1254)

The Baldwin strategy was the best way to play the game when nothing was known about which cards had already been played. (Location 1260)

In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. (Location 1492)

He explained that the two mink-coated beauties were his nieces. I took this at face value, although I could see from Vivian’s expression that she had a different view. (Location 1529)

Vivian was both apprehensive and supportive about the casino test. (Location 1537)

This plan, of betting only at a level at 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 tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger. (Location 1613)

The book details the story of how Steve Ross “took his father-in-law’s funeral business and a parking lot company and grew them into the largest media and entertainment company in the world, Time Warner. (Location 1724)

Kimmel allegedly made his fortune in the 1920s and ’30s from bootlegging and the numbers racket, in company with Abner “Longie” Zwillman (chronicled in the book Gangster #2 by Mark Stuart), the don of New Jersey and supposedly the second most powerful mobster (Location 1726)

According to Bruck, Manny Kimmel died in Florida in 1982 at the age of eighty-six, leaving a young widow named Ivi, the older of the two nieces who had, with her younger sister and Manny, visited us so long ago on that dreary winter afternoon in Boston. (Location 1738)

When I last spoke with him, Eddie Hand was prospering in the wealthy enclave of Montecito in Southern California. Later he retired to the south of France. Meanwhile, blackjack had still more to teach me, (Location 1742)

As I was making this decision I agreed to write a book about blackjack. This came about after I mentioned my successful casino test to a few of my friends. (Location 1772)

Although I learned from Junior that cheating was a serious problem and could make me a loser instead of a winner, he didn’t show me how it worked or how to spot it. (Location 1801)

When we picked a casino and I found a seat I liked at the blackjack tables, our plan was for me to bet modestly until I got the go-ahead from Mickey. (Location 1821)

To further avoid notice, I stopped playing in any session before my wins became large, and I also stopped after a moderate loss to limit the impact in cases of cheating that we hadn’t detected. (Location 1825)

Invited to tell our story, we recounted for two hours the litany of second dealing, stacked decks, missing or marked cards, and more. (Location 1844)

Although the gaming control board official repeatedly invited us to guess or speculate, we made clear which statements were facts and which inferences. (Location 1847)

After his damning report he was never again asked to consult by them. Russell Barnhart became fascinated with gambling and went on to write several books on the subject. (Location 1876)

mathematical system for beating blackjack had both scientific and public interest, and they enthusiastically agreed on a piece. But the story was evergreen, meaning not time-sensitive, so they had no schedule. (Location 1892)

Ideally, a player with a bankroll large enough to allow $1,000 bets when the deck is favorable would bet the table minimum, say $5, when it isn (Location 2026)

Such a wide betting spread of 200:1 is a red flag to casino personnel. (Location 2027)

The Big Player might appear to be a drunken flamboyant high-roller, often with a beautiful companion. (Location 2031)

My younger daughter, an assistant deputy district attorney for more than two decades, tells me that modern forensic scientists are aware of this. (Location 2252)

So far, I’ve never needed more than three to connect with a stranger. (Location 2267)

For roulette, the Kelly strategy showed that it was worth trading a little expected gain for a large reduction in risk by betting on several (neighboring) numbers, rather than a single number. (Location 2296)

I could roam the world as a professional gambler winning millions per year. Switching between blackjack and roulette, I could spend some of the winnings as perfect camouflage by also betting on other games offering a small casino edge, like craps or baccarat. (Location 2336)

ambling is investing simplified. (Location 2559)

Each requires money management, choosing the proper balance between risk and return. (Location 2561)

Great investors are often good at both. Relishing the intellectual challenge and the fun of exploring the markets, I spent the summer of 1964 educating myself about them. I haunted the big Martindale’s bookstore then in Beverly Hills. I read stock market classics like Graham and Dodd’s Security Analysis, Edwards and Magee’s work on technical analysis, and scores of other books and periodicals ranging from fundamental to technical, theoretical to practical, and simple to abstruse. Much of what I read was dross but, like a baleen whale filtering the tiny nutritious krill from huge volumes of seawater, 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. And just as in blackjack, my first investment was a loss that contributed to my education. A couple of years earlier, when I knew nothing at all about investing, I heard about a company whose stock was allegedly selling at a bargain price. It was Electric Autolite, and among their products were automobile batteries for Ford Motor Company. The story on the business page of my newspaper said we could expect a great future: technological innovations, big new contracts, and a jump in sales. (The same forecasts for battery makers were being made forty years later.) As I finally had some capital from playing blackjack and from book sales, I decided to let it grow through investing while I focused on family and my academic career. I bought one hundred shares at $40 and watched the stock decline over the next two years to $20 a share, losing half of my $4,000 investment. I had no idea when to sell. I decided to hang on until the stock returned to my original purchase price, so as not to take a loss. This is exactly what gamblers do when they are losing and insist on playing until they get even. It took four years, but I finally got out with my original $4,000. Fifty years later, legions of tech stock investors shared my experience, waiting fifteen years to get even after buying near the top on March 10, 2000. Years later, discussing my Electric Autolite purchase with Vivian as we drove home from lunch, I asked, “What were my mistakes?” She almost read my mind as she said, “First, you bought something you didn’t really understand, so it was no better or worse than throwing a dart into the stock market… (Location 2565)

The SUV was in “my” space (anchoring: I’ve attached myself to an abstract moving location that has a unique historical meaning to me, and am allowing it to dictate my driving behavior). (Location 2609)

Two “expert” longtime insurance investors from Dallas drew me into my next adventure in the market. (Location 2617)

Do not assume that what investors call momentum, a long streak of either rising or falling prices, will continue unless you can make a sound case that it will. (Location 2621)

I learned from this that even though I was right in my economic analysis I hadn’t properly evaluated the risk of too much leverage. (Location 2651)

I also learned from my losing silver investment that when the interests of the salesmen and promoters differ from those of the client, the client had better look out for himself. (Location 2654)

Shareholders of companies that have been pillaged by self-serving CEOs and boards of directors are painfully familiar with this. (Location 2656)

A warrant, like a lottery ticket, was always worth something before it expired even if the stock price was very low, if there was any chance the stock price could move above the exercise price and put the warrant “into the money. (Location 2668)

A few days after I had the idea of hedging warrants versus common stock, we packed up our possessions and moved from New Mexico State University to Southern California, where I became a founding faculty member of the Mathematics Department of the new Irvine campus of the University of California (UCI). (Location 2678)

Feldman introduced us and I learned that Kassouf had discovered the same concepts in 1962 and had already been shorting overpriced warrants and hedging them, doubling his initial $100,000 in just three years. (Location 2687)

There we extended our approach to include the much larger area of convertible bonds. (Location 2699)

Sheen felt that he understood the companies well enough to deviate from a neutral hedge. (Location 2703)

used Occam’s razor—the principle that given more than one explanation, you should begin by choosing the simplest one—and plausible reasoning to arrive at a neat formula for determining the “correct” price of a warrant. (Location 2708)

He told me with a laugh that the $100 was his contribution. (Location 2728)

During the twelve years from 1956 to 1968, these funds Buffett managed compounded at a rate of 29.5 percent, before he took his fee of one-fourth of the gain in excess of 6 percent. (Location 2729)

couple of years he would be liquidating his partnership. His investors could cash out or, along with Warren himself, take some or all of their equity as shares in two companies owned by the partnership, one of which was a troubled little textile company called Berkshire Hathaway. (Location 2739)

As the evening went on, I learned that he focused on finding and buying into undervalued companies. (Location 2752)

he expected each of these investments to substantially outperform the market, as represented by an index such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500 (S&P 500). (Location 2753)

in our approaches to investing became clearer to me. He evaluated businesses with the aim of buying shares in them, or even the entire company, so cheaply that he had an ample “margin of safety” to allow for the unknown and the unanticipated. (Location 2786)

dice, I wondered whether bidding systems at bridge might be like those dice. (Location 2818)

Then your best strategy would be to ask the opponents to disclose their bidding system, as they are required to do, then choose the most lethal counter to it. (Location 2824)

Bridge is what mathematicians call a game of imperfect information. (Location 2827)

He also could continue to rely mainly on his own talent even as his capital grew to an enormous amount. (Location 2834)

We seemed to make a natural team. I would generate most of the ideas but he would bring suggestions and trading possibilities from “the Street. (Location 2852)

Bachelier used mathematics to develop a theory for pricing options on the Paris stock exchange (the Bourse). (Location 2967)

This didn’t match real prices well, especially for periods longer than a few days. (Location 2986)

Even so, these newer formulas for fair option prices, which applied as well to warrants, were not useful for trading because they included two quantities that could not be estimated satisfactorily from data. (Location 2987)

fact that investors tend to value an uncertain payoff less than if it was a sure thing. (Location 2991)

This value is found by multiplying each payoff by the number of ways it occurs (one, in this example) and dividing by two, the number of possible outcomes. (Location 2993)

I made reducing risk a central feature of my investing approach. (Location 2996)

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. (Location 3039)

The possible collapse of the S&Ls could have been predicted and prevented by suitable regulation, but wasn’t. The great financial crises that came later shared this characteristic. (Location 3345)