Friends: Edward Thorp and Bill Gross

From 2006 MedicalNews: 
"Over the last few years, Sue and Bill Gross have developed a keen interest in health care and advances in stem cell research. Aware of their interest, the couple was invited to tour UCI's Reeve-Irvine Research Center last fall by their friends Edward Thorp, a founding UCI faculty member and pioneer in the field of quantitative finance, and attorney Paul Marx and his wife, Monica. The Grosses later became aware of Hans S. Keirstead, an associate professor of anatomy and neurobiology at UCI and one of the nation's pioneers in human embryonic stem cell research, after his work was featured on "60 Minutes" in February. The television news magazine described his use of a treatment derived from human embryonic stem cells to improve mobility in laboratory animals with spinal cord injuries."

"His (Bill Gross) roots, it turns out, are in Canada. Mr. Gross is a first-generation American, born in Ohio to parents originally from Winnipeg. His mother’s family farmed wheat in Manitoba; his father, an executive with a steel company, played hockey.

The path toward finance began with a near-death experience. A bad car accident in his final year in college sliced off much of his scalp. As he recuperated, he read a book which became a cult favourite among investors: Beat the Dealer by Edward Thorp, then a math professor.

The book detailed how to win at blackjack by using a system for counting cards. After Mr. Gross recovered, he hopped a freight train to Las Vegas. Over the next four months, playing 16 hours a day, he turned $200 into $10,000."
On Edward THorp:

"There are, however, a couple of hitches. Thorp opens his fund only once a year. Next opening will be in January, 1989. Secondly, he requires a minimum investment of $2 million, which obviously keeps out the paperhangers. ("To invest $2 million," he said, "requires a net worth of $10 million, which means about 4,000 people in this country.") Finally, even the $2 million isn't guaranteed to get you in the club. "If you bang on the door with that money next January," said Thorp matter-of-factly, "I'll be happy to wait-list you." Thorp comes across precisely the same whether he is talking about playing blackjack, running a marathon, investing multimillions in the stock market or winning a Tangletowns contest. Not just sincere, which would do him a disservice, but distressingly, dispassionately rational. Thorp's rather ordinary appearance-wiry, modest stature, offhand mien-makes the quicksilver elasticity of his mind even more startling, and, in an odd sort of way, warming.

His fascination with blackjack-which his associates had figured out was the commercial gambling game in which the house held the smallest edge over the player-started when he was a graduate student. He found that by using the system described in the statistical journal he could play all day on just a few dollars. That wasn't good enough, so when Thorp began teaching at Massachusetts Institute of Technology, he taught himself to program a computer and poured into it several years of research relating to blackjack possibilities and probabilities. From that came a system that Thorp was convinced couldn't lose.

About this time, he met a New York City stockbroker named Jay Regan who was bored selling stock and wanted some of the action himself. So he and Thorp pooled their money and plunged. They haven't looked back since. They discovered that they could multiply their assets more quickly with a larger kitty, so they opened a limited partnership and began attracting outside money. Thorp quit his job at UCI and did the research and programmed the computers in Newport Beach. Regan-who, according to Thorp, "was a philosophy major at Dartmouth and has a good, intuitive understanding of things"-handles the accounting and trading out of Princeton, N.J."

Hedge Funds Head for Mediocrity? - 2007 Time

Hedge Funds Head for Mediocrity
"In 1962, a government study of mutual funds revealed that they were, on average, average, or worse. This was an affront to many on Wall Street who assumed that, of course, professional investors beat the market. It was left to legendary investor Benjamin Graham to explain in a speech to securities analysts that "neither the financial analysts as a whole nor the investment funds as a whole can expect to 'beat the market,' because in a significant sense they (or you) are the market."
In red, G. Soros's similar view expressed in his "The Alchemy of Finance" book

Read more: http://www.time.com/time/magazine/article/0,9171,1584783,00.html#ixzz1BQluE9tO
and to continue, article quotes Mr. Thorp's e-mail:
"Thorp, who at 74 no longer runs a hedge fund but still invests in a few, doesn't worry too much about a meltdown. "My opinion is that the most likely scenario is not a blowup but rather that hedge funds as a group will gradually and continuously lose their edge (if they haven't already) over other asset classes," he writes in an e-mail. "Then they will 'top out'--like mutual funds, real estate, etc.--and then just be a fluctuating fraction of total financial assets--part of the financial landscape."

Kelly Principle through the "Fortune's Formula" and Beyond

Author's page about Kelly
Fortune's Formula - Book Review from SIAM News Magazine
JE Kelly original Paper "A New Interpretation of Information Rate"
Kelly followers: Buffett, Munger, Legg Mason Capital Management CEO Bill Miller, per Peter Lindmark 2007 article at gurufocus.com; Bill Gross as per Wikipedia article stating that "taking more risk increases the probability of both very good and very bad outcomes. One of the most important ideas in Kelly is that betting more than the Kelly amount decreases the probability of very good results, while still increasing the probability of very bad results. Since in reality we seldom know the precise probabilities and payoffs, and since overbetting is worse than underbetting, it makes sense to err on the side of caution and bet less than the Kelly amount".
As one blogger simply put it:
"The formula is 2p - 1 = x

Where p is the probability of success, x is the portion of your bankroll (or portfolio) that should be allocated to this bet. If an event has a 40% chance of paying off, don't bet. If a bet has a 55% chance of winning, only put in 10% of your money. If the chance of winning is 95%, invest 90% of your money.

A Kelly bet is the most aggressive bet you should ever take. Bets larger than Kelly are inefficient money management and will cause you to lose your money. The Kelly bet size does not ensure the highest probability of making a gain, it ensures the highest profitability for a set of games, or trades. It is also known as "tear your hair out" trading, as in practice they are actually quite big bets for many games and your equity curve will be extremely volatile.

P.S. Peter Lindmark's return:

Lindmark Capital 2008

Peter Lindmark's Contrarian Book Recommendations

In an exclusive interview with Downside Protection Report, Peter Lindmark recommended the following books, which he has read or re-read recently:

• Changing Fortunes by Paul Volcker and Toyoo Gyohten

• Speculative Contagion by Frank Martin

• A Demon of Our Own Design by Richard Bookstaber

• The Power of Gold: The History of an Obsession by Peter Bernstein

• Simple But Not Easy by Richard Oldfield