Quotes from Edward O. Thorp

Too bad. Lesson: It doesn't pay to push the other party to their absolute limit. A small extra gain is generally not worth the substantial risk the deal will break up.

A trait that showed up at about this time was my tendency not to accept anything I was told until I had checked it for myself.

The problem was that the issuers of CDSs could issue them with no collateral other than their "full faith and credit," meaning that if their bets lost they might not have the money to pay.

Mathematically, interruptions didn't matter, because my lifetime of playing was just one long series of hands, and chopping it into sessions and playing them at various times and in various casinos should not affect my edge, nor the long-run amount I could expect to win. This principle applies in both gambling and investing.

that acknowledgment, applause, and honor are welcome and add zest to life but they are not ends to be pursued. I felt then, as I do now, that what matters is what you do and how you do it, the quality of the time you spend, and the people you share it with.

Neither Jerry nor I believed the efficient market theory. I had overwhelming evidence of inefficiency from blackjack, from the history of Warren Buffett and friends, and from our daily success in Princeton Newport Partners. We didn't ask, Is the market efficient? but rather, In what ways and to what extent is the market inefficient? and How can we exploit this?

The time was right for our project because the necessary high-quality databases and the powerful new computers with which to explore them were just becoming affordable. By luck, one of our researchers almost immediately found the basic idea behind statistical arbitrage.

Shakespeare might advise, "The fault is not in our markets, but in ourselves…

Unlike some hedge fund managers who also had a waiting list, we could have increased our fees by raising our share of the profits or adding more capital, thereby driving down the return to limited partners. Such tactics by the general partner to capture nearly all the excess risk-adjusted return, or "alpha," rather than share it with the other investors are what economic theory predicts. Instead, I preferred to treat limited partners as I would wish to be treated in their place.

The most important reason to wind down the operation was that time was worth more to me than the extra money. Vivian and I wanted to enjoy our children and their families, and to travel, read, and learn. It was time once again to change course in life.

Success on Wall Street was getting the most money. Success for us was having the best life.

As Keynes said, the market can remain irrational longer than you can remain solvent.

This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger. Eddie

With time, lucky managers tend to fade.

The list of issues goes on, the point being that hedge fund investors don't have much protection and that the most important single thing to check before investing is the honesty, ethics, and character of the operators.

How can we prevent future financial crises driven by the systemic and scarcely regulated use of extreme leverage? One obvious step is to limit leverage by requiring sufficient collateral to be posted by both counterparties when they trade. That's what is done on regulated futures exchanges, where contracts are also standardized. This model has worked well for decades, is easy to regulate, mostly by the exchanges themselves, and has had few problems.

Our corporate executives speculate with their shareholders' assets because they get big personal rewards when they win—and even if they lose, they are often bailed out with public funds by obedient politicians. We privatize profit and socialize risk.

Moshe Adler, in his article "Overthrowing the Overpaid," points out, economists David Ricardo and Adam Smith, writing more than two hundred years ago, "concluded that what a person earns is determined not by what that person has produced but by that person's bargaining power. Why? Because production is typically carried out by teams…and the contribution of each member cannot be separated from that of the rest.

the philosopher George Santayana famously warned, "Those who cannot remember the past are condemned to repeat it." Though the institutions of society have difficulty learning from history, individuals can do so.

Write down everything you spend. The waste in your daily spending should soon become apparent.

If you do this, what do you want to happen? and If you do this, what do you think will happen?

accurate balance sheet, which I do about once a year.

They also adopted a notion we rejected, called VaR or "value at risk," where they estimated the damage to their portfolio for, say, the worst events among the most likely 95 percent of future outcomes, neglecting the extreme 5 percent "tails," then acted to reduce any unacceptably large risks. The defect of VaR alone is that it doesn't fully account for the worst 5 percent of expected cases. But these extreme events are where ruin is to be found.

For the second time, the Ten-Count System had shown moderately heavy losses mixed with "lucky" streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.