By Jerry Wagner
Reading Edward Thorp's 1967 book "Beat the Market" in the summer of 1968 changed my life. I had picked the book up as a summer read while home from college. I was intrigued. Years before, I had read a Life magazine account of how Professor Thorp had created the system to beat the dealer at the game of blackjack, or twenty-one.
The method outlined by Thorp in "Beat the Market" used arbitrage (simultaneously buying one asset while selling short another to realize the difference) with stock warrants (rights often issued with stock to make it more attractive to investors by giving the opportunity to gain more shares at a later time at a fixed price).
It turned out that these warrants were often overpriced, and if one sold them short while buying the underlying stock, you could create a "can't lose" trade that made money whether stocks advanced or declined. Included in the index was a valuation formula that allowed you to calculate what the warrant should actually be selling for at current market conditions.
Since I had just completed my first computer programming course, this was a perfect vehicle to practice my newly acquired skill. Merging computer analytics and the stock market just seemed like a natural fit to me. The rest, so they say, is history. So far, I have spent almost 50 years of my life working on the task.
Of course, the original allure was beating the market. Like in gambling, where the conventional wisdom had been no one could beat the casinos, the accepted academic dogma at that time - and for most of the time since - had been that stock price fluctuations were random, and once you adjusted returns for risk, you could not expect to outperform.
Professor Thorp, for most
