Book Analysis: Ed Thorpe's "Beat the Market"

I have been studying for the CAIA Chartered Alternative Investment Analyst exam coming up. It is a bit like the CFA but is only 2 exams and focuses on alternative investments. It may be geeky to admit but it is fun stuff. I used to build trading models as a kid and play with neural networks and t-bond futures in college back in 1990. 

One of the areas that is new for me is convertible bond arbitrage which is a great way to get back into math a bit. The strategies and approaches are familiar as I used to be a runner in the 10 year t-note options pit at the CBOT. 

A while back I reviewed Fortune's Formula which was all about gamblers, gangsters and information theory. It also had great stuff on portfolio allocation and risk, which is a subject much like taxation that few investors think about at their peril.

Successfully growing wealth via compounding returns needs tax deferment and minimal impacts from Siegel's Paradox (the fact that money lost beyond 13% has to work harder to break even). Risk management and portfolio allocation is sorely disrespected in the field of investing for the long term. A simple understanding of portfolio auto-correlations and re-balancing approaches can add 100s of basis points to a portfolio at the fund or even asset class level every year. Of course this means thinking about 10-20 year horizons.

One of the gurus of convertible arbitrage was and is Ed Thorpe, who runs a multi-billion dollar fund in New Port Beach, California. He still publishes and is revered byNassim Taleb and the Wilmott quantitative finance crowd for his pioneering work.

He published a book in 1965 called Beat the Market that is now out of print. I found a copy via my grandmother in Iowa of all places and had it scanned. You won't learn anything new in there, but it is interesting to see a pioneering piece of work and the historical bits such as:

• Spreads of 30-40% on warrants
• A capital gains rate of 25% considered long term after holding a position for 6 months
• Today we call them investment "ideas", back then they were "situations"
• and this view of the future: "We are misguided when we exalt ourselves by insisting that the psychology of the marketplace and of man are unknowable. The sciences of man are now emerging from the Dark Ages.  Economics and psychology stand today at Koestler's watershed just as astronomy did in the time of Tycho Brahe. Our superstition, blind belief, and ignorance are being swept away forever by the scientific accumulation and analysis of data. There will be predictability in the affairs of men."

Funny how the technology always gets better but the folly and fickleness of men never changes. Glad a I took anthropology study psychology and sociology in my spare time. That scientific prediction of man is a little over the horizon.

If anybody is interested in a PDF of Thorpe's book Beat the Market for educational purposes, drop me a line.

Comments

[Nick Gogerty:]

Apologies to all an sundry. I overstepped my bounds. I don't agree with the current US copyright laws, sometimes referred to as the Mickey Mouse law due to its perpetual extension via Disney Lobbying, but I must abide by those laws. I must therefore rescind my offer of distributing free copies of the book. If someone can persuade the Copyright owners, I will relinquish the book. US copyright laws typically stop at the border and many countries may have looser regulations on a 40 year old book. Again my apologies.

Nick Gogerty

2008 Sep 02 09:11 PM

[tomfitz:]

Cal Irvine must not be worried about copyrights: www.economics.uci.edu/...

Mar 03 03:34 PM