Friends,
I finally got to the second half of Ed Thorp’s autobiography, A Man For All Markets, which I’m reading with my 10-year-old. After years of breaking casino games, Thorp is now setting his sights on the “biggest casino in the world — Wall Street.”
He’s dabbling and learning. This is before he starts managing money. On an early trade, he gets the direction of silver right but he takes on too much leverage and can’t weather the path. He loses his full investment when he’s forced to blow out his position. A risk management lesson he said he’d carry with him for the next 50 years. (Considering how he already mastered gambling, I thought this was a charitable point for the rest of us — investing is so sneaky hard that Thorp didn’t transfer his unparalleled understanding of risk-of-ruin math and bet sizing to his early trades!)
Both me and my son are excited for this journey. I recommend reading this book with your kid. Ed explains things slowly and in detail. From the silver trade, I got to teach Zak about how leverage, futures, and carry work…there’s a cost to leverage and for physical silver which Ed buys in Swiss francs and vaults in a Swiss bank there is a storage fee. (The stories of Ed’s rabble-rousing childhood are also pretty wild. This guy came out of the box very different. I get the sense that he was one of the smartest people of the 20th century. He collaborated with eminent scientists in the government and Bell Labs with mutual admiration. Seeing what he was doing as a kid must feel like seeing a young Bo Jackson of brains. Reminds me of Morgan Housel’s bit that a handful of people in the world’s advantage is they are just straight-up smarter than everyone else. Bill Gates is one of his examples.)
Thorp was also a prankster and good-natured when he poked fun at the nerdy scientists he worked with in his academic life. He relays an old joke — how do you spot an extroverted mathematician?
An extrovert mathematician looks at YOUR shoes.
I’m not spoiling anything when I say Thorp would become an early pioneer of quantitative and arbitrage investing. For today’s Munchies, I want to share my notes from a recent interview with Peter Brown, CEO of RenTec. RenTec is the GOAT of quant investing. The intellectual heir to Ed Thorp’s approach (Citadel is the literal heir…Ed seeded Ken Griffin).
🔗Notes from RenTec CEO Peter Brown on the GS Podcast (Moontower)
RenTec is notoriously secretive but I won’t waste time speculating why Brown did the interview. I inserted a lot of my own thoughts into this one. The notes are too long to fully print here.
Full table of contents:
There are several spicy sections so you should definitely check it out (I even felt the need to defend value investors).
I’ll choose just one section because it goes against conventional thinking — for a bunch of world-class mathematicians and physicists, RenTec founder Jim Simons exhibits the type of “EQ” you’d expect from a seasoned manager or general.
Examples of Emotional Intelligence
[Kris: The EQ vs IQ thing is a false dichotomy. I suspect they are actually positively related but when we look at outliers on either dimension there is a major Berksons Paradox effect. RenTec has the reputation of being the true “smartest guys in the room” in the IQ/STEM sense of the word. And yet, multiple times in this interview I am struck at how people-savvy they have been. Which makes perfect sense to me. In a domain where the competition constantly learns and psychology plays an enormous role this is exactly what you expect. Only the naive who believe that investing is physics as opposed to biology cling to Spock-like caricatures of effective quants. Here are several excerpts demonstrating a deep understanding of human behavior]
Selling an approach to employees
Brown: At the end of 2002, Bob and I also took over the rest of the technical side of the firm, which included the trading of currencies, bonds, options, and futures. Now, our plan was to use the equities code that we and others had developed to trade these other instruments. But we recognized they would not be so great for morale to tell, say, one of the futures researchers, “You know all that code you spent the last decade of your life developing, guess what, we’re going to throw it out.” So, we had to spend quite a bit of time getting everyone to buy into our plan. To do this we used an approach that I learned from a biography I’d recently read of Abe Lincoln, which was to get them to come up with our plan themselves. Now, that took some time, but eventually it all worked out.
Jim Simons weighing the input to manage a risk crisis
Jim Simons reading a situation shrewdly
Brown: In the fall of 2008, the whole financial system was stressed. So, we were concerned with the stability of our counterparties. So, we spent a lot of time with those counterparties and examined their CDS rates and so forth. I remember at one point, two senior executives from some firm we did business with came into our New York City office to meet with us. They assured us that the funds we had in our margin account were safe with them. And I was inclined to believe them. Why not? But after the meeting, Jim said, “Peter, they wouldn’t have come to our office. They wouldn’t have requested the meeting unless they were in real trouble. It’s time to get out.” So, we did. And Jim was right because shortly thereafter, that firm just disappeared.
Stay groovy ☮️
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