Legendary Trader Edward O. Thorp on Beating the Stock Market and Blackjack

Edward Thorp, 89, recounts his unlikely path from physics and math academia to beating blackjack, then roulette (with Claude Shannon), and finally building a hedge fund that returned nearly 20% annualized over 20 years with only three minor down months. He walks through the mental models, risk frameworks, and investing principles he believes anyone can use, including why most people should simply buy and hold a low-cost index. He shares his approach to lifelong health and fitness, his early identification of Warren Buffett and Berkshire Hathaway, and his role in detecting Bernie Madoff's fraud in 1991. Throughout, he stresses thinking for yourself rather than following the crowd, and the importance of knowing when you have 'enough.'

• Thorp's first real-world blackjack test turned a $10,000 bankroll into about $21,000 in roughly 20 hours of serious play over one weekend (around $110,000 in today's dollars).
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• With Claude Shannon, Thorp built a wearable computer with 11-12 transistors to predict roulette outcomes, giving a 44% edge; it is now in the MIT Museum and considered the first wearable computer.
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• Thorp's hedge fund ran about 20 years with only three down months (each less than 1%) and just under 20% annualized returns.
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• When the Chicago Board Options Exchange opened in April 1973, Thorp's traders were nearly alone using options pricing math, which he likened to having 'machine guns against bows and arrows.'
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• After meeting Warren Buffett in 1968, Thorp told his wife Buffett would become the richest man in the world based on his ~30% compounding.
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• In 1991 Thorp investigated a mysterious McKenzie & Company investment, found half the trades never occurred, and concluded Bernie Madoff (via brother Peter) was running a fraud, 17 years before it collapsed in 2008.
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• Thorp was investor number one in Ken Griffin's Citadel, having met Griffin at around 18-19 through partner Frank Meyer and shared his collection of convertible securities prospectuses.
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• Claude Shannon got Thorp's blackjack paper published quickly in the Proceedings of the National Academy but insisted on retitling it from 'A Winning Strategy for Blackjack' to 'A Favorable Strategy for Twenty-One.'
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• Thorp expected 50 mathematicians at his talk but 300 showed up, many with pinky rings and sunglasses; novelist Tom Wolfe (then a reporter) wrote the AP piece that spread the story nationally.
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• At about age 20, Thorp doubled his strength on a bet, eventually bench pressing 375 and military pressing 185 after a year of lifting.
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• After gasping during a quarter-mile jog at 35, Thorp used Ken Cooper's aerobics points system and went on to run marathons for about 20-25 years.
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• Berkshire Hathaway shares Buffett's exiting partners could take around 1964 were about $12; the stock now trades a little under $500,000 per share.
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• In 1982 Thorp bought Berkshire at $982 a share even after missing the run from $12, trusting he knew what Buffett would do.
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• Thorp's '4% rule' for retirement spending and '2% rule' for endowments (including advising a cryonics group's endowment fund) come from his mathematical and simulation studies.
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• Teaching himself chemistry at age 14 in 1946, Thorp learned Svante Arrhenius's 19th-century work showing carbon dioxide causes global warming.
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• Thorp closes with Kurt Vonnegut's story about Joseph Heller, who, at a rich man's party, said he had something the host never would: 'enough.'
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