I’ve reread two-thirds of Ed Thorp’s autobiography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.

After profiting from playing blackjack and the royalties from his book detailing his card-counting system, Thorp lost money investing in the stock market. He decided to learn his way out of the problem and spent the summers of 1964 and 1965 reading books on economics, finance, and the markets—all while still losing money.

Thorp’s two summers of learning established a foundational understanding of markets, and he absorbed practical lessons about anchoring and other pitfalls. He eventually discovered a pamphlet describing common stock warrants. A warrant is a derivative security. It gives the owner the right to purchase a company’s stock during a specific time window at a specified price. It’s basically a call option issued by the company. Thorp realized that math could be used to value warrants and to offset any risk by hedging. Thorp had found his way to beat the stock market.

In the fall of 1965, Thorp joined the University of California Irvine’s Math Department, where he learned that economist Sheen T. Kassouf had written his PhD thesis on warrant valuation and hedging. Together, Kassouf and Thorp refined their methods, invested their own capital, and published what they learned in Beat the Market: A Scientific Stock Market System in 1966.

Additionally, Thorp devised a formula to identify the precise worth of a warrant, option, or convertible bond. This formula increased his returns, confidence, and investable opportunities. He began managing accounts for friends and coworkers, one of whom introduced him to a thirty-eight-year-old Warren Buffett. Buffett ran a $100 million hedge fund, Buffett Partnership, Ltd., and invested in warrants, too. Thorp decided to mirror Buffett’s partnership structure to simplify managing his $400,000 in assets in a single account.

Jay Regan read Beat the Market and cold-called Thorp. The two agreed to start a hedge fund based on Thorp’s methods. Thorp would manage the research team in Newport Beach, California, while Regan managed traders and back-office administration in Princeton, New Jersey.

Princeton Newport Partners (PNP) launched in November 1969 with $1.4 million in assets. Thorp split his time between PNP and his professorship. A decade later, PNP had $28.6 million in assets and achieved an average annual return of 14% after fees, far superior to the S&P 500’s average annual return of 4.6%. In the 1980s, PNP expanded to statistical arbitrage, a “fund of hedge funds,” and other strategies. At its peak in 1987, the firm managed $272 million. From 1979 to 1987, PNP generated average annual returns of 18.2% after fees; the S&P 500, 11.5%. PNP had no losing years or losing quarters.

Thorp was 55 years old and managing roughly 40 people at PNP full-time. He was making millions annually. His life had reached heights he’d never imagined because of his curiosity about the markets, love for math, and willingness to share what he learned with others (before PNP, at least).

The good times wouldn’t last forever.

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Jim Simons’s biography mentioned another notable investor, Ed Thorp. I’d read Thorp’s biography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market, but I started reading it again.

This quote sums up Thorp’s life:

“In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.”

Thorp was a college professor, started two quantitative hedge funds, and created a blackjack revolution. He’s ninety-one now and still doing chin-ups and push-ups.

Where he started, the distance he traveled, and his choices along the way are all notable.

He was born during the Depression to struggling parents. Ten relatives lived in his home, and he attended one of the worst-ranked high schools in his city. Seeing how the Depression and World War I had shaped his father’s future, he vowed to do better.

Thorp shrewdly recognized that he could use math and science to change his life if he ranked first in the state’s chemistry exam. He finished fourth but took the physics exam the next year and ranked first. He received a full scholarship to UC, Berkeley (and transferred to UCLA for financial and social reasons). His decision to focus on acing state exams did indeed change his life’s trajectory.

While working toward his master’s in physics and PhD in mathematics at UCLA, he wondered if math could improve the odds of winning at blackjack and roulette. While on a teaching assignment at MIT and with the help of Claude Shanon, the “father of information theory,” he proved that they could, in both games. He shared his blackjack findings in an academic paper and a bestselling book, sending armies of blackjack players to Las Vegas. His curiosity about gambling led to unexpected highs and lows. He was introduced to the underworld of Las Vegas and was nearly killed. But book royalties and gambling winnings gave him his first financial cushion.

Thorp reflected on the type of life he wanted to live. He didn’t want to live in casinos and deal with shady people. He wanted to follow his curiosity, solve math problems, and work with smart people. He became a professor at New Mexico State University and began investing his savings—but his investments lost money. He wondered if math could improve his odds as an investor. He began looking for a link between math and the market. His curiosity—about the stock market this time—would change the trajectory of his life . . . again.

Thorp was dealt a tough hand, but he was able to change his life through good decision-making. His curiosity and love for math led to breakthrough discoveries in gambling and to working with the brilliant Claude Shanon. His decision to share that knowledge led to more opportunities and improved his finances. By age 29, his life had drastically improved. His next decision would propel his life to unimaginable heights.

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Now that I’ve read Gregory Zuckerman’s The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, it’s clear to me that people were Jim Simons’s greatest asset.

Massive losses from investments based on Simons’s judgment were crushing in Renaissance Technologies’ first year or two. Simons was forced to clarify his mission. “I don’t want to have to worry about the market every minute. I want models that will make money while I sleep,” Simons said. “A pure system without humans interfering.”

Simons was brilliant but couldn’t build this system himself; he didn’t have the skills to build the models that would power it. He needed to recruit people who could. So, how did he find the right people for this seemingly impossible mission?

Spotting

When Simons was working at the Institute for Defense Analyses (IDA), peers noticed that he had a gift: “His ability to identify the most promising ideas of his colleagues was especially distinctive.”

“He was a terrific listener,” one person said. “It’s one thing to have good ideas; it’s another to recognize when others do . . . . If there was a pony in your pile of horse manure, he would find it.”

In short, Simons had an eye for great ideas. He recognized them even before the person with the idea realized what they had. Simons would leverage this strength in recruiting his team.

Talent Pools

After working at IDA and Stony Brook University, Simons maintained relationships with these organizations—shrewdly, given the exceptional mathematical abilities of their people. He kept his contacts up to date with what he was working on at RenTech and how things were going. He inquired about what others were working on and who seemed promising. He also acted as a conduit, connecting people who could help each other. He stayed top of mind at IDA and Stony Brook and kept a finger on the pulse of these organizations.  

Simons strategically assembled a team that could build the “pure system” he envisioned. He leveraged his natural strength in spotting great ideas and his relationships with organizations with talented mathematicians.

“He told one Stony Brook professor, Hershel Farkas, that he valued ‘killers,’ those with a single-minded focus who wouldn’t quit on a math problem until arriving at a solution.”

When Simons found someone with the rare combination of killer persistence, great ideas, and original thinking, he aggressively recruited them to RenTech.

It was a slow and winding journey, but it eventually paid off. Simons assembled a team that slowly created the model that would power a highly profitable trading system that didn’t require human intervention. RenTech’s outsize and consistent investment returns enabled Simons to build a personal fortune exceeding $30 billion. And he had control of his life and a company where he felt at home and could be himself.

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I’m finishing up reading The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman. The book gives readers insights into Jim Simons’s life and how he built Renaissance Technologies into a $130 billion investment firm.

As I shared yesterday, Simons racked up accomplishments early in his career. He was an Ivy League professor and started a manufacturing company in Colombia, among other things. When he started RenTech in 1978, Simons was forty. His success at RenTech was anything but up and to the right.

Simons knew that to succeed, he had to build an environment of original thinking and exploration and also one of collaboration and great ideas that could serve as a foundation for other people’s future ideas.

To do this, he recruited mathematicians, let them develop mathematical models, and gave them capital to trade using their models. Some worked for RenTech, and others Simons seeded as independent firms. He encouraged everyone associated with RenTech to collaborate and share learnings.

Simons closely monitored the models’ progress and returns. Some took several years to reach production and longer to become profitable. Simons merged the most promising models into a single model at his flagship Medallion fund. And once a model was incorporated into the fund’s model, it was part of RenTech’s core investment approach and something others could continually improve upon.

Navigating this journey was far from easy for Simons. He went through a divorce, two of his sons died in separate freak accidents, and he struggled with self-doubt. Professionally, he endured crushing losses at times. Some key employees and fund managers whom he’d seeded jumped ship. Simons pushed through.

In 1990, twelve years after launching, RenTech was finally on solid footing. A reliable statistical model that could generate above-average returns was in place. RenTech had only $30 million in assets but generated a pre-fee profit of $23 million that year (the year before, it was $0). Three years later, the firm had $122 million in assets and generated $66 million in pre-fee profits. By 1998, the firm had $1.1 billion in assets and generated $628 million in pre-fee profits.

Simons’s early career was characterized by rapid success and many accolades. Then he became a founder. Twelve years of pain followed before he saw consistent and accelerating results. Every founder’s journey is different, but Simons’s reminds us that sometimes things take longer than we planned: persistence is key. You have to stay in the game long enough to win!

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Jim Simons was the founder of Renaissance Technologies, a $130 billion hedge fund. It’s a private partnership that usually invests in public markets. When I read an article about Simons passing earlier this month, I decided to read the biography I’d purchased months ago.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman details Simons’s life and journey to build RenTech. Simons generated incredible returns for his investors and created a personal fortune worth over $30 billion.

Simons was a gifted mathematician. He taught at MIT and Harvard, worked at the Institute for Defense Analyses (IDA), and cracked coded Soviet Union messages. He chaired and built the math department at Stony Brook University from scratch. He received the American Mathematical Society’s Oswald Veblen Prize in Geometry. By age 40, he was accomplished by any standards.

What motivated him to become a founder? Why did he build a hugely successful investing firm from nothing? I learned that his motivations were like those of many founders.

Outsider

In an interview for the book, Simons shared, “I’ve always felt like something of an outsider, no matter what I was doing.” “I was immersed in the mathematics,” he said, “but I never felt quite like a member of the mathematics community. I always had a foot [outside that world].”

Simons didn’t enjoy the community at Harvard. He had interests that other academics didn’t have. He’d traded soybean futures and loved the thrill of being in the markets. After teaching at MIT, he started a company in Colombia with a college buddy manufacturing vinyl flooring and PVC piping.

Simons needed a place that embraced everything he enjoyed: entrepreneurship, markets, and math. He didn’t feel comfortable in a standard box.

Control

As an academic, Jim didn’t have much money. He borrowed to invest in the Colombian manufacturing company. To pay his debts, he secretly moonlighted, teaching classes at Cambridge Junior College.

He took the job at IDA partly because it doubled his salary. Even at IDA, Simons searched for ways to make more money to pay debts. A failing attempt to launch iStar, an electronic stock trading and research firm, was one effort.

Jim realized he wasn’t in control of his destiny when IDA fired him for opposing the Vietnam War in a Newsweek article. With three children, he was rocked by the abrupt firing. He uprooted his family to Long Island, New York, and took a job at Stony Brook University.

These and other experiences reinforced his need to control his destiny. He realized that money equated to control and power. “He didn’t want people to have power over him.”

Founders are a different species. They don’t fit in standard societal boxes. To be the best version of themselves, they need environments where they feel in control. These worlds don’t exist, so they need to create them. Founders are world builders. So, in 1978, Simons created his own world, RenTech.

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Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television chronicles Robert “Bob” Johnson’s journey, his highs, and his lows.

Bob wasn’t a well-rounded founder and didn’t have a well-rounded founding team. Bob had deficits, but he shrewdly got around them to navigate unfamiliar waters. Some people work on their weaknesses. Bob took a different approach: he leaned on his strength, relationships (he was a lobbyist). Here are a few examples:

Satellite

After launching, Bob wanted BET’s programming to expand from six hours a week to 24/7. Through his cable relationships, he learned that HBO had unused satellite capacity. It was worth $2–$3 million a year, money Bob didn’t have. Bob negotiated a deal with HBO: it took a 15% stake in BET in exchange for the satellite time. HBO was owned by Time Inc., a major cable system, so Bob was now partnering with two large cable systems, Time Inc. and TCI (i.e., John Malone). And BET was a 24/7 network.

Sales & Marketing

Bob had no sales or marketing staff, so he struggled to sell advertising or convince cable operators to carry BET. His relationship with Time Inc. solved this problem. For $450,000 a year, Time agreed to manage BET’s marketing and affiliate sales using experienced HBO employees. This deal jump-started BET’s charging per-subscriber fees to cable systems, a new revenue stream. BET also leveraged Time Inc.’s lawyers for negotiations and its engineers for developing BET’s technical skills. After several years, BET gained expertise in these areas. The partnership ended in 1988. Bob hired a sales leader and built a sales team. By 1991, BET reached 53% of US homes wired for cable and reported $50 million in annual revenue and $9.3 million in annual profit.

Finance & Capital Markets

Bob knew nothing about raising money or about capital markets, which put him at a resource disadvantage. Luckily, his first investor, John Malone, was a financial engineer and master capital allocator who sold TCI to AT&T for $48 billion. Bob sought his counsel on capital-related issues. Malone was instrumental in Bob using savvy tactics in the early years, such as paying interest on $8 million of debt by issuing additional BET shares while not diluting Bob’s or Malone’s stakes. Malone planted the idea of BET capitalizing on a booming stock market by going public. He coached Bob through the IPO process, and the company’s stock began trading on NYSE in 1991. He helped Bob navigate BET buying Time Warner’s equity for a discounted $58 million (it was worth $191 million two years later). And he advised Bob to take the company private again, which he did in 1998 at a $1 billion valuation. Malone was at Bob’s side for the pinnacle of his career: negotiating and selling BET for $2.3 billion in stock to Sumner Redstone and Viacom.

Bob’s tactic of leaning in to his natural strength—relationships—was masterful. Using the expertise and assets of his partners kept him from wasting time and making mistakes while simultaneously lessening his weaknesses.

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This weekend I read Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television. Pulley details Robert “Bob” Johnson’s path from poor kid from Mississippi to cofounder of BET and billionaire.

When Bob landed John Malone’s investment in BET, he’d never run a business. He asked Malone for advice (after getting the investment check). Malone was direct: “Get your revenue up and keep your costs down.”  Bob took that advice to heart and combined it with a mercenary founder mentality to find a profitable content strategy.

Bob couldn’t afford to produce content on par with broadcast networks like NBC and CBS. He needed something else. Music videos were the new craze, but Black artists weren’t being played on MTV. BET got promotional videos from record labels free of charge and aired them. Viewers loved them, and artists loved getting national exposure.

Bob had hit on a winning strategy: Find a form of entertainment with high Black demand not being satisfied by other networks and a large supply of Black talent. By connecting supply to demand, he added value to both sides. Also important was that the talent valued the national exposure it couldn’t get anywhere else and didn’t expect much, if any, compensation. Bob had found a highly profitable content strategy.

ESPN launched and was a success. Bob noticed that ESPN didn’t broadcast games played by Black colleges. BET began broadcasting football and basketball games from well-known Black colleges such as Grambling and Jackson State. He made sure to broadcast the half-time performances of school marching bands and dance teams, something Black communities enjoy to this day. BET could broadcast games for less than $15,000 per game, while networks like ABC paid up to $50,000 per game. Black colleges enjoyed the national exposure, viewers enjoyed watching games they couldn’t watch anywhere else, and BET got exclusive low-cost programming.

Bob also noticed there were many talented but undiscovered comedians. BET launched ComicView, and the show became one of its most successful shows ever. The show propelled the careers of now-famous comedians such as D.L Hughley, Cedric the Entertainer, and Kevin Hart. Keeping costs down was taken too far, though. The result was a mini public relations crisis. BET learned from this and modestly increased pay to comedians and moved production from Los Angeles to Atlanta, whose comedians were plentiful and non-union. A one-hour episode of ComicView cost $18,500 to produce—while “inexpensive” half-hour sitcoms cost big networks $500,000 an episode and hits like Friends cost over $6 million an episode.

Bob’s focus on entertainment content gained him critics in the Black community. But his goal was clear: generate profits and become wealthy. He aligned his content strategy with that goal. Advertisers were paying BET rates that were less than half of those they paid MTV and other networks, yet when Viacom acquired BET for $2.3 billion in 2000, BET’s profit margins were the highest in the industry and strongly influenced Sumner Redstone’s decision.

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Reading about John Malone and TCI’s early BET investment led me to Sheila Johnson and Robert “Bob” Johnson, BET’s founders. I read Sheila’s autobiography and just finished reading The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television by Brett Pulley. The book details Bob’s journey before, during, and after BET.

Bob Johnson grew up a poor kid from Mississippi and was the first person in his family to attend college. But Johnson didn’t let his starting position define him. He found creative ways to overcome obstacles. How he launched BET is a great example.  

Johnson was a cable association lobbyist. He knew Malone needed low-cost programming that appealed to the large Black audience covered by a cable system Malone acquired in Memphis, Tennessee. Johnson saw an opportunity to create a nationwide Black cable network. Johnson understood the cable industry at a high level—but not how to start a cable network. He needed a plan.

Ken Silverman was launching a network for viewers age 50 and older and asked Johnson to lobby for him. Johnson realized that Silverman’s plan was a blueprint that could be applied to the network he envisioned. He got Silverman’s permission to modify and use the plan. Johnson changed “elderly” to “Black” and had a plan demonstrating that his idea made business sense.

Johnson still needed capital. He needed time on a satellite to transmit his channel to various cable systems, which was a major expense. He budgeted $10 million for leasing a satellite and other start-up expenses. An investor was interested in his idea, but $10 million was too much—more than the investor’s entire fund. Raising $10 million wasn’t an option.

Bob Rosencrans had just started what would become USA Networks. Rosencrans was leasing a satellite but had two problems: He didn’t have enough programming to fill time slots 24/7, and he needed to increase subscriber revenue (so he needed more subscribers). Johnson saw an opportunity. He asked Rosencrans to give him two hours on Friday nights free of charge for Black programming. That would help Rosencrans, so he agreed.

Johnson's original plan required a satellite lease and a studio to transmit to the satellite. His agreement with Rosencrans eliminated those costs, so he needed only a fraction of the $10 million he originally sought.

With a business plan in hand, distribution in place, and a lean $500,000 start-up budget, Johnson pitched Malone. Malone was impressed. He invested $180,000 for 20% ownership in BET and provided a $320,000 loan.

Johnson had zero entrepreneurial experience, but nevertheless he managed to reduce the amount of investor capital he needed to raise by 95% and turned his idea into reality by leveraging partnerships. If Johnson couldn’t overcome a hurdle or didn’t understand something, that didn’t stop him—he found someone who could help him and creatively partnered with them. His use of partnerships has been a key strategy throughout his career.

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I finished reading Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. The book didn’t give me as much detail about Henry Singleton’s struggles as a founder as a biography would have. But it did provide details of strategies that made him a great master capital allocator and entrepreneur and that made Teledyne successful during his tenure as CEO.

Here are a few things about Singleton that stood out to me:

• Age – Singleton didn’t found Teledyne until he was 43.
• Missionary founder – From the start, Singleton was very clear about what he wanted to build. When asked, he replied, “I’m trying to create another GE.” Singleton was solely focused on creating a conglomerate that rivaled General Electric. That mission informed his decision-making over the next thirty years.
• Growing market – Singleton recognized the importance of semiconductors when the technology was still new and unknown. Because of the growth potential of the semiconductor market, he made it the base of Teledyne. In Teledyne’s early days, he bought small companies with growth potential in the semiconductor space. As the semiconductor market grew, Teledyne’s market grew rapidly, too.
• Cloning – Singleton knew that a lot could be learned from others. He was open to borrowing ideas. His foray into insurance was borrowed from a book written by GM’s chairman. The chairman learned, through a painful experience involving failed financing, that a growing public company with a strong financial base needs an internal finance company. Singleton borrowed this idea and expanded by building a massive insurance operation. Years later, Warren Buffett apparently borrowed from Singleton’s insurance playbook for Berkshire Hathaway.
• Zigzagging – Singleton was a first-principles, independent thinker. He was flexible in his thinking and execution. As market conditions changed, so did his thinking and strategy. He quickly adapted to new realities and often took actions others considered abnormal. For example, when the P/E multiple of Teledyne’s stock went from a range of thirty to seventy times earnings (overvalued) in the 1960s to roughly nine times earnings (undervalued) in the ’70s and ’80s, he stopped acquiring companies with Teledyne stock beginning in 1969. He began aggressively repurchasing shares in the ’70s and ’80s. This was unheard of at the time, but eventually it was mimicked.
• Twin tailwinds – Singleton recognized and took advantage of two simultaneous forces. More details on this here.
• Cash flow and profits – Singleton focused on making sure revenue was profitable and that customers were paying promptly. He created a metric to measure this consistently across Teledyne’s hundreds of operating companies. More detail on this here.

I enjoyed learning about Singleton and Teledyne. I’m glad I was able to locate a copy of this hard-to-find book.

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I’m finishing Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. The book details Teledyne’s rise from inception to conglomerate with billions in revenue and hundreds of operating companies. This book interested me because I was curious to learn the specifics of how Henry Singleton developed and executed his capital allocation strategy—the same strategy Warren Buffett likely borrowed from to build Berkshire Hathaway.

The book details how Teledyne managed its sprawling operations and evaluated the performance of each operating company. I assumed that Singleton used free cash flow or something similar to measure each operating company’s financial performance. I was wrong. Singleton created his own metric, the Teledyne return, which measured profitability and net cash flow in a single number.

The Teledyne return was an average of net cash flow and profit. The book gives the following example:

• Reported profit: $1,000,000
• Reported cash flow: $500,000
• Teledyne return: $750,000 = ($1,000,000 + $500,000)/2

The company’s thinking was this: Your profit was $1,000,000, but you received only $500,000 in cash. We’ll credit you fully for profits booked and received as cash. We’ll give you credit for some of the profit booked but not yet collected.

This single metric forced company presidents to focus on profit and cash flow simultaneously. It also allowed Teledyne corporate to standardize its comparison of operating company results.

I’ve seen profits or cash flow used to evaluate financial performance, but I never thought a singular focus on either made sense. When I ran my company, I kept a close eye on free cash flow and net income. By looking at both, I was ensuring that we were generating profitable revenue and that we collected revenue faster than we had to pay our expenses.

Singleton’s Teledyne return is a creative way to force managers to focus on what matters most. For entrepreneurs it’s a financial metric worth considering if it makes sense for their specific business.

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