#596: Edward O. Thorp, A Man For All Markets — Beating Blackjack and Roulette, Beating the Stock Market, Spotting Bernie Madoff Early, and Knowing When Enough is Enough

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I'm a cybernetic organism, living tissue over metal and doscelling. So Hello, boys and girls, ladies and germs, this is Tim Ferris, and welcome to another episode of the Tim Ferris show. I'm gonna keep my intro short because I want to jump straight into the conversation. My guest today is Edward O. Thorpe. He is the author of the bestseller Beat the Dealer, which transformed the game of Blackjack, his subsequent book. Beat the Market, co authored with Sheen T. Kasouf, influenced securities markets around the globe. He's also the author of A Man for All Markets, subtitle from Las Vegas to Wall Street, How I Beat the Dealer and the Market. Thorpe was one of the world's best blackjack players and investors, and his hedge funds were profitable every year for 29 years. He lives in Newport Beach,

California. And his website is Edwardothorpe.com. Ed, it is so nice to see you and thank you for making the time. Pleasure to be here, Jim. I've enjoyed many of your brows. It's lovely to finally connect and perhaps we'll get to the small world that connected us at some point, but I thought we could begin with a little bit of background for people who may not have the

entire context and then we can fill in the gaps. So perhaps you could speak to A little bit of your growing up and your formal education. If you wouldn't mind. How was uh

Born in Chicago. During the reign of Herbert Hoover. President number thirty one. So I've seen sixteen presidents.

I moved out to California with my parents during World War Two. And basically. Grew up in uh California went through junior high school and high school out here.

And then uh went to U C Berkeley and U C L A God. Uh bachelor's degree. And a master's degree in physics. I mean. In the middle of my

PhD. For physics. realized I needed more math. So I started taking it and then I saw I could graduate more rapidly in mathematics. So I got my PhD in math instead. And then I went on to teach at U C L A M I T.

New Mexico State University and uh finally uh University of California, Irvine. Now how did gambling or interest in those types of applications of physics or mathematics enter the picture for you. Well, I'm a curious person, and you could say that it happened uh purely by chance.

When I was uh teaching at UCLA. I got interested in Beating blackjack, somebody Told me about an article. That.

Would've let me play almost even. So One Christmas vacation, my wife and I went out actually Christmas vacation of nineteen fifty eight, just after I got my PhD. We went out to Las Vegas. And I never gambled because I knew it was uh

A loser. For most people. And uh the odds were against you, but I Got ten dollars. And I played for about forty minutes and I had an interesting experience.

The first twenty minutes I had a little card. Telling me what to do and people thought I was a fool. Who knew nothing about the game and They were right that I knew nothing about the game. But the card made me uh much smarter than the other players. I made some remarkable plays that attracted their attention.

And then they all how I was making these plays. In one of them I got a uh seven card Twenty one. Which is very rare.

And in most places. Paid a bonus. They didn't pay a bonus in this particular place, but they thought I was trying for that and I somehow managed to reproduce it. So I realized they didn't know much about the game, really. And I went back and

Read carefully the statistics article and realized That I could see. From my math background. How to actually Devise the system to beat the game. Then I w set about to do it.

And about that time I moved from U CLA to MIT and I had access to the big computers. At uh MIT. This was back in uh Nineteen fifty nine. They had an IBM seven oh four, which was a refrigerator sized machine that served thirty New England universities.

So I taught myself how to program. And as I worked my way through with my ideas, I saw that I had a winning system. And it was just a matter of finishing all the calculations. So I went ahead and did that. I wanted to get this System published because I thought that

From my experience in mathematics and what I've seen happen elsewhere. Other people would claim they did it and grab the credit. That annoyed me because it already happened to be in mathematics a couple of times. So I went

Shopping for somebody who could get me quick publication. And Turned out that on the MIT campus. There was a man. Who I knew nothing about, named Claude Shannon.

who was an institute professor. And he was a member of the National Academy of Sciences. So he could get me. If you approved of what I wrote. A quick publication in the proceedings of the National Academy, it would only take uh couple of months.

To get it out. So I looked him up. One day and The secretary at MIT's math department said there's no point going to see him. He doesn't see people. He's very private.

And if you do get to see him, you're only gonna have five minutes. So I finally managed to see him at lunch for five minutes. After we talk. He said, Well it looks like you've got all the

Main ideas here. Yes, I'll put this through, but we have to change the title. The title was A winning strategy for Blackjack. And

He changed it to something like a Favorable strategy for twenty one. Which sounded battery. Okay. He didn't want to make too bold a statement for the National Academy.

And uh make it look like this was a just a gambling paper. So anyhow the paper got sent in. And it caused a uh Sensation. Because I had

Submitted an abstract to it to the uh American Mathematical Society meeting in Washington, D C Where I was going to present. By the way. They initially rejected the abstract, saying that this is just another fool with a

System that doesn't work because we know you can't beat gambling games. But on the abstract committee was a person I knew well from U CLA, a number theorist named uh John Selfridge became quite well known in number theory. And he said, Well, if Thorpe says it's true, it probably is. So you should accept the substrat.

So I went there and I presented. And I thought there'd be about fifty mathematicians in the audience, but instead of the There were. Three hundred people. It was jammed.

And uh a lot of people uh were very odd looking. They had uh pinky rings on and sunglasses and Tropical shirts in the middle of winter. So After I finish the lunge for my uh little handout. I brought fifty handouts thinking that's all I need there, and I

Tossed the handouts out and left as quickly as I could. Then it was picked up by uh That's all I named. Tom Wolf, who became a famous American uh novelist. He was uh

A young reporter then he wrote a piece for A P which went across the country and so It got massive press. That led to me writing a book. And telling everybody how to do it after a couple of years. Between the time I wrote the book, though.

And when I told People how to do it by publishing. I went out and played Blackjack myself. And Prove the system worked.

I figured that there's no point in writing a book unless I knew it really worked. I knew it worked in theory. But what if you actually tried to do it? You know, a lot of things they seem to work in theory, but when you get down and actually uh Put something to the test. You find out there are all kinds of things you didn't think of.

Turned out in this case it worked very well. We made uh in one weekend with a test uh eleven thousand dollars, which Is about That with a zero on the end in today's money. This isn't about twenty hours of serious play.

So I had a lunch money at M I T for uh a very long time thereafter. Ed let me just jump in for a moment. So a couple of questions. I could have a a thousand follow up questions, but I'll just I'll limit it to a handful. The first was four that eleven thousand Which would be say a hundred and ten thousand in today's dollars.

twenty hours of serious. Do you recall roughly what the The bankroll was Yeah, it was ten thousand dollars. Oh that was the starting. Okay, got it. We started and we had eleven thousand.

I see, I see, got it. On top of that. And my prediction before we went was that that's what would happen. So it it panned out. All right. Two other questions rewinding a bit to your earlier story. When you were first sitting at that blackjack table, if I heard you correct, you said you had a little card. If I heard you correctly, could you describe what that was on the card? Yeah, it was uh a set of rules for uh Hitting and standing.

Doubling down. And fair splitting. And it was uh The best way to play. with a higher degree of approximation. It was the best way to play against a

Full deck. Or what was left of a randomly shuffle deck. If you didn't know anything more about the cards that have been used up. And my contribution. After I Understood this.

Was To figure out what would happen when Some of the cards missing from the deck. Because The cards that are used up.

Or not. Mm. representative sample of the cards in the deck. They can vary quite a radically. For example, you might use all the aces early. And that would be bad for the player. Or you might use none of them up.

Until late in the game and that would be quite good for the player. And With Claude Shannon. The person who doesn't meet anyone. You said you were able to get five minutes at lunch. Why were you able to get time? With Claude.

Or why do you think he was willing to spend time with you? He was willing to spend five minutes. I think probably just to get rid of me. But after we try. He kept asking me questions and it it became fifteen minutes. And then he approved the paper.

That I wanted to submit. And then he said, What else are you working on? So I said, Well, there's another project which actually I started before Blackjack. And which got me interested in gambling. And that's A way of beating roulette.

And Claude Shannon, it turns out, was Probably the King of Gadgeters. He built Many ingenious machines.

Over the course of his life. You built Robots that would run mazes. Machines that would play chess. He

Just Loved all that sort of thing, and he had a house full of gadgets and equipment. Hundreds of thousands of dollars worth in Valued in money back in uh nineteen fifty eight, fifty nine. So when you hear it about roulette.

And I explained to him what my ideas were there, he got very excited. So we continued to talk. And this Five minute meeting became a little bit more. half an hour and then an hour, and then we adjourned to the

Cafeteria at MIT. To grab a bite. And we w went on for another couple of hours. And we decided that we would Joined together.

And make an all out effort to build a Machine. That would allow us to project the outcome of of our roulette game. And the house. in casinos have had to

I was gonna say adapt, but really counteract. your strategies and tools by changing the rules. So could you say more about what what you then devised? In the case of Roulette. What we did was we built a Small

Computer. That w had about Eleven transistors in it. Eleven or twelve, I Don't remember which'cause we had two versions and uh forget whether we ended up with the eleven or twelve transistor version.

The uh computers now At the MIT Museum in uh Cambridge. So it's been on exhibit. in uh various parts of the world at one time or another. In any case. Over about nine or ten month period.

We worked in uh Shannon's basement almost full time. And we Built this wearable computer. First wearable computer according to the MIT Media Lab. And

One person would Where the computer and Andrew push button information about the Position and velocity of the ball. And the rotating

Wheel in the center. And then the computer would instantly There's a trick there. I I do mean instantly. It would instantly tell you word about. And so The other person would sit at the roulette.

Table. Apparently connected with the observer who was busy. Putting in the eight. Relent information. And that person would hear a series of musical tones.

And when the musical tones stop. The last tone. In the octave. We'll tell him. What section of the wheel to bet on? We

Divided the wheel into eight sections with a little bit of overlap. So uh The person who bet which happened to be me. Was Able to quickly put down

Money on. Five. Neighboring numbers on the wheel. And had a massive edge of forty four percent. So The

Piles of dime we started out with it with our experiment. Dime chips became huge piles of dime very quickly. So the computer worked wonderfully well. Yeah, I wanna take a step back just for for people who are listening. And say that.

There are many reasons that I wanted to have this conversation with you. And It is not specifically related to to gambling in the sense that what most There there are many things that interest me about your life and your thinking. And my hope is that for people listening

They get a window into at least two things. One would be Your methods of thinking frames more. works for thinking, how you think about thinking, and then also Your personal approach to

Health. and fitness and because as people may have picked up with some of the references Could you tell everyone listening what your age is as we speak today? I'm uh eighty nine. And for those people who can't see video

You look like you're in your sixties. And I am just beyond excited to to hop right into that. So we're gonna jump around quite a bit. We won't do this exactly chronologically, but Could you Perhaps describe

Your approach. to health and fitness and you could tackle that. starting wherever you like. Is it just that you you were given the right parents and out of the box have tremendous genetics? Is there more to it? How would you Begin to unpack this.

I kind of wandered into health and shouldn't spy. accident initially, just like I wandered into blackjack and roulette. I'm curious and always looking for things to understand. I like the idea of self improvement too. So I was walking

behind the student co op one night when I was about twenty. And heard a bunch of clanking. I look down in the basement. And there were some uh fairly burly guys down there. Pumping iron.

And I walked in and I said, You know, this is This is a waste of time. This is ridiculous. I'll bet you a milkshake. That if you work out

With us for a year. Just One hour. An evening. Three evenings a week.

You'll double your strengths. Yeah. A set of exercise that they uh Describe. So I said, I don't believe it. Let's try it.

So I went down and uh the four exercises were The squad. With a barbell on a rack. The military overhead press. The bench press.

And uh deadlift. It wasn't deadlift, it was something else. I forgot the fourth one at the moment, but I'll think of it. Yeah, clean and jerk, maybe, who knows? Or Bent Row. It was something wrong those lines.

But a compound exercise like like the others. Yeah. So there was a fourth exercise. So anyhow What happened was I was a uh I wouldn't say ninety eight pound weekly.

But maybe uh A hundred and fifty pound weekly. And at the end of a year I could uh military press one hundred and eighty five. Which uh was At least double what I started with.

I could bench press. Three seventy five. I could do fifteen at uh Three twenty five. Um I could

Yeah, I could squat with three seventy five. I could do sets. Forget what the other one was. Wish I could remember it.

Any case I was astounded that all this uh came to pass. So maybe pay attention to uh Strength at least. And some time went by.

And I did a little swimming'cause I got interested in scuba diving. Then uh One day in my Thirties I was jogging along the beach with my uh Brother in law.

Yeah. He said, Let's go for a little jog. I went for about a quarter mile and I was gasping. I was thirty five then I remember. I said, This is awful. I'm I'm in terrible shape. I have to do something about this. So they had a book

On aerobics by somebody named Ken Cooper. Who has a had a lab down in Texas and started In large part the aerobics a revolution that uh swept the country. So I started keeping track of his points. He gave you points for uh various degrees of aerobic effort.

I think if you did a miling. Between twelve and fifteen minutes you got one point and Yeah between. What ten and a half and twelve you got two points. And so forth.

So I started trying to run a mile a day and I did that. Well, I ran a mile every Saturday to start with. And then One Saturday I decided to try a little further, so I'm two. And then three.

And then I said, I'll tr I'll try a ten mile race. I got another ten mile race, which was uh kind of foolish. Well I finished and I did I did reasonably well. So then I said I'll try a marathon. So then I got into Marathon running.

And I really like that. I did that for about uh twenty years until I uh hurt my back weightlifting. All my uh bad events have been from pushing myself athletically. So hurting my back was uh probably the worst thing. Ever needed a disc, so I had to stop. Had to stop heavy pounding, heavy running.

But twenty years of uh road running. Well, more than that, maybe twenty five years and marathon. Gave me I think a very good Base. For going forward.

And so now I Do things like uh walkabout. Three miles. Three or four times a week. And I spent about

Two days in the gym. Doing stretching and uh Strength exercising. core strengthening and so on. Lot of emphasis on core because of my back, which is just fine now.

I was just gonna ask how your approach seems like it has evolved and changed over time, say After fifty years of age or In the last. Say forty years or so, are there any particular changes that you made in addition to the core? strengthening to support the back that you think have

contributed to your longevity? I've evolved. I try to listen to my body. So I do what I enjoy. Yeah.

The rule I started to follow was some is better than none. And more up to a point is better than less. So there's there's no excuse. I mean If you tell yourself, gee, I'm not gonna do this because I can't do the whole program. That's a big mistake. Just start doing it.

And I find that If you start doing it. And you get used to it. You find more and more things that you kinda like that you could build on? And then you just keep getting better at it.

I was probably in my best shape at around uh Fifty five to sixty five because of all this. That is inspiring. I am uh just about to turn forty five and even Amongst my It's just a age cohort.

It's very common for me to see people giving up even in their 40s and blaming it on age. But with you sitting in front of me, describing your trajectory and uh sort of adaptive habits. I feel like those Those excuses don't hold a whole lot of weight.

One thing that's pretty neat is uh Racewalking. I did that for a while. And that's something that is uh lower impact than running. But you can get the same kind of aerobic work out.

So that's something I uh direct people towards. What does your strength training look like? Now. Or over the last few decades. Well, it's as I get older.

Declines. I get weaker. And it gets a little harder to do things. Yeah. I feel a little tired where I can't do as many uh

Rip. Or sets of things. So I have a mix of things that I do now. I will do Squats.

Usually now just body weight. And I try to I'll do dumbbell squats. Or Lunges with a lot of emphasis on

One leg and then shift and do a lot a lot of uh Weight on the other leg. Do pull-ups. I think the best I've done recently, which is not very much, is uh four underhand pull ups. I'm too overhandful of

Ten years ago I could do a dozen of each. Well I do A lot of back exercises regularly. On the map. And

That's very helpful for keeping my back in shape and keeping my core. In pretty good condition. So we may come back to this, but let's segue And go back in time yet again. And

look at investing. How did finance or investing? Enter the scene. For you. Well the way I got into finance and investing was That

I made money at Blackjack. And from book royalties. This first time in my life I had any spare money before that. As an academic, my wife and I were living From month to month. With uh no surplus.

Amen. Kids for coming. And that made it even tougher. So Once I had some money from uh

Both gambling and book royalties. I wanted to figure out what to do with it. And so investing made good sense to me. I would Put some capital aside and let it grow.

I uh started out by making A lot of foolish beginner mistakes, which cost me. And then I decided to sit down and re figure this thing out. And so I began to study. Investing.

in my spare time. So I spent the summer Nineteen sixty four. Which was uh I guess the third year I was in New Mexico State. Just reading All summer.

In a big bookstore in uh Beverly Hills, uh Martindales. Reading all the investment books and newspapers they had. And then I started again in the summer of sixty five. reading whatever I could find. And I happened to get a little book on uh warrants.

Common stock purchase warrants. Which were the forerunner. to what people call Call options, no. And

When I saw that a light came on and I realized that I could mathematicize this. And I could figure out. How to value these things. Yeah. If I did that.

I'd probably be ahead of the crowd. Who didn't know how to do these things. And so I'd probably have an edge. By chance I came to UC Urvine when it opened in the fall of nineteen sixty five. And I was telling one of the deans there.

About This idea that I had. And that I was working on. He said, Oh, we have someone else who does that. And turn out to be uh Uh Sheen Kassoof.

And so the two of us hooked up and she and Kazuf had actually been doing it in practice. It's already made. An elementary model. For trying to judge warrants. So we decided to write a book together and work out

More of the details in theory. And so that became the book Beat the Market. And that launch. Both of us. Into separate businesses.

And so I began to Do what are called warrant hedges. And Basically you by a cheap warrant. And you short common sock against it. That's one way.

Or you buy an overpriced warrant? And You short it. I said bye. You short an overpriced warrant? And you buy the common stock against it to hedge the risk.'Cause they tend to move together.

In the case of the overpriced warrant. as it collapses toward uh zero or Toward its uh conversion value. You capture. An excess return. And what I found was that

You could make a steady twenty five percent a year with practically no risk doing this. So I was doing it for myself. And then Word spread around UCI campus. And people wanted to sign up.

So I signed up the Dean of the Graduate Division. And I s also signed up the Secretary to the Chancellor. And uh some people in the math department and so forth. So I was managing the whole collection. Of uh

Little accounts for people and they were making twenty five percent a year and they kept telling everybody about it. The dean of the graduate division happened to be an investor also. With a fellow named Warren Buffett? And Warren Buffett was uh

At that point. Shutting down his partnership because everything was Overpriced back in nineteen sixty eight. Prices were crazy. And the dean of the graduate division wanted to know where to move his money to. So he introduced me to Warren Buffett to kind of check me out to see if I might be a good place to put it. And so Warren and I got along fine and apparently I passed the test because the dean gave me his money to invest.

And uh so I got to know Warren Buffett. And I was sorry to see that he was going out of business because I thought As I told my wife then, this is gonna be the richest man in the world. We'll come back to the that a little later. I think you'll find the follow up to that quite interesting.

So I need to. I got the idea of forming a hedge fund. From uh Warren Buffett who was just Closing down his hedge fund. So I went into business.

Managing. Accounts. And then Merge the accounts into the hedge fund. And Start of this

hedge fund or private limited partnership. That ran for about twenty years. And use Ideas. That I kept generating mathematical finance ideas.

To keep Staying ahead of other investors and making excess returns and Yeah. Twenty years. We only had uh three down months out of all those months.

Yeah. those down months were less than one percent. So it basically just printed money every month. And it made just under twenty percent annualized during that time. I'm very risk averse, as you'll you'll find as we continue to talk.

And so this thing ran with extremely low risk, but yet had very high return. So that was my entree into investing. That's that one hell of an entree. Twenty to twenty five percent annually. Let's touch on a few points here. So there were

Two other people. Who I believe read Beat the market or were influenced by it, Fisher Black and Myron Scholes. Could you just perhaps fill in the dots? refers to the Black Shoals model with a different name. Could you perhaps just fill in the gaps there for people?

Or listening. I actually figure out what this model was. Back in the middle of Nineteen sixty seven.

Um I decided that I would just use it. For myself. And then Later. I kept it quiet for my own investors. The idea was to

Basically make a lot of money out of it for everybody. And it was fun. To me. Just to develop it. And apply it to various things.

No. Fisher Black and Myron Scholes. Red. Beat the market, which was sort of the launching pad for me. into the uh finding this model.

And it was also a launching path for them. They saw how to Improved. The ideas and beat the market. And they made a

mathematical finance model that value warrants and options very accurately. So It was based on uh Set of assumptions that are fairly narrow, but pretty good. And

Bye. Thought that I was the only one who had this model. So When The Chicago Board Options Exchange.

Opened in nineteen seventy three. I thought I'd have the feel to myself. But unfortunately. Fisher Black and Myron Shoals. How much?

The idea. And they did a better job of the model than I did because they had Very tight mathematics behind their derivation. I had. To make a couple of assumptions to get to the same.

Point. But they were reasonable assumptions. And in theory later on. So in any case, they published the uh model and I thought oh I have this hedge fund I've been running for a few years. It's been doing well. We're gonna make a lot of money in options, but no.

Black and Sholes have told everybody what the secret is. But People didn't catch on right away. So when the Chicago Board Options Exchange opened for business in April nineteen seventy three, the only people on the floor were my traders. Ha

It was like uh having machine guns against bows and arrows. For people who don't know, Schultz went on to win the Nobel Prize for Economics in nineteen ninety seven. Yes, and a black would have been there too if he hadn't died of Cancer before that. Right.

Was it MIT where they didn't know? Uh doing a lot of good theoretical work on uh the development of warrants. And options. And so He wrote some beautiful papers about this theory about the same time that uh Black and Schultz were doing their work.

So The prize was awarded jointly to Merton. And Shoals. And I will say this about the prize.

The people who publish Are the ones who get the prizes. People who don't publish. It doesn't matter what they figure it out or when they figured it out, they don't get the prizes. Since they don't deserve to because If you don't publish.

You haven't really proven to the world that you really did this on the one hand, and you haven't really changed the world in the same way that people who published you. So I think the people who don't publish don't have claims to these prizes. Having the tool in place turned out to be revolutionary for my life because I was able to use this tool

And I had some Shortcuts in using it that other people didn't have for a very long time. Because I developed it myself. beforehand and they didn't get around to seeing it the way I saw it. These shortcuts were very useful. We stayed ahead of

The marching legions of PhDs who came later, we stayed ahead of them all the way through into the Atomic Closement Partnership in uh nineteen eighty eight. Let me hop in for a moment here. To Ask a few questions about your

Meeting or at least one. With Warren Buffett, why in that meeting did you come away saying you thought he would end up being the richest man in the world. What did you see or hear or observe in that meeting that led you to that? I saw that he was Compounding at a high rate of return.

That he'd been doing it for a long time. It was very, very smart. And that he really knew a tremendous amount about companies. So he was a good evaluator. of companies.

And he demonstrated a very large edge already. He'd been running his partnerships from nineteen fifty six to nineteen sixty eight. And had About a thirty percent before fee. And the large return rate. And

I was sorry that he was going out of business. I met. Things look so bleak. From the standpoint of Stock pricing to him at that time.

Interesting follow up to that story. What Warren Buffett did at that point was Hm. Decided to make A

Poor textile company. In uh I forget where Ruiz, uh. Somewhere in New England. Call Berkshire Hathaway.

private mutual fund. And he bought up as many shares as he could. And He didn't Particularly encouraged. His exiting partners.

To take shares in that company. Because he wanted them himself. They did have a choice. They could take cash. Or they just take sharing brokshire. And Not knowing.

What to do. Many of them just took cash. And exited. Some of them took Berkshire, though. Bush, I think was they would have gotten it at something like twelve dollars a share in nineteen sixty four.

Now it's a little under five hundred thousand dollars a share? Yeah. Oops.

The virtual story is kind of interesting. I knew how smart he was. And I said the way he's compounding, he's going to be My opinion, the richest man in the world. Yeah, while

It'll just take time. I lost track of him. I figured he was just Working for his own account. And there was no opportunity for an investor. That was largely the case. But then up in nineteen eighty two I happened to see an article about Berkshire Hathaway and I saw that he was running it.

And then I decided to take a look. I said, Oh It's going from twelve. The nine hundred and eighty two. So Is the option really gone?

Many people who owned it had sold. On the way up. Taking their enormous profit of Multiple of five or ten or fifteen. Yeah.

I said. I know what he's doing. I know this man. I know what he's going to do. I'm buying a nine hundred and eighty two. Even though I missed out the move from twelve to nine hundred and eighty two. And of course buying nine eighty two turned out to be a good move.

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Let me ask you, if you were teaching A Let's just say What could be undergraduate or graduate? Seminar in investing now.

So You were teaching a class of Neophytes. How to invest. And some are

Say mathematically inclined and some are not. It's a very mixed group. What types of tools or thinking frameworks Mental models. Anything.

would you focus on? in the first handful of lectures. Yeah. The first thing I tell them is The answer is really easy.

For almost everybody. But you're not going to believe me. Until you work through yourself and understand it. Yeah. I'll tell you the answer to start with.

And then I'll try to convince you. That's that's the right answer. So I'll just tell you the answer to start with. The answer is If you're a long term investor.

You should just buy and hold. Equity. Yeah. To have bought and hold equities.

Has been the US. The last couple of hundred years overall. Equities here have compounded it. About Um

Or ten and a half percent. Or two hundred years. The data for the first number of years is Not as good as the data for the last hundred. But the data for the last center is quite good.

And uh very well documented. How does that do against everybody else? Well. You can prove by logical and mathematical arguments.

Yeah. I won't go into all the details, but Some of it's in my book. It's also in my book, but it's You can prove Yeah.

For person. Simply Buys the index and holds it. He will outperform. Most

All the other players. The people who buy and hold the index will be The whole collection of people who don't do that. They do way better on average. The ones who don't do that pay Trading costs.

They have More volatility from diversification generally. From lack of diversification. And they often pay investment advisors. And

All this And they also pay taxes when they trade. So the upshot is that you might make ten and a half percent. If you don't pay all these people. You might make.

Eight. Or seven or six percent. To pay the crowd of people waiting to Cool. Help.

So That's the simple answer for people who don't know anything about investing. Now you might say, Well yeah, but I'm pretty smart I hear all these stories. I listen to Kramer on TV, he jumps around and makes a lot of noise and sounds good. So

Why can't I do better? Well, the academics have something called the efficient market theory, in which they claim that You can't do better. No. I've already.

Explain that that's That's wrong. You can find instances where you can do better. Warren Buffett did much better. I found with my hedge fund I could do much better. But the

kind of work you have to put in to do much better. Is substantial. It doesn't seem like it at first. But when you get into it, there are all kinds of details. Follow ups.

And things to be checked out. And you end up spending a substantial amount of time and energy. Figuring out how to do it better. Um For everybody who finds out how to do it better.

The Rest of the crowd. Who isn't buying the index. is doing a little bit worse. Because

You can show you. Yeah. The whole collection of people. Mm. Don't buy the index.

As a group like the index. Because everybody as a group is like the index. You subtract the index part out. And the rest is like the index too.

So The people who Mm-hmm. Buying the index. that are like the index as a group are busy paying all these costs.

Taxes. Investment advisors and so forth. So on average That whole group does worse. You're paying uh basically uh

Casino vigorish or whatever, if you're not indexing. And you've got to beat that in order to do better than the indexers. And Obviously the group can't beat that. So it it's only a small collection of people, some by luck and some by skill. We end up doing better. So you're basically betting against the odds if you just step in and buy stories and invest in various mutual funds that are actively managed and so forth.

So that's what I would tell people now. Now on the other side of the coin. If you really are interested in investing. It's worth Educating yourself and trying to do it because you will learn a lot.

About Investing. You might actually find a way to win. And You'll learn about

How the world works and a lot about life too. The things you learn. From What seems like a narrow specialized field. generalized very widely.

If if you're the kind of person who can Take a lesson in one part of life. Yeah. Transport it to another part of life. What are some of those transferable

Lessons. In your mind. Let's take uh risk. as a good example. You learn about investment risk. And

How You want to avoid Very great risks or minimise them. Great investment risks can take you out of the game altogether. So you might have a a thing where you

Multiply your money by ten times. But you might also lose it all. Some things that are highly volatile. Like buying cryptocurrency. Or in this category where you you may have

The chance of a very large game. But also the chance of a very large loss. And if you lose most of your capital it's very hard to climb back out. For instance If you lose Ninety percent of your capital? You gotta multiply what's left by ten.

In order to get back to even. Which means you've gotta make nine hundred percent. To offset that ninety percent loss. That's Not gonna be easy to do.

It takes a long time. So you want to avoid really bad outcomes. So I applied that for example to uh Covid.

I thought about What to do and how to deal with it. I said. You know, at my age The

Stats from China which came over in early twenty twenty showed that People eighty five and up. Yeah. Dying at the rate of If they were male, eighteen percent.

Of those who got it. Yeah. Even now the death rate is very high. For those who get it. If they're unvaccinated, it's probably pretty close to that. If they're vaccinated, it's maybe attempt that.

So I consider that a risk that can uh take me out of the game. With uh fairly high probability. So I'm going to avoid getting covet if I possibly can. Uh I'm going to mask up.

I'm gonna avoid crowds. I'm gonna think about What the risks of various activities are. That I do. And decide whether it's worth it. So I

Yeah. My own analysis Of Covid and its risks. And Uh trying to be very careful from then on.

I think it's paid off then. Uh it's paid off for my family too. I've passed this information on to people around me. Do you have any recommendations for And this might sound a little meta, but how people should think about long term thinking or the long term.

Because the the recommendation For Say an equity index or index ETFs. was Predicated on

Investing in holding for a long period of time. What would you consider sort of the minimal viable long period of time? If you have an answer to that and How can people become more aware of their own weaknesses related to short term or short term thinking and switch to more long term. I tend to be

A long term thinker, you might say, Well if you're eighty nine How can you be a long term thinker? Well I have uh Children. Grand children.

I also Feeling pretty good and staying in good shape. So I eighty nine may not be all that old at this point. In any case. I would say that if you're looking out Fifteen or twenty.

Years or more. Maybe you have a A dynasty trust or something like that? Or you have descendants? And you yourself? Oh, expect to live?

Fifteen or twenty years or more. The best investment. I think is The bye. Almost entirely equities and hold it, you might have wanna have a little cash around. I think a Buffett recommends ninety percent index and ten percent

bonds or short term intermediate term bonds for cash. That does just about as well as a hundred percent equities. I just put it all in equities because I have enough so I don't have to worry about Fluctuations up and down. If you have a Shorter time horizon.

You may want to do things differently. Yeah, it depends on how much you're going to need and how much you have. I have a set of rules that are a little bit helpful here. There's I'll start with the uh what I'll call the four percent rule.

Suppose that you're going to retire. And you want Enough. Two last year. From your capital.

Throughout the rest of your life. I would say a pretty good working rule. But mostly inequities. And spend four percent of your capital each year. Or less, if you can.

And that ought to last you. From Save. The sixties. Till the end of your life.

It's not guaranteed. Mm. Pretty good chance it will. Then I have the two percent rule. Which I found by

Studies both mathematical. And by simulation of Stock returns. If you Only drain two percent out per year.

Yeah. That money will Probably growing perpetuity. There's a small chance it'll be extinguished by really bad downturns, but it's very small. There is

An organization that Freeze people. And they asked me for Advice about How to invest their endowment fund.

Freezing meaning cryogenically freezing people. And so I said For the endowment fund. Which is going to get people out. Oh.

Uh being frozen sometime in the far future, fifty, a hundred, two hundred years out. But that's fun. You're going to want to Invest long term and let it run because that's gonna get you the most money down the road. Yeah.

If you're going to. Attempt to reanimate somebody. There is no specific timetable. If you don't have enough money.

to reanimate'em at a certain time. You can wait a few years and let the money grow a little more. So you want money. To grow. to as big an amount as possible in the far future. And so

The Two percent rule. For the endowment fund. I think was a Pretty good rule.

Sure. Spending. Because all the simulations showed that it were growth To a very large amount. Over a period of time.

So That's long term thinking. Uh intermediate term. I think of that as maybe uh Five to Fifteen or twenty years.

Yeah. There something like the four percent rule that I describe might be good. And for short term. It's just a matter of what your needs are and what you're going to have to uh come up with.

Yeah. People are in various uh ranges of wealth. There's what you might call poor work. You don't have very much to save or put aside. And be hard to retire and hard to make it.

Then there m may be middle class people. Who can put a moderate amount away? I know somebody, for example. She saved about it. A million and a half. And she is uh in her mid fifties.

I think she'll be fine. So I've explained to her. Pile it all inequities and let it rip. She gets scared every so often when there's a downturn and she calls me and I tell her uh All fast.

And then it goes back up. She's I'm really glad I held fast. A lot of people are what I call scared rabbits. Yeah. Well marks goes up.

They get confident, they start buying. And then it drops and they get really scared at the bottom and they sell out. Then it goes back up and they buy again. And it drops and they get really scared at the bottom and they go back out again. So they seem to have the worst of it.

All the time. Yeah. Doesn't feel good to go through life as a scared rabbit. It certainly certainly hurts your financial standing. That's where thinking for yourself comes in.

You you won't hold fast to something unless you understand it yourself. There's an old saying, give a person a fish and they eat for a day. Teach a person to fish and they eat for a lifetime. And that's a simple thing for thinking. If you give somebody advice

About a problem. They might solve that one problem. If you teach them how to think about problems. They can solve problems for the rest of their life. And so that's the way to go. And also if you give them advice and they don't know understand what the advice is or how to think about it.

There's a good chance they won't take their advice. I'll give you an example. Back in nineteen ninety one. I was invited to review the portfolio. Oh.

McKinsey and Company. Back in New York. And so they had a profit sharing and a uh Pension plan.

And I came and I Look. At all the things they had things. The headwork. But there was one very strange

Investment, yeah. It printed out. One or two percent a month. Every month. They've been doing it for years. Yeah, a record going back. Into the late sixties, supposedly.

Um I said, w how do they do this? Um They said well uh We don't know exactly. They tell us that they won't explain what their method is.

But we can show you our accounts. So I looked at their accounts. Yeah. I saw that. This account.

Walt stock. Damn it. What? Option positions aren't called collars. Yeah.

Had a put option a little below the stock price and they bought a call option a little bit above. And the The uh two things pay for themselves or self financing. So they didn't have apparently a whole lot of risk. But I could show that.

in a down market they would lose You know, down months. And enough months they would win. But they won every month. And the reason they won every month. Was because a mysterious trade was put on.

Involving. S P index options. And it was always in the right direction. So if they were gonna lose It would be a winner.

If they're gonna win, it will be a loser. So I said this is not possible. I said I want to go over and look at this place. So they called the person in charge, who happened to be at that time Peter Madoff. The brother of Bernie mado. Bernie was off in Europe raising money. This is nineteen ninety one, mind you.

So when Peter Mayoff heard I was coming, he said, No, I won't let him in the front door. So I held my nose and I said I want to take a better look at all this. So I looked at all the trades. And I saw that. Half the trades never happened when I researched them.

That is there was No trades occurred on any exchange. As the prices they were making them at for these options. Another quarter of the trades.

Had So much volume. Yeah. The volume couldn't have happened because there wasn't that much volume on the exchanges where they traded. The last quarter of the trades there were

Which consisted of forty. There were one hundred and sixty to start with. The last quarter of the trades Yeah. Happen anywhere. There was no explanation. So I said okay.

Let's Look at some of the trays. That actually could have happened. So I want to uh a vice president of Bear Surns.

Rest in peace. And Said, you know. We do a lot of business together. I'd like to ask you a special favor, which you might or might not be able to grant.

I'm gonna give you ten options, trades. I'd like to know Who was on the other side? Of these trades. In particular was

Made off from company. On the other side of any of them. So they researched the trades and they came back and said, No, can't find any trace of any mate off in company. So I said to McKinsey. This is a fraud.

And they said, But we're making twenty percent a year. I said, Well you're making sixteen percent of your currently in your other investments. If I'm right. This twenty percent's not real and the roof's gonna fall in some day. And

You might lose your jobs. On the other hand If I am right. And you move. You've saved this problem.

If I'm wrong and you move, you're only going from twenty percent to sixteen percent. So you know it makes a lot of sense. To just Exit. So they exited in two months.

And We inquired. Of everybody we knew. I through my network, they through their network. To find out. Who had investments we've made off?

And how much they had. No, we could only cover a small part of the territory because our network was not comprehensive. And It turned out that About

Half a billion. We're able to identify. No. That meant that there was a lot more than half a billion out there. How much more we couldn't say. But

Things were looking very bad. On the other thing, how could you challenge Badoff? He was a pillar. V National. Association of securities.

Thank you. Past president, he'd been on on committees there. He was the biggest Third market that is not the exchange maker in the country. So A respected person.

And uh well known to everybody. And he has thousands of investors, as it turned out. Yeah. Because he had so many investors. Everybody knew it had to be right because Surely those people have checked it all out.

No. No. Finale of the story is Yeah. When I was doing this, the person who invited me

Who was uh Hedgehog manager Himself. Who invited me to do this for McKinsey. He had been an advisor to them. This person.

Believed and made off. It continued to go out. And raise money for him. And In two thousand and eight.

When the news came out that Made off was fraud. My son called me up and said, You know, Dad? The stuff you've been telling me about for seventeen years it finally happened. It blew up.

So anyhow this fellow who would been running. A fund of funds. And include madoff in that fund of funds. They were uh that's a special type of hedge fund. Then invest in other hedge funds.

He had been doing this and had a very big fund of funds. He was raising money for Madoff. The same week. Yeah. The bad news came out.

And he had his own Personal money. And his family's money. Um Trust for money.

With mid off. But I had explained everything to him in great detail. I knew him quite well. At the time back in nineteen ninety one. Yeah. McKenzie and County.

had this analysis explained to them and decided to pull out. So the whole point of this is Here's the person. Mm. Had all the information.

It was explained very clear. And he just Didn't believe it. And he himself was in the investment business and was very successful. But

He was reporter. In times passed. Um His family made a lot of money In the thirties he was

Came from a rich family in Chicago. And the way he Figure things out was he would pull people. And he would ask? People.

What they thought about something. It would be like I asked you what's the uh Best diet pill I can take. You'd probably say there aren't any good ones and I'd probably agree with you. Right. He'd ask a hundred people. Amen.

They would in fact be a pole. And he'd go by the poor. So Just imagine that you Yes.

Ten thousand people. Whether They thought You could travel faster than light. Um

All but one said. Yep, you can do it. I saw it on TV. And Only one guy said no, you can't do it, Albert Einstein.

So A guy like him, but overwhelmingly reject Einstein and believe the the ten thousand Average people who just Said yeah, you could do it.

Because The poll was Nine thousand nine hundred and ninety nine to one. On one side. So

He doesn't think for himself. He lets the crowd think for him. And I think is A fundamental mistake.

Yeah. Many people make. They let the crowd do their thinking. They don't figure it out for themselves. Let's talk about toolkits. And Bring in.

We don't have to focus on him necessarily, but we've since Warren Buffett came up earlier You have then his partner Charlie Munger, who is well known for Mental models. And I think Buffett describes him as having the best sixty second mind he's ever met. Something like that. What

Mental models. Do you find helpful? Yeah. Would you teach in that class that I mentioned earlier.

And you can really approach it in any way that you think is is sensible. But how should people Think about mental shortcuts or mental models and are there any that come to mind that you think are particularly valuable? I'll tell you about a few. Then I'll tell you where to get more.

Perfect. Let's take A notion that economists Call by They're

Priestly name. Externalities. Have you heard of that term? I have. I have heard the term. Okay.

Good. Most people have not, as it turns out, so you're you're way ahead already. Well extra now. We'll see where we go. Correctionality. Simplistically is A consequence that

Of somebody's action. That's generally not intended. And it's usually bad. But it's sometimes good. I'll give you examples of each of varying sizes.

Here's a bad one that happened to me, uh Actually last week. I go out to get my car and I find out that The tire's flat. I look.

And I see a sheet metal screw. In the sidewall. Which means Yeah. This tire's gonna have to be replaced.

So I I end up taking care of the problem. Where did the problem come from? Most likely, I think. Down the road from me, there's been a lot of construction going on. I've noticed as I go for walks.

Yeah. Pieces of metal. Are often lying in the road. Sheet metal screws. Nails

Other Things that aren't good for tires. I think I'm up. When I happen to walk by. But

I don't get'em all. And The workers are carelessly. Depositing more. Not very many. But it only takes one to give me a flat.

So This is An unintended Bad consequence. Of the work going on there.

Who benefits? Well the homeowner does because he doesn't have to police his guys to clean up. Carefully and sweep the streets afterwards. He doesn't have to spend another five dollars A day. Um

Sweeping labor. To make sure that none of these things are there. But it cost me Five hundred dollars for a new tires. Unfortunately it's a Tesla playout. With a ten and a half inch wide Michelin tire, so the tires are not cheap.

So th this is an unintended bad consequence for me. That saves a very small amount. Yeah. The guy who's doing the construction.

Few draws down. Let's take a little bigger one. When I was a Chemistry. student back at age fourteen in nineteen

Forty. Six. Teaching myself. I mean the It wasn't. Wasn't a decent chemistry class around. I came across a fellow named Svante.

Aurenius. The great Swedish physical chemist from the latter part of The nineteenth century. He At that time.

And I learned it then. This study. Uh How? Gases.

In the atmosphere trap heat. And he explained how much the heat trapping power was of various gases, including Carbon dioxide. He explained very clearly. How much.

Carbon dioxide. would contribute to global warming as it increased. So this was known way back then. Well, I knew it as a fourteen year old. And the mechanism is obvious.

You can sit Behind a uh Plate glass window. When the sun is shining. And feel

Everything heat up around you, the greenhouse effect. So it's simple, it's obvious, it's got plenty of science behind it. What do people do now? Well They create

A negative externality by polluting. People drive around in cars and dump CO two into the atmosphere. And each individual Is convenienced by being able to drive around in his car.

But he Contributes. To a global problem. A problem that won't come back. Perhaps to haunt him.

If he doesn't live long enough. More. Maybe gradual so gradual that he doesn't notice it. But Everybody together is busy.

Contributing this major externality. Of the world. Which leads to a second. Little mental model. It's called the tragedy of the commons.

That's uh Pretty famous thing by a guy named Garrett Harton. Um The simple example is you've got a village With a little green in the middle.

And it's got a lot of grass growing. Um Only a few people live in the village. So one guy has sheep and he lets his sheep Grays on the green and there's plenty of grass, so that's not a problem.

A few more people move in. They get some sheep. They turn them loose on the green. Pretty soon. There are too many sheep for the green. It's all eaten up.

So Each person acts in his own self interest. But Collectively. What they do is against the common good.

So that's another little mental model or idea. Things that are out there that are very uh valuable. For thinking purposes. One collection is um there's a fifty item collection that came out

Under INC period on the internet from Elon Musk. That's quite good. There's also Charlie Munger's

Book. Poor Charlie Zominac. Yeah, which has a lot of these things embedded in it. One of my favorites. Yeah.

It has a strange name. Oh. Fundamental attribution error. Yeah. I didn't like it anyway. I said, Charlie, why are you calling this fundamental attribution error?

Well Charlie actually just Picked it up. From Sociology and and psychology. That's what they call it.

Yeah. I thought it's a terrible name. You should call it something else, but as I thought about it some more, I decided actually not a bad name after all. Roughly speaking. What it does. Is

It's a human tendency. Two Make assumptions. That are not Fully justify by the evidence, for instance.

You go to lunch. Yeah. The person you invited doesn't show up. So you begin to Speculate. Well

Maybe he just forgot. He's a forgetful guy. Or uh Maybe Since we had a little quarrel. Two weeks ago, maybe that was it.

Maybe he's just mad and he's gonna show me. Or something of that sort. You start making up stuff to try to explain it. But you don't have the evidence for it. It turns out. Yeah. He had a car accident on the way.

He's busy dealing with all the fall off in a car accident. And two hours later you Find out what actually happened and It's too bad. He apologizes profusely. But

You didn't have any idea what actually happened. You just started making stuff up. That is something that we humans do over and over and we're wired for it. It's evolutionary. It ties into a famous book. Thinking fast and slow. Daniel Kahneman. Yes, exactly.

Um So he has an example there of You're in the forest? And You hear a roar.

You don't stop to find out where the roar's coming from. You run up the nearest street. Because it might be a lion. In fact it might be something entirely different. But you don't take any chances. You you react. And if it's not a line.

You've made fundamental attribution error. You attributed to being a lion when it wasn't. But it saved your life. Often. When it wasn't uh an attribution error.

That ties in with something else, which is learning how to think. If you Think fast. Kind of emotionally from the gut. responding without really reflecting. You will make a lot of mistakes.

Sometimes though, it's a way of saving your life. For example, somebody else fire. You're at you're at the door of the theater. You run out the door. Medium. Before you find out whether there is a fire.

Th or may not have been. But running out the door. Before the time to reflect, in which case it might be too late. Is a good thing to do. I hold it all open for everybody else too as I run out.

Just wanna mention a few things on the externalities piece. And thinking about the say unintended secondary or tertiary effects on the collective there can also be Positive.

Externalities. Or externally benefit like if you were to buy fire insurance for your house, your neighbor might be a little bit safer. Right. So it can it can go both ways. That's a good example. Was a real life experience for me right here.

We had a fire. Wildfire. Couple of months ago, and we all had to evacuate. And uh I have chub.

And they have Wildfire insurance. And so I have that. And so Chubb actually had a water truck out here, which protected not only me, but lots of other people in the neighborhood. Uh.

So is the next step after identifying these externalities, for instance, in the case of the construction site, thinking about How to Somehow create and enforce Incentives. Such that

Someone is acting. to the benefit of the collective. For instance, the construction site where someone's not spending five dollars but it costs individuals. Who are affected five hundred dollars to replace. A given tire

I'm sure there are a million different examples of this. Does that then lead to a study of incentives? Yes, that's a good point. The If somebody creates an externality. That's negative.

A good thing to do. Is to tax it. What we've learned is if you tax something you get less of it. So Yeah.

Let's take carbon, for example. If you tax carbon. You get less of it in the air. So a carbon tax. Is the rational logical solution.

So the whole Pollution problem. All you have to do is make the tax big enough. People find other ways to do things than uh pollute with carbon. However.

That leads to another. Thought principle. Which is The to social problems.

A rational solution is one that Is generally good for almost everybody. As opposed to a select few. You can have rational solutions to social problems. But you often can't. Get them implemented.

So You also have to think about What can you actually accomplish politically? And there's a great book about that. There's a professor at Yale.

The strolling professor of political science. I listen to podcasts. Yours included when I go for my walks. Yeah.

His course was one of the ones I listened to was absolutely great. It talks about how to actually Get something done politically. Yeah. We've seen For example, the Biden administration has had great difficulty

Getting very much of what it wants to do passed. And they could learn a lot. From this professor who has a lot of good things to tell them. He has a book called Uh The wolf at the door.

Which. It's fairly recent. Which Basically explains the things that I learned in his uh political science course. So A few months ago. And

It tells you how to form coalitions. That can win. And how to pass things that will stay in place. For example, social security stayed in place. Because

It had. A strong constituency that are created right away. In that constituency. was going to defend it forever after. And it's

Politically. Even though Some politicians. Yeah. occasion political parties have tried to destroy it. They have not been successful because the consistency is so embedded and so strong now.

So anyhow, he has A clear of how you can actually get things done. And he believes I think that You can make incremental progress. Discouraging as though it seems these days.

By doing The right way. of putting uh coalitions together. Yeah. Defending against blocking coalitions.

So it it's a very insightful course anybody who wants to get something done evolutionarily. I would recommend uh reading his book. And I might say. We're in a crisis of uh democracy now, in my opinion. And simplistically we have three paths. There's devolution.

Which I think. Or undergoing now. There's evolution. Which I hope. Is the way things

work out in which we fix things and things get better. And then there's revolution. Which is extremely ugly and unpleasant. And one of your uh A previous interviewees, Ray Dalio.

as a book. That I would I think it's very well worth reading, even though it's a tough slog. And uh maybe I Uh change the writing a bit.

But You know, it's It's a real contribution to thinking about the crisis that we're going through now. And it talks about the

Changing world order. I think that's the name of the book. Yeah. The rise of China as an empire.

And the decline of the United States as an empire. And I think that uh We have some serious thinking to do. We can't just sit back on our laurels and say we've been so great. We've been uh the world superpower. And hope that it's going to last. We have to do things differently.

I'd recommend that. I also would second that recommendation. Francis Fukiyama has also some fantastic writing. That is worth exploring. And I I have that Dalio book within fifteen feet of me here where I sit right now. And speaking as someone who in China myself, uh at a pretty pretty fascinating time to be there. I was around uh

In Beijing at two universities in nineteen ninety six. And have tracked things pretty closely since. that it's definitely worthwhile to read up also on the history of China because that is going to and is coming to bear as we speak on the entire sort of three dimensional chess of uh geopolitics, which is uh ex fascinating and also at times terrifying, certainly. Let me ask you if I may

What other investors aside from Warren Buffett Impress you. And they could be People who are no longer actively investing. They could be current. But are there any other investors who come to mind who have particularly impressed you outside of

Buffett and the reason I ask for people who are wondering is related to what you said earlier, that by studying investing, by participating in investing, you get to stress test and look at how other people stress test. thinking and cognitive biases and so on. Is there any anyone who comes to mind for you outside of outside of Buffett? There are people in the hedge fund world who have done remarkable jobs at various times.

But they're not. Accessible. To most people, for example, let's take uh Jim Simons of Renaissance. Renaissance partners is basically yeah. Uh private operation at this point.

But it's been extraordinarily successful. Uses PCs and computers. And math. And code breaking and so forth and It has.

From around nineteen Eighty nine or ninety on. Been spectacular in its performance. Probably the best. Risk adjusted record.

In the world. From that time forward. And for people who want to read more about Jim Simons, there's a book called The Man Who Solved the Market. Which is a good read. Uh, although you're y you're probably not gonna be able to, as you mentioned it

emulate the sort of quant approach that that he is taking for a million and one reasons, but Absolutely fascinating story. Any other names do come to mind? I'm trying to think of who I would Give money to to invest.

I don't have anybody now that I'd get money to to invest. There are a few good hedge funds around. But They take too much. For the general partner.

And be too little for the limited partner. And they also Generate Income that is Highly taxed.

If you're a taxable investor. So They're only good for non profits at this point. Tax exempt investors. What about past investors say

In decades past who you would have given. Money too, willingly. Does does anyone come to mind? Well, I I did give money to Ken Griffin's Citadel for From the time it started, I think. I was investor number one.

After Frank Meyer who was the uh Other general partner with Ken Griffin? Frank Meyer was a longtime friend of mine from the past. So that's how I learned about it. Actually have Dim Gerson out to the house and When he was about eighteen or nineteen and uh just starting up with Frank and talk to him about how

My headphone, Princeton Newport, worked. And we discuss it some length. The idea of profit centers and subsidiary businesses. And I handed him uh boxes of Prospectuses that were hard to get on all kinds of convertible securities. Uh these things would come out when the securities were issued.

Then they would no longer be findable anywhere. They were just like rare books. So I handed him my whole collection of cartons of these things. So I had a very good ride with them and I finally uh Exited. Recently because

The Taxes take too big a bite. out of the returns that I get. It's just simpler to invest in an index fund might end up better off than if I were to remain in a citadel. Also it's complicated.

Papers, I had four feet of paperwork. When I finally uh boxed it all up at the end. Ha ha That is a lot of paperwork. Introduction, but what was it at the time about

Ken Griffin and Citadel that made it pass muster for you. Well then we're gonna follow the exact plan that I was following when I shut down Prince Newport, so that was good. And I knew Frank. And he was smart and capable.

And uh can seem very smart and capable and energetic. So They were doing what I would be doing if I had I stayed in business. Ha ha. So let's let's talk about staying in business. Because I had a question that I wanted to make sure I touched upon.

And there are a million others that I would love to talk about, but could you please speak to having enough. You've spoken about, or at least written about, how your hedge fund could have taken over your life. And you could have just ended up as a

Capital accumulator. That's just full time full time uh job plus How did you make the decision? to wind it down. And how do you think about having enough? Because it doesn't strike me as

Something I come across. often with people who are really good at investing. The way I got into the investment world, I was an academic And I was curious and I found things interesting. I wasn't really in there.

To get rich. I was in there To deal with interesting math problems that kept coming up. Black track. Well, that was a math slash physics problem. Investing was uh

For me, lots and lots of math. So I enjoyed that. I just do things I like. Yeah.

I don't worry about money. As my uh former sister in law once said. Do what you love and the money will follow. She wrote a book with that title. And uh

I said, you know that's That's right. Yeah. Do what you love and the money may follow. And if it does, that's fine. If it doesn't, you're still doing what you love. Um

What's important in life, I think. Is the journey. And The people You know and you spend your time with.

And How you spend your time otherwise also. That's how I looked at things. Yeah. I started out.

As a child of the great depression. I knew what it was like to have There's no money. I used to sleep. Four or five hours a night in high school.

And get up at two or three in the morning and deliver newspapers. And I made twenty five dollars a month, which seemed like really big money. Right. Save part of that for college. And Invest it part of it in

Science equipment. Chemistry, telescopes, electronics, and so forth. Just because I like Playing with those things and learning about them. My goal wasn't to make money, it was to have A good life and enjoy myself and have fun.

Yeah. It just so happened that it turned out a lot of money too. What I found though in the investment world is Lots of people go in it for the money. And when they do.

They keep going and going and going. And It's a validation. of them. They can't stop. They end up with

Oh. Five or ten Villas. A yacht? A jet?

Yeah. Let's imagine you have five houses, just to take an example. How much of your time are you gonna spend on each house? It can't be. On average more than a fifth.

But my mass. Um You're not gonna be in Your house the whole time anyhow, you can do vacationing, travelling, meeting, and so on. So maybe it's a sixth or seventh. Of the time on average.

Now some houses are gonna you're gonna spend more time in it, some less. So you may spend a tenth or fifteenth of your time. Or none of your time almost in one of those houses. So you end up with a whole lot of stuff. To manage and take care of. Yeah.

You end up hiring people to do that? So you don't have to do it? And then you have to manage those people. And then you have to hire people to manage the people who manage the people and so on. It's like running your business. It's terrible.

Yeah. You you don't get to enjoy the important part of your life, which is time. Did you

Which point you knew you were going to exit. the business, so to speak, or was there a particular day That prompted a particular experience that prompted you to say enough is enough. I want out. Do you remember what the catalyst was if there was one? I

Wasn't having fun anymore. It was turning into work. And I said, Well I don't need to do this. I have enough wealth.

I'm never gonna spend it all. Why? Keep. Doing this. So

I decided to wind it down. It was fun. For a long time because there were challenges and problems. It was uh Challenging. True.

Trying to figure out new things. And to deal with all the issues came up. But when it became uh bureaucratic and paperwork And a grind where I had to do things I didn't want to do. That was enough. It was time time to go.

It was the same thing in academia. I loved academia. But There were aspects to it that became burdensome. Committee meetings. And those reviews.

Grant proposals. What I liked was research. And teaching. And The people.

That I met there. The students and the faculty that were Smart. And uh challenging. And if it was only that.

I'd still be there. But it wasn't only that. And I found other things that uh were e equally or more fulfilling. So anyhow, I just migrate to where where I want to be. I don't have a set uh

Thing that I have to keep doing. So let's explore that a little bit further. Nasim Talib. How many people will know. Because of books like Fooled by Randomness, The Black Swan, Anti Fragile, wrote the forward to your memoir, and in that he writes about your restraint not getting caught up in of the

Yeah. The golden fetters of large structures, multiple offices, morning meetings, et cetera. And he highlights the value or the fact that you value independence. So what does independence mean to you? And How did you spend your time after winding down?

The investment. Side of things. I spent my time. Reading? Travelling.

Exercising. Enjoying my family and my friends. And uh learning. Things that I could learn. And then it's also entertaining too. Casually manage my investments.

I might just interject here that One of the things that makes you independent. Is to accumulate capital. Because of the capital. Can grow on its own.

If it's uh Simply invest it as I described before. For example an index fund. And once you have capital. Then You have the chance of independence.

If you have enough capital. It will support you indefinitely. When you've achieved that goal, there's no point. And spending time doing anything you don't like doing if you can help it. You know, I have to do some things you don't like, like gather all your tax information together every year.

Or uh Go in for routine medical appointments. Is there anything that you are particularly interested in learning more about now or in the process of learning about or looking forward to learning about? What I've focused on for the last

A year or so. Is reading about What's going on? In American society. What may happen.

I don't think we can project For sure was going to happen, but we can Map out scenarios. We can map out possibilities. We won't get them all. But we can map out quite a few of them. And ask ourselves.

What will we do with Scenario A, Scenario B, Scenario C materializes. Yeah. Have some sort of preparation and readiness for that. Yeah.

I won't. Go into a list of extreme scenarios, except maybe a few. You could have An autocratic. Country.

Where A minority. Pretty much rules everything. And dictates everybody else. You could have

Turbulent country work. large part of the country, maybe a majority, is badly upset. And just wants to bust everything up. And start over somehow. So

You could have the choice as I described, a devolution, evolution, or revolution. I don't know how it's gonna play out. But It's worth thinking about. What might happen.

And whether there's anything Any of us can do about it. Yeah. I don't think there's much. an individual can do on a grand scale.

Unless he happens to be in a position of great importance. Or manages to get himself in a position of great importance. But I think there's a lot that an individual can do on a small scale. And I think the best thing we can do is teach everybody to think for themselves. So they don't just take

What they're told. In the press, for example. Or in the other forms of the media. Internet. Twitter. So on they don't just take that and stop it up.

And Boldiva? But they Question it. And they ask. Whether in fact.

It might not be true. What the motives are of the people who are putting these things out and so forth. When you begin to think for yourself The whole world changes. And becomes much Clearer in my opinion.

And you can manage your life. A much better. Fundamental attribution error. Learning about things like that. Yeah.

Putting your own thinking. under examination. Ed, this has been so fun and I know that there are a million other things we could talk about and hopefully we'll have a chance to do a round two at some point. But I wanted to be respectful of your time and begin to bring this to a close. Is there anything else that you would like to Mention or call attention to any request of my audience that you would like to make

People can certainly find You online at Edward. O Thorpe.com and I'll link to that as well as your books and everything else that we've discussed in the show notes at Tim.blog slash podcast. Uh is there anything else that uh you would like to bring up before we And this round one. Conversation.

I'll tell you one story. You probably read my book. It's about Joseph Heller. And uh

Kurt Vomiga. Yes, please. Joseph Halloween wrote this. Famous book Cap twenty two. Unfortunately, I mean a movie.

Way back. Maybe fifty years ago, I'm not sure exactly when. But it was uh Very well known and famous at the time. And Kurt Family got.

Is well known too for a variety of books. Yeah. Joseph Fellow died. I'm not sure when maybe uh Early two thousands.

And Kurt Fonlight was writing in The New Yorker about him and he said Joseph. Heller and I were at A henge fund Moguls. House.

I'm not sure if it's has from Mogul, but Somebody very, very rich in New York. And I said to Joseph Heller. You know? You've made a lot of money out of uh Cash Twenty Two.

This guy makes as much money. In a day. Is you're ever gonna make. He's got And houses.

And yards. And jets. And Villas. And models falling off his arm, and so on. And Justin Halloween looked back and said, You know, I have something

He'll never have. Well he said, What's that? Hell or said. I have enough. And that's something that

People who emphasize chase money to the end. Don't figure out. That you can have enough. And it's better Than not having enough.

It's certainly better than never being stated. And Staying on That's sort of compulsive. track and I am so endlessly fascinated by by you, your story, your lessons learned.

And I really hope we have a chance to have Another conversation because I Have still so many Different notes.

and questions that I would I would love to tackle, but we'll we'll leave people wanting more and hopefully we'll we will make time to have that second conversation. But thank you so much for taking the time today, Ed. It's been uh it's been a real joy to spend this time with you. Well, I enjoyed it very much. It was a pleasure to meet you and Now I know. Yeah. Since I'm on your podcast, my wife will listen to me.

What One can hope. One can hope. One can hope. And uh to everybody listening, thank you for tuning in, as always. And until next time, try not to act like a scared rabbit and be just a little bit kinder than you think you need to be. And As always, thank you for tuning in. Hey guys, this is Tim again, just one more thing before you take off, and that is Five Bullet Friday. Would you enjoy getting a short email from me every Friday that provides a little fun before the weekend?

Between one and a half and two million people subscribe to my free newsletter, my super short newsletter called Five Bullet Friday. Easy to sign up, easy to cancel. It is basically a half page that I send out. every Friday to share the coolest things I've found or discovered or have started exploring over that week. It's kind of like my diary of cool things. It often includes articles I'm reading, books I'm reading. albums perhaps, gadgets, gizmos, all sorts of tech tricks and so on that get sent to me by my friends, including a lot of podcast guests, and these strange esoteric things end up in my field and then I test them and then I share them with you. So if that sounds fun, again, it's very short, a little tiny bite of goodness before you head off for the weekend, something to think about. If you'd like to try it out, just go to Tim.blog slash Friday. Type that into your browser, Tim.blog slash. Friday, drop in your email and you'll get the very next one.

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