Book Review – A Man for All Markets, By Ed Thorp

By Jesse Koltes,

When I was eight years old, my dad caught me trying to cheat at blackjack.

“People get shot for doing that,” he said. If I wanted to win, he told me I needed to count cards. My dad became calm as he methodically explained a simplified counting method involving the five card.

Even as a boy, I sensed his fascination, and caught an early glimpse of my dad’s gambling streak. I wanted to connect with him about whatever this was.

Seeing that I wasn’t quite following, and still reeling from the casual death threat, my dad handed me a dog-eared copy of Ed Thorp’s book Beat the Dealer, and said that that was how he had learned.

Twenty years later, Ed Thorp’s autobiography, A Man for All Markets, was the only book Charlie Munger recommended at the 2017 meeting of the Daily Journal Corporation. That recommendation was my most important takeaway from the 4-hour affair. *

While Mr. Munger’s own comments from the meeting are worth reading, I’d suggest reading Thorp’s book first. In many ways, Thorp is a second Charlie in terms of both intellectual power and scope, which is perhaps the highest praise I could offer another person. Thorp’s book is chock- full of knotty lessons for investors, thinkers, and business people, but because Thorp is far less well covered than Munger, many of these ideas felt new and let me see them with fresh perspective.

My biggest takeaways are below.

Extreme Knowledge and Circles of Competence

“We often find that winning systems go almost ridiculously far in maximizing or minimizing one or a few variables” – Charlie Munger


“I’m no genius. I’m smart in spots—but I stay around those spots.”

— Tom Watson Sr., Founder of IBM

 One of my favorite ideas from Charlie is that the secret to winning systems is the maximization or minimization of one or two key variables. Think of the minimalism at Costco, fee reductions at Vanguard, or portfolio concentration in the Kelley formula: In order to have better than average results, you need to have different than average behavior.

But one of my other favorite ideas from Munger is that investors should stay within their circle of competence, and only bet big when they have a high conviction understanding. As Buffett has said, he greatly prefers stepping over one foot hurdles to heaving himself over ten foot hurdles.

Both of these ideas are fantastic advice, but Thorp’s book made me realize that when you combine them there is a tension.  In knowledge work fields (like investing), the variable you want to maximize is actionable understanding. You have to constantly improve your probabilistic understanding of how events will unfold in the future, while at the same time constraining your faith in your own abilities to understand the things you’ve learned about. You are forced to push and pull in opposite directions—to an extreme degree—at the same time.

Ed Thorp is an excellent and understudied example of how to thread this needle between growth and humility. When Thorp began to study the stock market, he was surprised and encouraged to discover “how little was known by so many.” He quickly recognized that the stock market was full of the same ignorance and lazy analysis that had pervaded the gambling world.  Where others saw an unbeatable game of chance, Thorp saw a system of probabilities and payoffs masked by a veil of psychology and whim. If he could maximize his understanding of the system, perhaps he could beat the market, just as he had beaten Vegas.

His ambitious endeavor paid off. By applying the tools of physics, computer science and math to finance, Thorp created the world’s first “quant shop,” and a trading system that functioned profitably for decades with few drawdowns.

What I find incredible about Thorp’s example is not only that maximized his understanding and beat the market, but that he avoided the quackery and hubris that can so often bedevil people who have ventured so far from the average.

To make this point clear, consider how Thorp’s example compares with inventors of the Black-Scholes model. Thorp, and later Fischer Black, Myron Scholes and Robert Merton, stretched their understanding of the world to the extreme, and were able to deduce a theoretical model for pricing derivatives. Thorp took his discovering and traded it profitably for years. Merton and Scholes won the 1997 Noble price for the same discovery, but were unable to control themselves and use it safely within their circles of competence. Their hedge fund, Long Term Capital Management, blew up in 1998 and had to be bailed out by a government led consortium.

Thorp’s example is like an anti-Icarus, skilled enough to balance hubris and humility, flying neither too low nor too high.

Nontransitive Odds

Although Munger’s observation that winning systems often maximize one or two variables, Thorp’s book points out an an important exception: non-transitive games.

In Thorp’s telling, Warren Buffett introduced him to the subject at a fateful meeting of the two greats. Buffett would offer a guest their pick from a set of three dice. The guest was asked to pick the “best” die, and Warren would pick the “second” best. Both players would roll the dice at the same time, and the highest number would win. The trick was that no matter which die the guest selected, Warren could always beat them by picking second.

“This puzzles people because they expect things to follow what mathematicians call the transitive rule: if A is better than B, and B is better than C, then A is better than C. For example, if you replace the phrase “better than” by any of the phrases longer than, heavier than, older than, more than, or larger than, then the rule is true. However, some relationships don’t follow this rule. For instance, is an acquaintance of, and is visible to, do not. The childhood game of Rock, Paper, Scissors, is a simple example of a nontransitive rule.”


A Man for All Markets, page 158.

 What’s remarkable about the non-transitive rule is that it bends the mind away from thinking that issues are always about straight-forward maximization or minimization. Sometimes, the edge doesn’t always go to the actor who boldly picks the apparently best option, but to the person who adapts to the first mover, and counters with something better.

Institutions and Resilience 

 For all the similarities between Munger, Buffett, and Thorp, it is notable that Berkshire stands as a colossal monument to the first pair’s intellectual achievements, while no such entity exists in Thorp’s wake. All three men possessed an enthusiasm for the power of compound interest, and enjoyed great returns and long careers. What explains the difference in institutional outcomes?

Part of the answer has to do with how Thorp and Buffett constructed their backup systems. In Berkshire’s conglomerate model, excellent businesses are acquired, but remain totally unintegrated. This requires that Berkshire forego the “synergies” and cost reductions that typical come with merger integrations.

But decentralization gives Berkshire a valuable firewall against negative contagions. When bad practices pop up at Wells Fargo, they can’t quickly spread to Kraft-Heinz or even to Omaha. Because no single pillar is central to Berkshire’s success, perhaps no longer even Buffett himself, the company has grown into one of the largest and most stable businesses in the world.

Compare that structure to Thorp’s now defunct Princeton-Newport Partners. Thorp arranged PNP such that the business was split into two geographically separate but equal offices. The East Coast office handled all the business administration and trading execution work that Thorp found tedious. Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies.

Critically, Thorp claims that both offices acted independently, with each exerting full control over their own hiring decisions and cultures. Thorp may have thought that this added a protective layer of redundancy to his business as he often thought deeply about worst case scenario planning in nearly all aspects of his business. Thorp even asked Goldman Sachs what would happen to PNP’s account if a nuclear bomb went off in New York harbor (Goldman allayed his concerns by having a backup system in Colorado).

Unfortunately for Thorp, his backup system overlooked how co-dependent the reputation of two separate offices, with two separate bosses and oversight systems could be. That was a fateful mistake.

When the top five officers at PNP’s East Coast office were charged with stock manipulation and other white collar crimes in the late 1980s, the system Thorp created did have the resilience to guarantee the firm’s survival.  The decentralization of the two offices had let one veer dangerously off track, but the interrelatedness of the two parts meant that neither could survive independently.

Though Thorp’s West Coast office was innocent in practice, it was fatally wounded by its relationship with the East Coast counterpart.  Seeing no way forward, Thorp was forced to wind down his partnership before it could achieve the scale we might have expected of it.

By Thorp’s telling, the opportunity cost of this closure was massive. His ideas went on to inspire the success of the next generation of great quantitative firms such as D.E. Shaw and Citadel, each now valued at many billions of dollars.

*My second best takeaway was taking the opportunity to ask Mr. Munger a brief question in person. Unfortunately, things did not go exactly as planned. I racked my brain for months searching for a line of attack that might shake loose a new, previously undisclosed nugget of wisdom. Unfortunately, Mr. Munger deflected my question before launching into a stump speech that while interesting, was well known.



2016’s Most Important Ideas

By Jesse Koltes

Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.


— Charlie Munger

I ordered 55 books for myself in 2016, and downloaded 18 audiobooks. I didn’t read every word in every book—not by a long shot. I read some books three times.

I approach a new book like a new dish at a restaurant. I’m curious and cautious at first, but if its delicious, I consume the whole thing with gusto. If the dish is bad after a few bites, it’s probably not going to get better, and I allow myself to skip around and look for good parts. I don’t understand the masochists who insist on finishing full plates of bad food.

In the spirit of Charlie’s quote, I thought I’d review the most important ideas I picked up from my reading and thinking this year. To generate the list, I asked myself which ideas spent the most time at the front of my mind, hoping that time roughly correlates with importance.

Some ideas are new, some are old, but hopefully there’s more here than the normal value investing fare. Enjoy!


2016 marked the first full calendar year that I worked for myself. I am my own boss, and my own employee (I am happy to report labor relations are very good).

Left to my own devices, I made inversion my project manager. For any given project, I ask myself what the stupidest way to go about something would be, and then proceed to chart the opposite path. I am embarrassed to admit how often I find myself slandering something I certainly would have done but for having taken the time to slander it first. It’s a wonderful mental trick.

The most common outcome of project management by inversion is that I assign myself a lot of reading. What could be dumber than failing to read the five best books on something of great importance to you? This usually only takes a week or two tops if I’m efficient, and I always end up enormously ahead of where I started. All it takes is a library card, some sitzfleisch, and enough chutzpah to believe you can learn.

Invert, always invert – Carl Jacobi 

I’m amazed how many people devote a career to something without having devoted a week to studying their craft. I also wonder how many expensive consulting projects could be avoided if a company assigned a smart person  to read five books and then summarize them first. Probably a lot.

Sales versus Marketing

I hated sales for most of my professional life. Even as a kid, I had the impression that sales were undignified, and somehow beneath me. I don’t like saying that, but I definitely believed it.

I didn’t become fully conscious of my own bias until I read Jim Koch’s book Quench Your Own Thirst. Koch is a recovering management consultant turned entrepreneur (like me), and reading his story was like looking in a mirror, albeit a far more successful one (Koch founded Samuel Adams).

Before I read Koch’s book, I thought that marketing was the thinking mans way of generating revenue, and that sales were merely a low level function. After all the top business schools don’t teach any courses on sales, but they teach dozens on marketing. Fortunately, Koch set me straight:

“The difference between marketing and sales is the difference between masturbation and sex. One you can do all by yourself in a dark room and fool yourself into thinking you’re accomplishing something. The other requires real human skills and all the fury and muck and mire of real human-to-human contact.” – Jim Koch

Koch destroyed the anti-sales mental roadblock that had been preventing me from studying sales seriously. That was no easy task. The anti-sales ignorance was very strong within me just a few years ago, and that ignorance, along with a lollapalooza of other compounding errors, is why my first entrepreneurial venture hardly lasted two years before failing.

Racking the Shotgun

When I began my study of sales, I searched for the five best books on the subject. Of the many I’ve read, 80/20 Sales and Marketing is far and away the best.

Perry’s “racking the shotgun” parable is the most powerful idea I have ever read about the act of actually being involved in sales

“In a noisy club in Las Vegas, a professional gambler pulled a sawed-off shotgun out of his jacket, racked it, and looked around to see who recognized the ratcheting sound and turned their heads. He said to his protégé, “John, the people who turned their heads are not marks. Do not play poker with them. Gamble with everybody else.”

The basic wisdom is that sales is an elimination game. If you send one signal to an audience that most people ignore, but qualified leads respond to, you have massively simplified the sales process. I think there is a broader point for all kinds of selection scenarios, including investing: its all about finding the right fishing holes.

Fractal 80/20

 “Most people think they understand 80/20. Not one person in 1,000 people actually does.” – Perry Marshall

A year ago I would have told you I understood 80/20. I even thought I understood it better than most business people and mused that it would be funny to name a pet (or a kid) Vilfredo, after the Italian economist who first identified the unequal relationship between inputs and outputs.

80/20 Sales and Marketing showed me about a dozen ways 80/20 worked that I had not understood. The most important new idea is that 80/20 relationships are fractal. This means that if 80% of the results come from 20% of the work, its also true that 80% of the 80% of results comes from 20% of the 20% of the work, and so on, ad infinitum.

In other words, the most important things are exponentially more important than non-fractal 80/20 would suggest. If 80/20 is fractal, 64% of the results (80%2) comes from 4% (20%2) of the inputs, and 51% of the results (80%3) come from less than 1%  (20%3) of the inputs.

The takeaway is that your best customer, opportunity, investment, etc is probably not two or three times more important than the median, but potentially 50-100 times more important.

Ask versus Guess

 The basic idea here is that some people are from “ask” cultures, and other people are from “guess” cultures (here is a link to the article).

An “ask” person is taught that it is perfectly polite to make nearly any request one may feel like asking, because it is assumed that if someone does not want to comply with the request, they will politely respond “no”. Because asking and answering are both permissible and even encouraged, neither party is offended by any outcome.

A “guess” person or culture is not comfortable asking direct questions. Bold requests are considered rude and forward. Instead of directly asking  for things, the appropriate course is to put out gentle feelers, insinuate your desires, and only ask questions you are relatively certain you will receive positive responses to. If a “guess” person plays it perfectly, they may even entice the person they want something from to offer something peremptorily, thereby avoiding the embarrassment of asking any questions at all.

The magic here comes from understanding which culture you were raised in, which culture you are currently in, and which approach might be more appropriate at a given time. I was raised in the Midwest (definitely a guess culture)but the world I work in now, and perhaps most markets in general, are ask cultures.

Two Ways to Tether Stock Prices to Reality

Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate, distributing to owners of pieces of paper the actual cash proceeds resulting from the sale of corporate assets to the highest bidder. A liquidation thereby acts as a tether to reality for the stock market – Seth Klarman

Warren Buffett has said that a good investing class would teach two things: how to value a business, and how to think about market prices. I humbly propose that a field trip to the federal bankruptcy courts in Delaware would make an excellent addition to this basic syllabus.

I’ll never forget what it was like to watch a set of creditors (or were they hyenas?) devour the corporate assets of a company I had been the legal owner of just weeks before. After you watch a bankruptcy, there can be no doubt about the nature of the stock market. Stocks are most definitely partial ownerships interests in real business that can really be liquidated.

On the flip side, my partial ownership of a non-traded company has illuminated the possibility for total control as a second tether between stock price and reality. If a stock price is somehow chronically low in relation to the fundamentals of the underlying business, buying 100% of the outstanding shares removes the veil, and closes the gap between price and value.

Jeremy Miller’s book Warren Buffett’s Ground Rules details Buffett’s long history of taking personal control of companies. By controlling the firm’s flow of earnings, he reduces the markets ability to either radically undervalue or overvalue the real value of the business.

In other words, after you have control, there really is no price, provided that you never intend to sell. The only way you can extract value from the firm is by consuming the free cash flow the business throws off. Ironically, over the long term, that was precisely the case that existed when the company was traded, but this truth was obscured by the expansion and contraction of trading multiples. Bankruptcy and private control both reveal the reality of the situation.


Philip Tetlock’s book Superforecasting was on my mind just about every day this year. I read this book multiple times, and will probably read it again in 2017.

The central idea of the book is that real world forecasting can be quantitatively expressed, measured, scored, and calibrated to a degree I had never thought possible. Tetlock not only hypothesized that it could be done, but also rigorously showed the way how, citing tremendously clear examples from his work with the intelligence community.

Tetlock was at his best when explaining how forecasters can improve their performance by carefully layering new information upon well selected base rate probabilities. Guy Spier has made a similar point by suggesting that investors should use an “inflight” checklist in addition to a “preflight” checklist to make sure you focus on both the initial conditions, as well as how the situation may be changing.

Superforecasting is an extremely successful blend of theory and practice. I couldn’t stop thinking about this book, and am still trying to integrate its lessons into my life and work.

The Power of Working Alone

 As I previously mentioned, 2016 was the first year that I worked alone. My nearest colleague lives nearly 1,000 miles away, and I see him roughly six times a year, although we talk on the phone quite frequently.

My isolation is an accident of my career trajectory, geography, and (lack) of money. I think it may be one of the most important accidents of my life. Through sheer happenstance, I have ended up in a working environment not terribly different from the one employed by Buffett, Munger,and other likeminded value investors. After a year of working this way, I’m noticing tremendous upside to the situation.

Working alone has been a boon to my productively, happiness, calm, and freedom. I read when I want, set my own work hours, and feel very little compulsion to produce anything but tangible results, which are usually the outcome of having harvested good ideas from books.

Working alone means I have no human resource issues. I am immune to the contagions of other’s moods, biases, and desires. When I hear about the pressures of hiring, firing, promotions and other cancers of office politics, I get positively giddy about my situation.

As an aside, I definitely didn’t understand this a few years ago (and it may not be right for all people at all times). I once wrote a letter to Mohnish Pabrai and told him I’d pay him to let me work for him (he once made a similar offer to Buffett, allegedly). He politely turned me down, and said he didn’t work with analysts.  I have a new appreciation for why.

Other Ideas in the Mix (New and Old)

In addition to the big ideas enumerated above, there are a few golden oldies I can’t help but touch upon briefly:

  • The power of coaching: I hired a (remote) strength coach for the second time. I made more progress in the last twelve months than I’ve made in 9 years of working by myself. My coach Andy Baker cowrote the books Practical Programming and The Barbell Prescription, both of which are worth careful study. I’m looking forward to starting several business coaching relationships in 2017. A good coach or mentor is invaluable.
  • Mutually exclusive, collectively exhaustive: I still use this consulting trick every day, and can’t imagine working without it.
  • The systems in Getting Things Done: I’ve been using this management system for six or seven years, but never more fully than this year. It’s simply incredible.
  • Talking to management: as I mentioned in my Horsehead postmortem, I previously under appreciated what can be learned by talking to a company’s management. Now that I am a company’s management in a startup, my old idea of ignoring management seems borderline insane.
  • Multiple languages of politics. Arnold Kling’s The Three Languages of Politics, got taken a step further by Jonathan Haidt’s theory of moral tastebuds in The Righteous Mind. Both ideas are tremendously useful for understanding why people don’t believe what you believe.
  • I thought about the dynamics expressed in Charles Murray’s Coming Apart at nearly every turn in the 2016 election. I also thought money would be more important to political outcomes. I read this book nearly three years ago, and still think about it almost daily.
  • The ideas and processes in Quantitative Value, by Wes Gray and Tobias Carlisle. This book set my brain on fire when I read it, and remains my gold standard for adding rigor and processes to a subject.
  • The business model canvas has become one of my indispensable tools for evaluating or creating businesses. Once you’ve used it and seen it, I find it impossible not to use it.

12 Times Donald Trump Disagreed with the Sage Wisdom of Warren Buffett

By Jesse Koltes

Donald Trump has made his business record the centerpiece of his campaign. When he’s not talking about banning Muslims, building walls, or trashing war heroes, he’s usually talking about all the huge (Yooge!) success he’s had in business.

But what do we really know about this man’s business philosophy? To catch a glimpse, here are twelve times that Donald Trump disagreed with the Oracle of Omaha.

1. On Reputation

  • “In the second grade, I actually gave a teacher a black eye—I punched my music teacher because I didn’t think he knew about music and I almost got expelled.” – Donald Trump, The Art of the Deal, p. 71
  • “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett

2. On Billionaires

  • “You have to be wealthy in order to be great, I’m sorry to say” – Donald Trump, 26 May 2016
  • “Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”— Warren Buffett

3. On Options

  • “I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first.” – Donald Trump, The Art of the Deal, p. 50
  • “The difference between successful people and really successful people is that really successful people say no to almost everything.”— Warren Buffett

4. On Debt

  • “Leverage: don’t make deals without it.” – Donald Trump, The Art of the Deal, p. 54
  • “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”— Warren Buffett

5. On Work

  • “I try not to schedule too many meetings, I leave my door open…I prefer to come to work each day and just see what develops…There’s rarely a day with fewer than fifty calls, and often it runs to over a hundred. In between, I have at least a dozen meetings. The majority occur on the spur of the moment, and few of them last longer than fifteen minutes.” – Donald Trump, The Art of the Deal, p. 2
  • “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.” – Warren Buffett

6. On Employees

  • “[My project manager] was one of the greatest bullshit artists I’ve ever met, but in addition to being a very slick salesman, he was also an amazing manager…the problem was that [he] wasn’t the most trustworthy guy in the world….”– Donald Trump, The Art of the Dealp. 85 – 86
  • “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”– Warren Buffett

7. On Friends

  • “I don’t kid myself about Roy [Cohn]. He was no Boy Scout. He once told me he’d spent more than two thirds under indictment on one charge or another….I said to him, “Roy, just tell me one thing. Did you really do all that stuff.” He looked at me and smiled. “What the hell do you think?” he said. I never really knew. – Donald Trump on Roy Cohn, Nixon’s legendary fixer, The Art of the Deal, p. 100
  • “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”– Warren Buffett

8. On Losing

  • “I’m not saying I would have a won, but if I went down, it would have been kicking and screaming. That’s just my makeup. I fight when I feel I’m getting screwed, even if its costly and difficult and highly risky.” – Donald Trump, The Art of the Deal p. 236
  • “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” – Warren Buffett

9. On Honesty

  •  “[The Holiday Inn was] attracted to my site because they believed my construction was farther along than that of any other potential partner. In reality, I wasn’t that far along, but I did everything I could short of going to work at the site myself, to assure them that the casino was practically finished. My leverage came from confirming an impression they were already predisposed to believe.” – Donald Trump, The Art of the Deal, p. 54
  • “Honesty is a very expensive gift, don’t expect it from cheap people.” – Warren Buffett

10. On Deal Making

  • “My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing to get what I’m after. Sometime I settle for less than I sought, but in most cases I still end up with what I want.” – Donald Trump, The Art of the Deal, p. 45
  • “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” – Warren Buffett

11. On Casinos

  • “I’ve never had any great moral problems with gambling because most of the objections seem hypocritical to me. The New York Stock exchange happens to be the biggest casino in the world. The only thing that that makes it different from the average casino is the players dress in pinstripe suits and carry leather briefcases.” – Donald Trump, The Art of the Deal, p. 196
  • “Gambling is a tax on ignorance… I find it socially revolting when a government preys on its citizens rather than serving them.” – Warren Buffett

12. On Each Other

  • “I ask Donald Trump: ‘Have you no sense of decency, sir?’”– Warren Buffett
  • “I don’t care much about Warren Buffett,” – Donald Trump
  • Bonus Charlie Quote: “My attitude is that anybody who makes money running a casino is not morally qualified [to be president]” – Charlie Munger