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Thorp - Beat the Market -Anyone doing anything similar?

My investment strategy consists of:

  • Something a little more exotic

    Votes: 0 0.0%

  • Total voters
    14
Finished reading Thorp's "Beat the Market" recently, largely dealing in holding hedged portfolios on shorted warrants etc. For various reasons, I can't mimic this investment strategy in my local markets, but I'm wondering out of interest, has anyone on this forum a) read this book and b) attempted to base an investment strategy along the lines of Thorps: i.e. hedged convertibles etc.

Seems to me that its very rare that any of the people I know who work in finance actually use their skills to try to invest in anything more exotic than a "long shares" strategy, and I'm interested in commentary as to why this might be so. Thoughts?
 

Joy Pathak

Swaptionz
The owner of Saba Capital used variations of convertible arbitrage strategies that Thorp put out in his book while he was at DB. There were many people back in the day that used those strategies and variations of it. I don't know off too many anymore. I am sure the base of many convertible arbitrage strategies use thorp's idea but they must be significantly modified by now.
 

Lyosha

Psychic in Training
Noone will tell you their strategy if it works and they make money on it.

My strategy is to identify what I consider gross mispricings, invest against them and hold until either a) (more likely) they correct or b) I can't deal with the pain anymore.

I tend to be short-biased, however as of recently I am long-biased.
 
Alexei : Interesting that everyone will tell you about their stock picks, but no one mentions their use of quant strategies ;) I am aware that no one is going to throw out their secret sauce for the masses, but I guess I am interested in how people identify what they consider "gropss mispricings". For example, I'm reading a couple purely fundamentals books, and they largely and literally fall back on "pick an enormous margin of error, because no one knows what happens in the future".

I noted that Thorp points out he had a strategy at one point, that returned around 50%... but after taxes and trade fees, closer to 25%. Still awesome, but particularly somewhere like Australia, where you get your capital gains taxes halved for holding an investment over 12 months, I am looking for appealing long-dated strategies, with minimal turnover. Which lead me to start asking my workmates and colleagues in the industry, but I was surprised to find that almost none of them invest their own money to any real degree.

I guess my point in asking the question was two-fold... literally "do any of you do must investing yourselves, and if so how much of it is very quanty and how much is pick a good stock and sit on it", and secondly "why do you think it is that people who are employed in this field and supposedly have the inside edge when it comes to valuing these instruments, do not apparently try to do so?" I've had to suggested to me that the case is simply taht people dont like to "take their work home", but I don't think that explains away the phenomenon entirely. Also had it suggested that it comes down to the particular area of finance someone works in... e.g. traders are more likely to punt on their own stocks... risk and compliance guys, less so. Any anecdotal evidence, either way?
 
That, and I was desperate to try to steer this quant forum back to somethign remotely related to finance... ;)
Haha, point taken :P

The reason that I don't think individual investors use such strategies is that they are more risk-averse and commissions play a larger role in their net profit.
 
Alexei : Interesting that everyone will tell you about their stock picks, but no one mentions their use of quant strategies ;) I am aware that no one is going to throw out their secret sauce for the masses, but I guess I am interested in how people identify what they consider "gropss mispricings". For example, I'm reading a couple purely fundamentals books, and they largely and literally fall back on "pick an enormous margin of error, because no one knows what happens in the future".

I noted that Thorp points out he had a strategy at one point, that returned around 50%... but after taxes and trade fees, closer to 25%. Still awesome, but particularly somewhere like Australia, where you get your capital gains taxes halved for holding an investment over 12 months, I am looking for appealing long-dated strategies, with minimal turnover. Which lead me to start asking my workmates and colleagues in the industry, but I was surprised to find that almost none of them invest their own money to any real degree.

I guess my point in asking the question was two-fold... literally "do any of you do must investing yourselves, and if so how much of it is very quanty and how much is pick a good stock and sit on it", and secondly "why do you think it is that people who are employed in this field and supposedly have the inside edge when it comes to valuing these instruments, do not apparently try to do so?" I've had to suggested to me that the case is simply taht people dont like to "take their work home", but I don't think that explains away the phenomenon entirely. Also had it suggested that it comes down to the particular area of finance someone works in... e.g. traders are more likely to punt on their own stocks... risk and compliance guys, less so. Any anecdotal evidence, either way?
may time people dont invest is because most of these firms have pre-approval requirement that sometime can take days and hence lose the pricing advantage that the person may have felt earlier.
 
As Alexei mentioned the approval case, the othe problem is the derivatives positions are on such large number of stocks ...like single lot is of 1000 stocks, which in some cases is just to difficult for retail investor
 
One more issue i think is you are not allowed to sell options , my broker in India doesnt allow even if you ready to pay the margin. So most of the strategies are rendered useless.
 
Indeed. In Australia, warrants cannot be shorted, and the options are typically short-dated. I have to research LEAPS some more, but I get the initial impression that they are quite illiquid and only traded on very few of the ASX stocks. Oh well... maybe I'll try investing in Asia... and battle the cross currency risk ;)
 
hehehe..same situation here.. leaving few stocks ..derivatives are very illiquid. And top of that only near month options are liquid, there's hardly any illiquidity for long term options.
 
I first read this book in 1969 and have read it a few more times since then. I currently have a copy of the book signed by Ed Thorp. As you probably know, Thorp is a financial genius. He also wrote Beat the Dealer, the book that changed the way Blackjack is played in casinos. I used the strategies in the book for many years in the 1970's. As the interest in warrants seems to have decreased from those days, and avaailability and interst in options has increased, I basically do covered options. I never did the Thorp strategy with convertibles. I liked doing ratio writing in the 1970's, but now as my portfolio has grown and I have gotten a bit more conservative, I am a bit more hesitant to be uncovered in any positions. I like the idea of selling options for more than they are intrinsically worth, and will vary the strike price sold based on how aggrsssive I am on the stock, and/or how much downside protection I want. I really don't follow the Thorp strategy to determine what positions to take.
 
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