Ed Thorp on beating the market
- Thread starter Gambit
- Start date
"For the record, we had also been looking at a related idea, now called “pairs trading”."
"In August 1992 we launched a new, simpler principal components version. This evolved
into the “omnivore” program, which incorporated additional predictors as they were discovered.
The results: in 10 years, from August 1992 through October 2002, we compounded at 26% per annum net before our performance fee, 20% net to investors, and made a total of about $350 million in profit. Some statistics: 10 day average turnover; typically about 200 long and 200 short positions; 10,000 separate bets per year, 100,000 separate bets in 10 years. The gross expectation per bet at about (2/3)% × 1.5 leverage × 2 sides × 25 turnovers per year is about 50% per year. Commissions and market impact costs reduced this to about 26%.
Concluding remarks
Where do the ideas come from? Mine come from sitting and thinking, academic journals, general and financial reading, networking, and discussions with other people.
In each of our three examples, the market was inefficient, and the inefficiency or mispricing tended to diminish somewhat, but gradually over many years. Competition tends to drive down returns, so continuous research and development is advisable. In the words of Leroy Satchel Paige, “Don’t look back. Something might be gaining on you”.'
"In August 1992 we launched a new, simpler principal components version. This evolved
into the “omnivore” program, which incorporated additional predictors as they were discovered.
The results: in 10 years, from August 1992 through October 2002, we compounded at 26% per annum net before our performance fee, 20% net to investors, and made a total of about $350 million in profit. Some statistics: 10 day average turnover; typically about 200 long and 200 short positions; 10,000 separate bets per year, 100,000 separate bets in 10 years. The gross expectation per bet at about (2/3)% × 1.5 leverage × 2 sides × 25 turnovers per year is about 50% per year. Commissions and market impact costs reduced this to about 26%.
Concluding remarks
Where do the ideas come from? Mine come from sitting and thinking, academic journals, general and financial reading, networking, and discussions with other people.
In each of our three examples, the market was inefficient, and the inefficiency or mispricing tended to diminish somewhat, but gradually over many years. Competition tends to drive down returns, so continuous research and development is advisable. In the words of Leroy Satchel Paige, “Don’t look back. Something might be gaining on you”.'
That was bull market. Even monkeys made money buying stocks.
Yep. I'm still waiting for that trader who boasts about how well he did when everybody else was losing it.
Give the man the respect he deserve. During his time, he was generating 26% per year regardless of whether the market went up or down. That's the beauty of statistical arbitrage, where they short as much position as they long. Does it still work now, anyone?
You don't know that. You're taking his average return and treating it like an absolute constant return, which it emphatically is not. The period Thorp averaged over was mostly a raging bull market. Every investor in the bulk of the '90s was minting coin.
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Common misconception.
Most probably lost money. People bought at tops and sold at bottoms or loaded up on one of the many heavyweight sinkers like Pets.com. Or they sold out of blue chips and put it all in AMZN, YHOO, CSCO, MSFT, ORCL, INTC, INFY, MSTR, etcetera in February 2000. For sure, almost all home day traders lost money even during the bull market. There were exceptions. Many of the "day traders" would trade CSCO or something and buy when it was low and sell when it was high (under the guise of a strategy). Their account would go up 4x while CSCO went up 12x. Also, many "day traders" lost money day trading but made money on core holdings resulting in net positivity of their accounts until the bubble popped.
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