1/

Ed Thorp (@EdwardOThorp) is a pioneer in the field of "how to recognize and take advantage of mis-priced bets".

This question has led Thorp to discover all kinds of fascinating and highly profitable strategies -- in Blackjack, Options Trading, Statistical Arbitrage, etc.
2/

In 2004 and 2005, Thorp published a 6-part article in Wilmott magazine.

In these parts, Thorp reminisced about his ventures into Statistical Arbitrage -- the science of profiting from the statistics of a large number of bets placed at once.
3/

I found this article to be an absolute gold mine.

It contains a wealth of investing/trading wisdom, plus a bunch of interesting nuggets from Thorp's extraordinary career.

👇👇👇
4/

Key insights/nuggets from Part 1:

- What does "market neutral" mean?
- How should we measure "risk-adjusted alpha"?
- Fundamentals of risk control via position sizing
- The importance of keeping transaction costs low
5/

Key insights/nuggets from Part 2:

- What is "arbitrage"?
- Types of arbitrage: riskless vs risky
- The fundamentals of Statistical Arbitrage
- Are markets efficient?
6/

Key insights/nuggets from Part 3:

- The importance of rigorous back-testing
- The fundamentals of Factor Analysis
- The founding of DE Shaw and Amazon
7/

Key insights/nuggets from Part 4:

- Why size tends to be an anchor of returns
- The fascinating story of Thorp buying an oil tanker
8/

Key insights/nuggets from Part 5:

- A precise definition of "haggling"
- Pros and cons of "haggling" while buying stocks
- Satisficers vs Maximizers: Good Enough vs The Best
- How Thorp got involved with Ken Griffin and Citadel
9/

Key insights/nuggets from Part 6:

- Fund manager fees, alignment of incentives
- The importance of running a lean organization
- The marginal value of "Time" vs "Money"
10/

If you want to learn more about Thorp, and about many other super-interesting characters who profited handsomely from asymmetric bets, I recommended the wonderful book "Fortune's Formula" by William Poundstone (@WPoundstone): amazon.com/Fortunes-Formu…
11/

Thanks for reading. I hope you enjoyed this thread!

/End

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More from @10kdiver

9 Oct
1/

Get a cup of coffee.

In this thread, I'll walk you through one of Warren Buffett's earliest business ventures -- his Pinball Machine Empire.

This "case study" can teach us a lot about great businesses -- how they work, what characteristics they tend to have, etc.
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In 1946, when Warren Buffett was ~16 years old, he started a pinball machine business with a buddy of his -- Donald Dunly.

The two of them would buy used coin-operated pinball machines, fix them up, install them in barber shops, and split the take with the barbers.
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Many Buffett biographies contain details about the economics and inner workings of this pinball machine business.

For example, here's an extract from Roger Lowenstein's wonderful biography, "Buffett: The Making Of An American Capitalist":

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29 Sep
Today (Sep 29) is National Coffee Day in the US.

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But without help from Bill Gates's father, this may have never happened. 👇
Continued ...
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25 Sep
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Get a cup of coffee.

This is a thread that @ruima and I wrote jointly.

In this thread, we'll help you estimate how much "margin of safety" a company has when it's loaded with debt.

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Like so:
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18 Sep
1/

Get a cup of coffee.

In this thread, I'll show you how to *correctly* calculate inflation-adjusted investment returns.

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Imagine 2 scenarios.

Scenario A. We buy a stock. It grows at 10% per year over the next 10 years. During this time, there's NO inflation.

Scenario B. Our stock grows at *15%* per year over the same 10 years. But during this time, inflation runs at 5% per year.
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What do you think?
Read 24 tweets
11 Sep
1/

Get a cup of coffee.

In this thread, I'll walk you through the basics of Capital Allocation.

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IBM generates cash by doing things I don't understand.

Etc.
3/

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What projects does he invest in? What acquisitions does he make? Does he return any cash back to shareholders? Etc.
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5 Sep
1/

Get a cup of coffee.

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I grew up in India.

We were a family of 4 -- my parents, my sister, and I.

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That's when I first encountered a "claw machine".

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