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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