Ed Thorp: Interview in 2018

There is a short beautiful interview of Ed in Barron's in early 2018. Some of the key points from that are below.

Why are some tables hot and cold?
If the game is honest, most of the time it’s just random fluctuations. Those random fluctuations are what I think of as luck.

That stock market drift you're talking about—are those the real numbers?
It is five basis points a day. Multiply that by 250 days, and it’s about 12.5%. The historical geometric growth is about 10.5%, because of the fluctuations.

Given that drift, is stock-picking even worth it?
There are three types of investors.

One wants to do well and not spend a lot of time. Those should be passive investors, and they will beat most of the others who will be dragged down by fees and costs and punished by what I call “the scared-rabbit syndrome,” which is that they run out at the bottom and get back in at the top. The index investors who just buy and sit avoid all these issues.

Then there is the small group of investors who want to be professionals hedge fund managers, people who work for endowments, universities, and so on. I might add that they haven’t done all that well.

Then there are people who just enjoy messing around in the market and are willing to spend time to get an education. For them, I say, take a small amount of capital and learn. But put most of it in an index fund where it will grow while you are busy getting your education and paying for it. I paid for my education and know it can be fairly expensive. My book talks about some big mistakes and also about the Kelly Criterion formula, which tells you how to allocate money between risky alternatives and gives you an idea of how much to allocate to each.

What's in your portfolio now?
One good stroke of good fortune was meeting Warren Buffett in 1968. It led me to realize that I needed to invest in Berkshire Hathaway, although I didn’t do it until 1982. It’s my single investment in the stock market. It’s like a broad value- stocks equity index. I hold it in lieu of VTSAX [the Vanguard Total Stock Market fund]. It does about as well with no current taxes to pay. VTSAX has dividends that are taxed annually. I also have some hedge funds, but I consider them not as good as Berkshire, so I use them to spend and finance other things I do.

Why not go out and find better investments, as you did in the past?
When I was 35, I had lots of time and less money, so doing 10% or so better than the index, with little risk, was attractive and fun. At 85, the marginal value of time is higher and the marginal value of money is lower. These are strong disincentives when I can make a long-run 10% or so by doing nothing.

What do you think of stocks?
Stocks today are on the high side and will be hurt as rates rise. We are probably late in this cycle. We're due for a slowdown and maybe another severe correction. If you're a long-term investor, though, equities are the way to go.


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