of withholding judgment until I could make a decision
based on evidence.”
This is great advice to those cultivating an independent
mind and I’ll be incorporating it into my annual letter
to my son this year.
Another key insight originally came from the casino
tables but extended to his investment activities: “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.”
Emotion is not often discussed in the investment
literature. But Thorp acknowledges it and I think
more of us should. Imagine two beginner investors,
both earning $50,000 a year. One has just managed to
scrape together $5000, at the same time the other has
inherited $120,000. On paper, the process of investing
these amounts might be the same but the emotional
stakes and pressure are far higher in the second case.
That could lead to bad outcomes – for instance, a higher
possibility of panic selling if a stock were to fall in the
short term.
I’ll explore some of the investment themes Thorp
raises more deeply in next month’s column. But I’d like
to conclude here with a few thoughts on self-education.SEEKING KNOWLEDGE
The fact that you’re reading Money means you have an
appetite for increasing your knowledge. Perhaps your
interest is casual, or maybe you’re in a more intense phase
of learning. It’s a wonderful feeling to dive into a subject
that you’re fascinated with. And Thorp’s description
reminded me of that joy: “Relishing the intellectual
challenge and the fun of exploring the markets, I spent
the summer of 1964 educating myself about them ...
I read stockmarket classics ... 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 sea water,
I came away with a foundation of knowledge.”
I love this description. While the Buffett biography
set me on the right path, the answers to the many
questions I had lay elsewhere. I devoured everything
from accounting textbooks to tomes on behavioural
psychology and stories about both great and failed
businesses and investors.
A s no si ng le book conta i n s a l l of t he a n swers, i ngesti ng
as much as you can is crucial. And if you’re educating
yourself about the sharemarket, I reckon purchasing
these two books will be among the best investments
you ever make. MGreg Hoffman is an independent financial educator,
commentator and investor. He is also non-executive
chairman of Forager Funds Management.When Buffett closed down his original investing
partnerships in the late 1960s, one of his clients asked
him to check out Thorp as an alternative. The client
ended up transferring their money to Thorp’s fund, so
Thorp assumes that he received Buffett’s approval. He
went on to produce a 19.1% average annual return over
the next two decades, with very little risk.
TIME TO CHANGE COURSE?
I’m not about to throw in the value investing towel and
become a “quantitative trader” (as those who practise
Thorp-like strategies are known). For one, I don’t have
the mathematical aptitude for it. And I have an approach
with which I’m comfortable and that continues to be
effective for me. But I have taken away bucketloads of
insight and inspiration from Thorp’s story. Here are
some of my favourite quotes.
In describing key pillars of his thinking, “First, rather
than subscribing to widely accepted views – such as you
can’t beat the casinos – I checked for myself. Second,
since I tested theories by inventing new experiments,
I formed the habit of taking the result of pure thought
- such as a formula for valuing warrants – and using
it profitably. Third, when I set a worthwhile goal for
myself, I made a realistic plan and persisted until I
succeeded. Fourth, I strove to be consistently rational,
not just in a specialised area of science, but in dealing
with all aspects of the world. I also learned the value
“Rather
than
subscribing
to widely
accepted
views ...
I checked
for myself”