#739: Brené Brown and Edward O. Thorp

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Yeah.
Hello, boys and girls, ladies and germs, this is Tim Ferris. Welcome to another episode of the Tim Ferris Show, where it is my job to sit down with world class performers.
From every field imaginable to tease out the habits.
routines, favorite books, and so on that you can apply.
And test in your own lives.
This episode is a two for one, and that's because the podcast recently hit its tenth year anniversary, which is insane to think about.
And past one billion downloads.
To celebrate
I've curated some of the best of the best, some of my favorites.
From more than seven hundred episodes over the last decade.
I could not be more excited.
To give you these super combo episodes, and internally we've been calling these
The Super Combo episodes.
Because my goal is to encourage you to, yes, enjoy the household names, the super famous folks.
But to also introduce you to lesser known people I consider
Stars.
These are people who have transformed my life and I feel like they can do the same for many of you.
Perhaps
They got lost in a busy news cycle, perhaps you missed an episode.
Just trust me on this one, we went to great pains to put these pairings together.
And for the bios of all guests?
You can find that and more at Tim.blog slash combo.
And now, without further ado.
Please enjoy.
And thank you.
For listening.
First up.
Doctor Brene Brown.
A research professor at the University of Houston and author of six number one New York Times bestsellers.
Including
Atlas of the heart.
Dare to lead.
And
The gifts of imperfection.
You can find Brene.
at Brene Brown.com
I think you can
Have self love and self acceptance.
And
Want to be s better in ways.
Here are the things I want to unwind.
I don't think you can truly
Change for the better.
In a lasting meaningful way.
Unless it is driven by self acceptance. I agree with that.
So I think being the shit out of yourself for performance, which you know, I work with a lot of sports people now, like it works.
And if all you have to do is pay someone for one season, or all you do is one game or one whatever, you're okay. But lasting meaningful change has to be driven by self acceptance.
Yeah. The other thing that is just so shocking to me.
about complacency
And self
Acceptance.
is as I think back, and I would really have to go into the data, but just sitting here.
I don't think
I have ever
Come across a single person.
Not a single person that I can think of.
Who ha was complacent.
Driven by self a acceptance.
I don't know that that is
Not
An oxymoron.
I gotta tell you that like
Self aware
Complacency?
doesn't work for me as a construct. Self aware no.
Or self accepted complacency. I don't know that I believe that.
Yeah, I mean I'll I'll push I'll push a little bit.
I knew you were going to because by the look on your face.
I would say and I think that I'm I'm struggling for the right
terminology, but I think we all know people who are
Alcoholics.
have various issues. And they are in denial of
Having problems. Yes.
Let me stop you there.
Yeah.
And say that is neither self awareness nor self acceptance. Definitely not self awareness. But not self acceptance either.
Well, I would and maybe there's a better word, but I would just say that there are people who
are delusional to the extent that they either
believe they don't have a problem that they have or they have a problem
And refuse to accept it as a problem.
We can go a lot of directions with this, but I would say that
I think we can agree there are complacent people.
And there are complacent people. And among those complacent people I think there are those
Oh.
Hate themselves.
There are those who sort of love themselves and are
Narcissistic and I know a number of these.
And then there's a lot in between. And I think that you there are complacent
In some respects complacent narcissists.
Who
almost by definition being a narcissist love themselves.
So is that self acceptance? Maybe yes, maybe no. I would say that it is, but it's a disabling self.
acceptance whereas to your point about blasting behavioral change
I think that at least psychologically
If you are
Divorcing parts of yourself.
If you hate parts of yourself, aspects of yourself that have been informed by your history.
And I'm borrowing this phrase from somewhere else, but like what you resist persists and that
you are going to carry that unproductive
And
in some ways self defeating tension within you, even if someone
is forcing you to change your behavior or incentivizing you to change your external behavior. And so even if
Technically you're changing a behavior.
If you carry self loathing, even partial self loathing with you, hating an aspect of yourself or certain emotion within yourself.
I view that as a loss.
Agree.
Yeah. So
No, this is this is getting out there a bit, but this is the type of stuff
That you know sometimes I worry that I lose that I've lost my audience. Can I c make a confession? Yeah. Because
For a long time I was thinking about writing a blog post about this, but for a very long time, if you look at all the books
That I've written.
It's like book on entrepreneurship, book on physical performance, book on cognitive performance and learning and the four of chef, et cetera, et cetera. It's mostly developmental. It's about improving
performance in one or more areas. And
Now what I've spent more and more time on, like we're spending time on right now, is the inner game.
For sure.
And the importance of
Developing a keen level of self awareness
So that
you can examine the contents of your this is gonna get super woo for a second. We're gonna simply the contents of your consciousness. Wherever you go, you're carrying your mind with you. And so to develop a familiarity with that, I think is the
Crux.
Skill that underlies everything else.
And you and I both know.
Plenty of achievers who are miserable.
Or for sure. High performing.
well known people who are utterly miserable. And to me the the question of
Why is that? How can that be the case?
Is
The question that I'm
extremely interested in these days.
But I worry that having built an audience

Largely, but not entirely kind of go go go, rah, rah, rah.
Win win win. There's nothing wrong with that, but people who are trying to develop skills and
Competitive advantages and so on.
then I may lose a large po portion of those people.
In shifting into talking about more of these things.
We'll see where it goes, but that's something that has occurred to me and I think I'm willing to make that trade. I think I'm willing to take that. If that's a cost of of doing business. I don't know.
So
A couple of things. One
The go go go.
audience that you've built.
This may scare them?
But I mean, as someone who works with elite athletes and professional folks and CEOs and those things, what I can tell you is this is the hardest challenge you've issued.
Mm-hmm.
And it's not about the conceptual complexity of what we're talking about. It's about
Unlocking
Performance is one thing. Unlocking people.
Yeah.
Way harder.
Way scarier in unlocking ourselves.
and creating self awareness, to me, you would be remiss not to go here.
Because
I don't know. I think
Something you said.
When you were talking about we all know a lot of narcissists and they love themselves, but
That's actually not true.
Do you know that narcissism is the most shame based of all the personality disorders?
Mm.
Narcissism is not about self-love at all.
It's about grandiosity.
driven by high performance and self hatred.
You know, I define it as the shame based fear of being ordinary.
And so you have
To me, you have this audience that and I'm one of them, I mean like, and I'm probably an outlier, I guess in your it's like me being a rush fan. Like
There's always outliers. No, yeah, the audience is like forty, forty to fifty percent.
female, but I appreciate yeah, yeah, it is. It's it's shifted a lot in the last handful of years.
Yeah. But I think
When I get invited in by a Fortune fifty CEO and here she says, look
We need help. We need help with a team. They're not asking me to help with time productivity.
They're not helping me to set up a Scrum or Agile process for software development. They're saying
We're at each other's throats.
We hate each other.
It's a shame based finger pointing, like it's all about self-awareness and changing those behaviors. And to me,
The hard thing about this
area in your work.
Is
A lot of what I've learned from you that has changed my life.
Has been
Not only effectiveness based, but efficiency based.
And so where you can lose people with this conversation is this is not an efficient process.
Yeah, right. Do you know what I mean? There's no I don't think there's a four hour
Self awareness. It's like I have no plans to write that one. Yeah, but I mean, but like but people would love it if you could, if you could unlock that fast. But to me
This is the capstone conversation for you.
Yeah.
Do you know what I mean? Like
They do.
In four.
Yeah.
You know, like
I'm fit, I'm winning.
I'm
Smart.
I'm successful.
And I'm on my third marriage and I don't speak to any of my children.
Yeah.
Which you see a lot, or I mean I see all the time.
Yeah.
Right.
I'm gonna tell you.
Not to dismiss the importance of that work.
That's easier.
Yeah.
Yeah, it is easier. It is easier, you know, because
The thing about these conversations
that you and I end up having every time we sit down, or this is a second time, but both times we've sat down is
What differentiates us is a social species.
Is
The need to be seen and known.
And loved.
And the need to see and know and love others.
And
No one rides for free.
Like we all come into this adulthood.
With hard stuff.
And
What I would say
is true about complacency.
And ninety five percent of what I see.
That people call pathology.
Is it's armor.
Yeah.
It's behaviors and ways of thinking that I've developed.
To protect myself from being hurt.
I have a question.

So my question related to armor is I'll get to through a segue, which is a quote that I wanna say Terrock.
The
Well known meditation teacher, also writer, radical acceptance is a fantastic book.
shared with me which I'm gonna paraphrase and it's along the lines of
You know, a great sage once said.
There's only one real question that matters and that is what are you unwilling to feel? I've thought about that a lot.
And
Not to say I have any
Concise answers to that.
I think it's uh an anecdote really worth meditating on. I've thought about it.
What do you say to
The people you meet who are on the third marriage, their kids don't talk to them.
And there are certain things that they have
Convinced themselves.
subconsciously or otherwise, maybe through an abusive upbringing or trauma, whatever it might be.
That it is unsafe to feel certain things.
And you come in.
They've asked for help.
But
They
Do not want to open Pandora's box.
Right. They do not want someone to drag them into the deep waters.
of emotions that they've kept under lock and key for so long.
How do you help someone like that? What do you suggest to them?
Because it does get messy.
Right. It's gonna get messy before it gets clean, right? At least in my experience. It's like you oh you're gonna do spring cleaning, guess what? You gotta take all the things that are up on the
Shelves, all the things in the drawers, all the things that are hanging.
On coat hangers and you're gonna put them in the middle of the room and it's gonna be a mess. It's gonna be a fucking mess. Yeah. You're gonna be pissed that you did it halfway through.
But
Can't really get
Pass go without that.
type of step. So for someone who's listening to this and says you know what?
I buy it.
Like I get it.
And yet, what do I do? Because I've had on this armor for so long.
So I would say a couple of things. I mean the first thing I always feel like is really important to say is that I'm a researcher and so I'm not a therapist. That would be differentiate me and Esther. Like I don't see clients. If I go in and I'm working with CEOs and this question comes up all the time.
What I would say to people is
Pandora's box is closed.
Right now.
But
Are you under the impression that you're living outside of the box?
Or in the box.
Like I like that.
You don't want to open Pandora's box. That's strange to me because you're living inside Pandora's box and what I feel like you've asked me to come here.
To open it up.
We're not gonna do this process without walking through some deep shit. With there's gonna be deep, swift water. And if the water is super deep and swift, you need to go through that with a therapist.
And
Get that settled before we work in the organizational way. But what I would say to people, what I always say is the same for me, and I'm sure the same for you that.
We
All grew up.
and experienced to very d varying degrees trauma, disappointment.
How you know.
Hard stuff. We armored up.
And at some point.
that armor no longer serves us. And so what I think I would say to that person is
How is not talking about this serving you?
Mm-hmm.
Like
I've been saved for twenty three years, so someone in AA would be like
How's that shit working for you?
Mm-hmm.
I probably would put a softer spin on it than that.
Over black coffee and a cigarette, but you know, but I would say that it's not serving anymore.
And now the weight of the armor.
Is too heavy.
And
It's not
protecting you, it's keeping you from being seen and known by others.
And so this is I mean just how you quent essentially.
This is
the developmental milestone of midlife from
Late thirties.
To
Through probably your sixties.
This is the question.
Mm.
Yeah, this is when the universe comes down.
and puts her hands on your shoulders and pulls you close and whispers in your ear
I'm not fucking around. You're halfway to dead.
The armor.
is keeping you from growing into the gifts I've given you.
That is not without penalty.
Time is up.
So this is what you see happen to people in midlife.
And it's not a crisis. It's a slow
Brutal.
Unraveling and this is where everything that we thought protected us.
keeps us from being the partners.
The parents
The professionals, the people.
that we want to be.
And
I've only seen this is a fork in the road.
I've only seen two responses to this visit from the universe. There was my response, which I I was like, Screw you.
Bring it.
Do you think you can best me?
And then it was just one nightmare situation after another until
Yeah, you're not gonna win that fight. Right.
I think if you say, you know what, I'm not gonna do it.
Then you've got to
Double down.
These are the people that walk through the world.
double down on their own shit.
In denial.
You know.
Cheek squeezed as they walk.
And
Cause.
So much pain in the world.
To themselves as well.
I mean yes because it is so much easier
To offload pain.
Then to feel pain.
Yeah.
And so
You really have a choice in midlife.
The first step of it, the whole process is
What armor?
I'm not saying just pull off all the armor.
And streak through Austin.
Because
I think you can't replace the armor with something.
I think it's curiosity.
is what you replace it. You just become very curious about yourself, about the world, why did I react that way.
When Tim asked me that question, I wanted to like
Hit him over the head with a Topo chica bottle, you know, what was going on there. Do you know what I mean? Like
What is my obsession about this? You just become very curious, is
Curiosity.
Is
Ріли за суперпар.
For the second half of our lives.
Because it keeps us learning, it keeps us asking questions and it increases our self awareness.
But
When you see and I think it's really hard because you know, I'll walk into a situation and they'll be the person who invited me.
who's usually the CEO.
And then you'll have like the cross armed pissed off clenched cheek like
F you looking person, usually in operations or technology, you know, and then they're like, what's the business case for you being here?
Yeah, right.
Here's our stock price, here's what's going on, here's our valuation, like what do you need? And then, you know, the CEO usually say,
Fucking hate each other.
And this can only last for so long.
You know, it's the end of every great band, right?
Like this is gonna come to an end and it's gonna be terrible.

And so
I don't know. I think
You can't pull it all off at once.
For all of us there's trauma.
Yeah. And people are like, No, there's not trauma for all of us, there's trauma for
You know, people who had have been abused.
physically, sexually, emotionally, there's trauma for people of color and people who have been on the margins. There's trauma for all of us. It's just different levels of trauma. Yeah.
You know, I mean
D escape childhood with nothing.
Is
I haven't met that person yet.
No I haven't either. Right.
So
The trauma staff literally the trauma message in our body is
You take this armor off, we die.
So you protect us at all cost and leave this on.
A lot of that work has to be done with a therapist.
The other two hacks that I think have saved our marriage.
besides just showing up and kind of using some of these things like what's working, what was hard.

Is
The eighty twenty.
So everyone says marriage should be fifty fifty. It's the biggest crack of bullshit I've ever heard. It's never fifty fifty.
Yeah. Ever.
And so what we do is we quantify where we are. So if Steve comes home and he'll be like
I got twenty.
Just in terms of energy. Just energy.
Investment.
Kindness, patience, uh twenty.
And I'll be like, I'll cover you.
I got you, brother.
I'll pull the eighty.
Mm.
Sometimes we come home, which we have done a lot. My mom has been sick and
I'll say I've got ten and see like
Touch.
I'm riding a solid twenty five.
So we know that we have to sit down at the table anytime we have less than a hundred combined.
and figure out a plan of kindness toward each other. Oh, I love that. Yeah, because
The thing is, marriage is not something that's fifty fifty.
A partnership works when you can carry their twenty or they can carry your twenty.
And that when you both just have twenty, you have a plan where you don't hurt each other. Yeah, it's the your threadbare, right? Yeah. And and and so
So what we'll say is I'm like, I've got ten and he'll be like I got maybe twenty five. We're like
Put all the groceries that are supposed to be great and healthy in the freezer.
We're ordering out.
Get the housekeeper here an extra day.
and we're canceling anything with people that we really actually don't like.
So how can we create some buff in the system? We do that.
So like and then you know, then we'll like a day or two later I'm like he'll be like I'm I'm riding a sixty. I'm like
Oh my God, work is kicking my ass. I'm still at a twenty. It's like.
I got you, but we're spare twenty.
So yeah, let's ask Charlie if he wants to skip water polar practice today and let's all turn in at eight o'clock.
Huge. The other thing I would say too that now I'm thinking about that is we made a determination very early.
There's kid focused families.
Parent focus families.
And family focused families.
We're a family focused family.
So that means
That
If you wanna do water polo, eagle scouts, tennis, and skeet shooting.
Then that comes to the family.
And the family agrees what will keep the family healthy. Like I've got a book launch, I've got this.
Steve's got patients. He's taking on others, you know, he's a pediatrician. He's doing this. So what works for our family right now is
You can do two extra curriculars.
And I'm going to have a two week tour, not a four week tour, but we put the family as the system that we serve.
It's not the kids at the parents cost or the parents at the kids cost. It's the family and it is
Remarkable.
How do you weigh?
If you do it all the voting system, so to speak.
Right. So if you all come to the table.
Does everyone have
і ко
vote in the
Decision making process with respect? No. No, this is a dictatorship.
Yeah, like yeah, we don't even bullshit around that. It's like when my kids like if I say like oh shit my kids are like ooh, you can't say that I'm like I can say anything I want.
You can't say that. And when you're old enough, you can do whatever you want. When you get your cursing license. Yeah, we yeah, you but right now I can I can totally do that.
Watch me. So we have very we talk to our kids about everything. We're super open. Steve and I both have veto power.
And we rarely use it. I bet I pulled out my veto card once in the last five years.
Vito meaning kid says I wanna do X and you say can't do X or Steve.
Yeah. I'm like, I I have to veto that. I cannot do that.
And then we really respect the video because we don't overuse it. So our thing with
Our kids This is my theory on parenting.
My theory on parenting is
The best we can do is a loving course from compliance to commitment.
that your kids need to do what you're asking them to do out of compliance. So don't run into the street, don't do this, you're not allowed to watch that kind of TV, you're not allowed to play that kind of video game. You need to comply, otherwise it's just some natural consequences.
At some point I've I've got a fourteen year old now.
He's at other people's house doing video.
Right.
And so if all I teach him is compliance and don't give him the why about why you can't do that.
If I don't say yes every time I can and explain the no's.
Then when he's there, and I can tell you that like we got a call from a parent maybe
A month ago and said,
The boys were having a sleepover. They wanted to watch, I don't know, some R rated violent thing. And Charlie said, Can we watch something else? My parents are not cool with this.
He didn't have to do that. Yeah. But he's moved to a commitment to our family values because
We say yes every time we can.
We don't do any of that stuff that my parents did.
Because I said no.

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I
And now
Edward O'Thorpe.
Legendary Blackjack player, hedge fund manager.
And mathematics professor.
And author of
Beat the dealer.
And
A man for all markets.
From Las Vegas to Wall Street.
How I beat the dealer and the market.
Find him on Twitter at Edward O Thorpe.
Yeah.
It is so nice to see you and thank you for making the time.
Pleasure to be here, Jim.
I've enjoyed many of your brows.
It's lovely to finally connect and perhaps we'll get to the small world that connected us at some point, but
I thought we could begin with a little bit of background for people who may not have the
entire context and then we can fill in the gaps. So perhaps you could speak to
A little bit of your
growing up and your formal education.
If you wouldn't mind.
How was uh
Born in Chicago.
During the reign of
Herbert Hoover.
President number thirty one.
So I've seen sixteen presidents.
I moved out to California with my parents during World War Two.
And basically.
Grew up in uh
California went through junior high school and high school out here.
And then uh went to U C Berkeley and U C L A God.
Uh bachelor's degree.
And a master's degree in physics.
And then
In the middle of my
PhD.
For physics. I
Realized I needed more math. So I started taking it and then I saw I could
graduate more rapidly in mathematics. So
I got my PhD in math instead.
And then I went on to teach at U C L A.
M I T.
New Mexico State University and uh finally uh the University of California, Irvine.
Now how did
gambling or interest
in those types of applications of physics or mathematics enter the picture for you.
Well, I'm a curious person and
You could say that it happened uh purely by chance.
When I was uh teaching at UCLA.
I got interested in
Beating blackjack, somebody
Told me about an article.
That
Would'll let me play almost even.
So
One Christmas vacation my wife and I went out actually
Christmas vacation of nineteen fifty eight, just after I got my PhD. We went out to
Las Vegas. And I never gambled because I knew it was uh
A loser.
For most people.
And uh the odds were against you, but I
Bet ten dollars.
And I played for about forty minutes and I had an interesting experience.
The first twenty minutes I had a little card.
Telling me what to do and people thought I was a fool.
Who knew nothing about the game and
They were right that I knew nothing about the game, but the card made me uh much smarter than the other players.
I made some remarkable plays that attracted their attention.
And then they all

how I was making these plays. In one of them I got a uh seven card
Twenty one.
Which is very rare.
And in most places.
Paid a bonus. They didn't pay bonus in this particular place, but they thought
I was trying for that and I somehow managed to produce it.
So I realized they didn't know much about the game, really.
And I went back and
Read carefully the statistics article and realized
That I could see.
From my math background.
How to actually
Devise the system to beat the game. Then I w set about to do it.
And about that time I
move from UCLA to MIT and I had access to the big computers.
At uh MIT. This was back in uh
Nineteen fifty nine.
They had an IBM seven oh four, which was a refrigerator sized machine that served thirty New England universities.
So I taught myself how to program.
And as I worked my way through with my ideas, I saw that I had a winning system.
And it was just a matter of finishing all the calculations. So I went ahead and did that.

I wanted to get this
System published because I thought that
From my experience in mathematics and what I've seen happen elsewhere.
Other people would claim they did it and grab the credit.
That annoyed me because it already happened to be in mathematics a couple of times.
So
I went
Shopping for somebody who could get me quick publication.
And
Turned out that on the MIT campus.
There was a man.
Who I knew nothing about, named Claude Shannon.
У вас інститут професор.
And he was a member of the National Academy of Sciences. So he could get me
If you approved of what I wrote.
A quick publication in the proceedings of the National Academy it would only take uh couple of months.
To get it out.
So I looked him up.
One day and
The secretary at MIT's Matthew Robins said there's no point going to see him. He doesn't see people.
He's very private.
And if you do get to see him, you're only gonna have five minutes.
So
I finally managed to see him at lunch for five minutes.
After we talk.
He said, Well it looks like you've got all the
Main ideas here.
Yes, I'll put this through, but we have to change the title.
The title was
A winning strategy for Blackjack.
And
He changed it to something like a favorable strategy for twenty one.
Which sounded better.
Okay.
He didn't want to make
Too bold a statement for the National Academy.
And uh make it look like this was a just a gambling paper.
So anyhow the paper got sent in.
And it caused a uh
Sensation.
Because I had
Submitted an abstract to it to the uh
American Mathematical Society meeting in Washington, D C
Where I was going to present.
By the way.
They initially rejected the abstract, saying that this is just another fool with a
System that doesn't work because we know you can't beat gambling games.
But on the abstract committee was a
person I knew well from U CLA, a number theorist named uh John Selfridge became quite well known in number theory.
And he said, Well, if Thorpe says it's true, it probably is.
So you should accept this abstract.
So I went there and I presented and I thought there'd be about fifty mathematicians in the audience, but instead
There were
Three hundred people.
It was jammed.
And uh a lot of people uh were very odd looking. They had uh pinky rings on and sunglasses and
Tropical shirts in the middle of winter.
So
After I finish the lunge.
For my uh little handout. I brought fifty handouts thinking that's all I need there, and I

Tossed the handouts out and left as quickly as I could.
Then it was picked up by uh
That's all I named.
Tom Wolf, who became a famous American uh novelist.
He was a
A young reporter then he wrote a piece for A P which went across the country and so
It got massive press.
That led to me writing a book.
And
Telling everybody how to do it after a couple of years.
Between the time I wrote the book, though.
And when I told
People how to do it by publishing.
I went out and played Blackjack myself.
And
Prove the system worked.
I figured that there's no point in writing a book unless I knew it really worked. I knew it worked in theory.
But what if you actually tried to do it?
You know, a lot of things they seem to work in theory, but when you get down and actually uh
Put something to the test.
You find out there are all kinds of things you didn't think of.
Turned out in this case it worked very well.
We made uh
In one weekend with a test uh eleven thousand dollars, which
Is about
That with a zero on the end in today's money.
This isn't about twenty hours of serious.
So I had
a lunch money at a M I T for uh a very long time thereafter.
Ed let me just jump in for a moment. So a couple of questions.
I could have a a thousand follow up questions, but I'll just I'll limit it to a handful. The first was four that eleven thousand
Which would be say a hundred and ten thousand in today's dollars.
twenty hours of serious play. Do you recall roughly what the
The bank roll was
Yeah, it was ten thousand dollars.
Oh, that was the starting. Okay, got it.
We started and we had eleven thousand.
I see, I see, got it. On top of that.
And my prediction before we went was that that's what would happen.
So it it panned out. All right. Two other questions rewinding a bit to your earlier story. When you were first sitting at that blackjack table, if I heard you correctly, you said you had a little card. If I heard you correctly, could you describe what that was on the card?
Yeah, it was uh a set of rules for uh
Hitting and standing.
Doubling down.
And pair splitting.
And it was uh
The best way to play
with a higher degree of approximation. It was the best way to play against a
Full deck.
Or what was left of a randomly shuffle deck if you didn't know anything more about the cards that have been used up.
And my contribution.
After I
Understood this.
Was
To figure out what would happen when
Some of the cards are missing from the deck.
Because
The cards that are used up.
Or not.
Yeah.
representative sample of the cards in the deck. They can vary quite a radically. For example, you might use all the aces early.
And that would be bad for the player.
Or you might use none of them up.
Until late in the game and that would be quite good for the player.
And with Claude Shannon.
The person who doesn't meet anyone. You said you were able to get five minutes at lunch. Why were you able to get time?
With Claude.
Or why do you think he was willing to spend time with you?
He was willing to spend five minutes, I think probably just to get rid of me.
But after we talk.
He kept asking me questions and it

And then he approved the paper.
That I wanted to submit. And then he said, What else are you working on?
So I said, Well, there's another project which actually I started before Blackjack.
And which got me interested in gambling.
And that's
A way of beating roulette.
And Claude Shannon, it turns out, was
Probably the
King of gadgeters.
He built.
Many ingenious machines.
Over the course of his life.
He built.
Robots that would run mazes.
Machines that would play chess.
He
Just
Love all that sort of thing, and he had a house full of gadgets and equipment.
Hundreds of thousands of dollars worth in
Valued in money back in uh nineteen fifty eight, fifty nine.
So when you hear about roulette.
And I explained to him what my ideas were there, he got very excited.
So we continued to talk.
And this
Five minute meeting became a little bit more.
Half an hour and then an hour, and then we adjourned to the
Cafeteria at MIT.
To grab a bite.
And we w went on for another couple of hours.
And we decided that we would
Join together.
And make an all out effort to build a
Machine.
That would allow us to project the outcome of of our roulette game.
And the house.
and casinos have had to
I was gonna say adapt, but really counteract.
your strategies and tools by
Changing the rules. So could you say more about what what you then devised?
In the case of Roulette.
What we did was we built a
Small
Computer.
That would had about
Eleven transistors in it.
Eleven or twelve, I
Don't remember which'cause we had two versions and uh forget whether we ended up with the eleven or twelve transistor version.
The uh computers now
At the MIT Museum in uh Cambridge. It's been on exhibit.
in uh various parts of the world at one time or another.
In any case.
Over about a nine or ten month period.
We worked in uh Shannon's basement almost full time.
And we
Built this wearable computer.
First wearable computer according to the MIT Media Lab.
And
One person would
Where the computer and Andrew
push button information about the
Position and velocity of the ball.
And the rotating
Wheel in the center.
And then the computer would instantly
There's a trick there. I I do mean instantly. It would instantly tell you word about.
And so
The other person would sit at the roulette.

Apparently connected with the observer who was busy.
Putting in the
Relet information.
And that person would hear series of musical tones.
Yeah, when the musical tone stopped.
The last tone.
In the octave would tell him.
What section of the wheel to bet on?
Divided the wheel into eight sections with a little bit of overlap.
And so uh
The person who bet which happened to be me.
Was
Able to quickly put down
Money on
Five.
Neighboring numbers on the wheel.
And had a massive edge of forty four percent. So
The
Piles of dimes we started out with with our experiment.
Dime chips became huge piles of dimes very quickly.
So the computer worked wonderfully well.
Yeah, I want to take a step back just for for people who are listening.
And say that.
There are many reasons that I wanted to have this conversation with you and
It is not specifically related to
to
Gambling in the sense that what most
There there are many things that interest me about your life and your thinking. And my hope is that for people listening
They get a window into at least two things.
One would be
Your methods of thinking frames more.
works for thinking, how you think about thinking, and then also
Your
personal approach to health.
And fitness. Because as people may have picked up with some of the references,
Could you tell everyone listening what your age is as we speak today?
I'm uh eighty nine.
And for those people who can't see video, you look like you're in your sixties.
And I am just
Beyond excited to to hop right into that. So we're gonna jump around quite a bit. We won't do this exactly chronologically, but
Could you
Perhaps describe
Your approach.
Two
Health and fitness and you could tackle that.
starting wherever you like. Is it just that you you were given the right parents and out of the box have tremendous genetics? Is there more to it? How would you begin to unpack this?
I kind of wandered into health and didn't spy.
accident initially. Just like I wandered into blackjack and roulette.
I'm curious and always looking for things to understand.
I like the idea of self improvement too.
So I was walking
behind the student co op one night when I was about twenty.
And heard a bunch of clanking.
I look down in the basement.
And there were some uh fairly burly guys down there.
Pumping iron.
And I walked in and I said, You know, this is
This is a waste of time. This is ridiculous.

I'll bet you a milkshake.
That if you work out
With us for a year.
Just
One hour.
An evening.
Three evenings a week.
You'll double your strengths.
Yeah.
A set of exercise that they uh
Describe.
So I said, I don't believe it. Let's try it.
I went down and uh the four exercises were
The squad.
With a barbell on a rack.
The military overhead press.
The bench press.
And uh deadlift.
Wasn't Deslift, it was something else.
I forgot the fourth one at the moment, but I'll think of it.
Yeah, clean and jerk maybe, who knows? Or Bent Row.
It was nothing wrong those lines.
But a compound exercise like like the others.
Yeah. So there was a fourth exercise. So anyhow.
What happened was
I was a uh
I wouldn't say ninety eight pound weekly.
But maybe uh
A hundred and fifty pound weekly.
And at the end of a year I could uh military press one hundred and eighty five.
Which uh was
At least double what I started with.
I could bench press.
Three seventy five.
I could do fifteen at uh
Three twenty five.
Um I could
Yeah, I could squat with three seventy five.
I could do south.
Forget what the other one was.
Wish I could remember it.
Any case
I was astounded that all this uh came to pass.
So maybe pay attention to uh
Strength at least.
And some time went by.
And I did a little swimming because I got interested in scuba diving.
Then uh
One day in my
Thirties I was jogging along the beach with my uh
Brother in law.
Yeah.
He said, Let's go for a little jog. I went for about a quarter mile and I was gasping.
I was thirty five then I remember.
I said, This is awful. I'm I'm in terrible shape. I have to do something about this.
So they had uh book
On aerobics by somebody named Cam Cooper.
Who has a had a lab down in Texas and started
In large part the aerobics a revolution that uh swept the country.
So I started keeping track of his points.
He gave you points for uh various degrees of aerobic effort.
I think if you did a miling.
Between twelve and fifteen minutes you got one point and
You do between.
What ten and a half and twelve you got two points.
And so forth.
So I started trying to run a mile a day and I did that.
Well, I ran a mile every Saturday to start with.
And then
One Saturday I decided to try a little further, so I ran two.
And then three.
And then I said, I'll tr I'll try a ten mile race.
I got under a ten mile race, which was uh kinda foolish.
But
I finished and I did I did reasonably well. So then I said I'll try marathon. So then I got into marathon running.
And I really like that. I did that for about uh twenty years until I uh hurt my back weightlifting.
All my uh bad events have been from pushing myself athletically.
So hurting my back was uh probably the worst angle thing.
It really needed a disc, so I had to stop.
Had to stop heavy pounding, heavy running.
But twenty years of uh road running.
Well, more than that, maybe twenty five years and marrifying.
Gave me I think a very good
Base.
For going forward.
And so now I
Do things like uh walk about.
Three miles.
Three or four times a week. And I spent about
Two days in the gym.
Doing stretching and uh
Strength exercising.
core strengthening and so on.
Lot of emphasis on core because of my back, which is just fine now.
I was just gonna ask how your approach seems like it has evolved and changed over time. Sape
After fifty years of age or
In the last.
Say forty years or so. Are there any particular changes that you made in addition to the core?
strengthening to support the back that you think have
contributed to your longevity.
I've evolved. I try to listen to my body.
So
I do what I enjoy.
And
The rule I started to follow was some is better than none.
And more up to a point is better than less.
So there's there's no excuse. I mean
If you tell yourself, gee, I'm not gonna do this because I can't do the whole program.
That's a big mistake. Just start doing it.
And I find that
If you start doing it.
And you get used to it.
You find more and more things that you kinda like that you can build on?
And then you just keep getting better at it.
I was probably in my best shape at around uh
Fifty five to sixty five because of all this.
That is inspiring. I am uh just about to turn forty five and
Even
Amongst my
It's just a age cohort.
It's very
common for me to see people giving up even in their forties and blaming it on age. But with you sitting in front of me
Describing your trajectory and uh sort of adaptive habits.
I feel like those
Those excuses don't hold a whole lot of weight.
One thing that's pretty neat is uh
Racewalking.
I did that for a while.
And that's something that is uh lower impact than running.
But you can get the same kind of aerobic work out.
So that's something I uh direct people towards.
What does your strength training look like?
Now.
Or over the last few decades.
Well, it's as I get older.
Declines.
I get weaker.
And it gets a little harder to do things.
Yeah.
I feel a little tired where I can't do as many uh reps or sets of things.
So
I have a mix of things that I do now. I will do
Squats.
Usually now just body weight.
And
I try to I'll do dumbbell squats.
Or
Lunges with a lot of emphasis on
One leg and then shift and do a lot a lot of uh
Wait on the other leg.
Do pull ups.
I think the best I've done recently, which is not very much, is uh four underhand pull ups.
And two overhand full of
Ten years ago I could do a dozen of each.
Well I do
A lot of back exercises regularly.
On the map.
And
That's very helpful for keeping my back in shape and keeping my core.
In pretty good condition.
So we may come back to this, but let's segue
And go back in time yet again.
And
Look at investing. How did finance or investing?
Enter the scene.
For you.
Well the way I got into finance and investing was
Yeah.
I made money at Blackjack.
And from book royalties.
This first time in my life I had any spare money before that. As an academic, my wife and I were living
From month to month.
With uh no surplus.
And then kids were coming.
And that made it even tougher.
So
Once I had some money from uh
Both gambling and book royalties.
I wanted to figure out what to do with it.
And so investing made good sense to me.
I would
Put some capital aside and let it grow.
I uh started out by making
A lot of foolish beginner mistakes, which cost me.
And then I decided to sit down and really figure this thing out.
And so I began to study.
Investing.
in my spare time. So I spent the summer
Nineteen sixty four.
Which was uh
I guess the third year of New Mexico State. Just reading
All summer.
In a big bookstore in uh
Beverly Hills, uh Martindales.
Reading all the investment books and newspapers they had.
And then I started again in the summer of sixty five.
reading whatever I could find. And I happened to get a little book on uh warrants.
Common stock purchase warrants.
Which were the forerunner.
To what people call
Call options, no.
And
When I saw that a light came on and I realized that I could mathematicize this.
And I could figure out.
How to value these things.
Yeah.
If I did that.
I'd probably be ahead of the crowd.
Who didn't know how to do these things.
And so I'd probably have an edge.
By chance I came to UC Urivine when it opened in the fall of nineteen sixty five.
And I was telling one of the deans there
About
This idea that I had.
And that I was working on he said, Oh, we have someone else who does that.
And turn up to be uh
Uh Shane Kasuf.
And so the two of us hooked up and she and Kazuf had actually been doing it in practice.
It's already made.
An elementary model.
Yeah.
Trying to charge warrants.
So we decided to write a book together and work out
More of the details and theory.
And so that became the book Beat the Market.
And that launch.
Both of us.
Into separate businesses.
And so I began to
Do what I call war and hedges.
And
Basically you by a cheap warrant.
And you're sure Thomasak against that's one way.
Or you buy an overpriced warrant.
And
You short it.
I said bye, you short an overpriced warrant.
And you buy the common stock against it hedge the risk.'Cause they tend to move together.
In the case of the overpriced warrant.
As it collapses towards uh zero.
Or.
toward its uh conversion value.
You captured.
An excess return.
You could make a steady twenty five percent a year with practically no risk doing this.
So I was doing it for myself.
And then
Word spread around UCI campus.
And people wanted to sign up.
So I signed up the Dean of the Graduate Division.
And I s also signed up the
Secretary to the Chancellor.
And uh some people in the math department and so forth. So I was managing a whole collection.
Oh
Little
accounts for people and they were making twenty five percent a year and they kept telling everybody about it.
The dean of the graduate division happened to be an investor also.
With a fellow named Warren Buffett.
And Warren Buffett was uh
At that point.
Shutting down his partnership because everything was
Overpriced back in nineteen sixty eight. Prices were crazy. And
The Dean of the Graduate Division wanted to know where to move his money to.
So he introduced me to Warren Buffett to kind of check me out to see if I might be a good place to put it. And so Warren and I got along fine and apparently I passed the test because the dean gave me his money to invest.
And uh so I got to know Warren Buffett.
And I was sorry to see that he was going out of business because I thought
As I told my wife then, this is gonna be the richest man in the world.
We'll come back to the that a little later.
I think you'll find the follow up to that quite interesting.
So I need to.
I got the idea of forming a hedge fund.
From uh Warren Buffett who was just
Closing down his hedge fund.
So I went into business.
Managing
Accounts and then
Merge the accounts into the hedge fund.
And
Start of this
hedge fund or private limited partnership.
That ran for about twenty years.
And used
Ideas.
That I kept generating mathematical finance ideas.
To keep
Staying ahead of other investors and making excess returns and
Yeah.
Twenty years.
We only had uh three down months out of all those months.
Yeah.
Those downmonts were less than one percent.
So basically just printed money every month.
And it made just under twenty percent annualized during that time.
I'm very risk averse, as you'll you'll find as we continue to talk.
And so this thing ran with extremely low risk, but yet had very high return.
So that was my entree into investing.
That's one hell of an entree.
Twenty to twenty five percent annually. Let's touch on a few points here.
So there were
Two other people.
Who I believe read
beat the market or were influenced by it, Fisher Black and Myron Scholes.
Could you just perhaps fill in the dots?
With that because not him tolerably
refers to the Black Shoals model with a different name. Could you perhaps just fill in the gaps there for people?
Or listening.
I actually
figured out what this model was.
Back in the middle of
Nineteen sixty seven.
Um
I decided that I would just use it.
For myself.
And then
Later.
I kept it.
Quiet for my own investors. The idea was to
Basically make a lot of money out of it for everybody.
And it was fun.
To me.
Just to develop it.
And apply it to various things.
No.
Fisher Black and Myron Scholes.
Red Beat the Market, which was sort of the launching pad for me.
into the uh finding this model.
And it was also a launching pad for them.
They saw how to
improved.
The ideas and beat the market.
And they made a
Mathematical finance model that value warrants and options very accurately.
So
It was based on uh
Set of assumptions that are fairly narrow, but pretty good.
And
All right.
So
That I was the only one who had this model.
So when
The cargo board options exchange.
Opened in nineteen seventy three.
I thought I'd have the feel to myself.
But unfortunately.
Fisher Black and Myron Shoals.
Publish.
The idea.
And they did a better job of the model than I did because they had
Very tight mathematics behind their derivation.
I had.
To make a couple of assumptions to get to the same.
Point.
But they're reasonable assumptions.
And in theory later on. So in any case they published the uh model and I thought oh
I have this hedge fund. I've been running for a few years. It's been doing well.
We're gonna make a lot of money in options, but now Black and Shoals have told everybody what the secret is.
But
People didn't catch on right away.
So when the Chicago Board Options Exchange opened for business in April nineteen seventy three, the only people on the floor were my traders.


It was like uh having machine guns against balls and arrows.
For people who don't know, Schulz went on to win the Nobel Prize for Economics in nineteen ninety seven.
Yes, and a black would have been there too if he hadn't died of
Cancer before that.
Yeah.
Was it MIT where they've been uh
Doing a lot of good theoretical work on uh the development of warrants.
And options. And so
He
wrote some beautiful papers about this theory about the same time that uh Black and Schultz were doing their work.
So
The prize was awarded jointly to Merton.
And shoals.
And
I will say this about the prize.
The people who publish
Are the ones who get the prizes?
People who don't publish. It doesn't matter what they figure it out or when they figure it out, they don't get the prizes.
Since they don't deserve to because
If you don't publish.
You haven't really proven to the world that you really did this on the one hand. And you haven't really changed the world in the same way that people who published you.
So
I think the people who don't publish don't have claims to these prizes.
Having the tool.
in place turned out to be revolutionary for my life because I was able to use this tool
And I had some.
Shortcuts in using it that other people didn't have for a very long time.
Because I developed it myself.
beforehand and they didn't get around to seeing it the way I saw it. These shortcuts were very useful.
We stayed ahead of
The
marching legions of PhDs who came later, we stayed ahead of them all the way through into atomic closement partnership in uh nineteen eighty eight.
Let me hop in for a moment here.
To
Ask a few questions about your
Meeting or at least one.
with Warren Buffett, why in that meeting did you come away saying you thought he would end up
being the richest man in the world. What did you see or hear or observe in that meeting that led you to that?
I saw that he was
Compounding at a high rate of return.
That he'd been doing it for a long time.
It was very, very smart.
And that he really knew a tremendous amount about companies.
So he was a good evaluator.
Oh.
Companies.
And he demonstrated a very large edge already. He'd been running his partnerships from nineteen fifty six to nineteen sixty eight.
It had
About a thirty percent before fee and a large return rate.
And
I was sorry that he was going out of business.
I met.
Things look so bleak.
From the standpoint of
Stock pricing to him at that time.
Interesting follow up to that story.
What Warren Buffett did at that point was
He
Decided to make
Yeah.
Poor textile company.
In uh
I forget where Ru is though.
Somewhere in New England.
Berkshire.
private mutual fund. And he bought up as many shares as he could.
And
He didn't
Particularly encouraged.
His exiting partners.
To take shares in that company.
Because he wanted them himself. They did have a choice. They could take cash.
Or they just take sharing a brochure.
And
Not knowing.
What to do?
Many of them just took cash.
And exited.
Some of them took Berkshire, though.
Versuche, I think was they would have gotten it at something like twelve dollars a share in nineteen sixty four.
Now it's a little under five hundred thousand dollars a share.


Yeah.
Oh.
The virtual story's kind of interesting.
I knew how smart he was.
And I said the way he's compounding, he's going to be
My opinion, the richest man in the world.
In a while.
It'll just take time.
I lost track of him. I figured he was just
Working for his own account.
And there was no opportunity for an investor. That was largely the case.
But then up in nineteen eighty two I happened to see an article about Berkshire Hathaway and I saw that he was running it.
And then I just started to take a look and I said, Oh
It's going from twelve.
The nine hundred and eighty two.
So
Is the opportunity gone?
Many people who owned it had sold.
On the way up.
Taking their enormous profit of
Multiple of five or ten or fifteen.
And
I said
I know what he's doing. I know this man. I know what he's going to do.
I'm buying a nine hundred and eighty two.
Even though
I missed out the move from twelve to nine hundred and eighty two. And of course buying it nine eighty two turned out to be a good move.
Yeah, I would say so.
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Okay.
Let me ask you if you were teaching
A
Let's just say it.
What could be undergraduate or graduate?
seminar in investing now.
So
You were teaching a class of
The Neophytes.
How to invest.
And some are
say mathematically inclined and some are not. It's a very mixed group.
What types of tools or thinking frameworks

Mental models.
Anything.
Would you focus on?
in the first handful of lectures.
Yeah.
The first thing I tell them is
The answer is really easy.
For almost everybody.
But you're not going to believe me.
Until you work through yourself and understand it.
Yeah.
I'll tell you the answer to start with.
And then I'll try to convince you.
That's just the right answer.
So I'll just tell you the answer to start with.
The answer is
If you're a long term investor.
You should just buy and hold.
Yeah, it's.
Um
That's
To have bought and hold equities.
Has been the US.
The last couple of hundred years overall.
Equities here have compounded it.
About
Him.
Or ten and a half percent.
Or two hundred years.
The data for the first time of years is
Not as good as the data for the last hundred.
But the data for the last hundred is quite good.
And uh very well documented.
How does that do against everybody else?
Well
You can prove
by logical and mathematical arguments.
Yeah.
I won't go into all the details.
Some of it's in my book. It's also another place.
You can prove
Yeah.
A person.
Simply
Buys the index and holds it.
He will outperform.
Most
All the other players.
The people who buy and hold the index will be
The whole collection of people who don't do that.
They do way better on average. The ones who don't do that pay
Trading costs.
They have.
More volatility from diversification generally.
From lack of diversification.
And they often pay investment advisors.
And
All this
And they also pay taxes when they trade.
So the upshot is that you might make ten and a half percent.
If you don't pay all these people.
You might make.
Eight.
Or seven or six percent.
to pay the crowd of people waiting to
Four.
Help you one quote.
So
That's the simple answer for people who don't know anything about investing.
Now you might say, Well yeah, but I'm pretty smart, I hear all these stories.
I listen to Cramer on TV, he jumps around and makes a lot of noise and sounds good.
So
Why can't I do better?
Well, the academics have something called the efficient market theory in which they claim that
You can't do better.
No.
I've already.
Explain that that's
That's wrong.
You can find instances where you can do better. Warren Buffler currently did much better.
I found with my hedge fund I could do much better.
But the
kind of work you have to put in to do much better.
Is substantial.
It doesn't seem like it at first.
But when you get into it.
The Walkins of G Tails.
Follow ups.
Mm.
Things to be checked out.
And you end up spending a substantial amount of time and energy.
Figuring out how to do it better.
Um
For everybody who finds out how to do it better.
The
Rest of the crowd.
Who isn't buying the index.
Is doing a little bit worse.
Because
You can show.
Yeah.
The whole collection of people.
Mm.
Don't buy the index.

As a group like the index.
Because everybody is a group is like the index.
You subtract the index part out.
And the rest is like the index too.
So
The people who
Oh.
Buying the index.
I don't like the index as a group. I'm busy paying all these costs.
Taxes.
Investment advisors and so forth.
So on average
That whole group does worse.
You're paying uh basically uh
Casino Vigorish or whatever, if you're not indexing.
And you've got to beat that in order to do better than the indexers.
Mm.
Obviously the group can't beat that.
So it it's only a small collection of people, some by luck and some by skill. We end up doing better.
So you're basically betting against the odds if you just step in and buy stories and invest in various
Mutual funds that are actively managed and so forth.
So that's what I would tell people now.
Now on the other side of the coin.
If you really are interested in investing.
It's worth
Educating yourself and trying to do it because you will learn a lot.
About
Investing.
You might actually find a way to win.
And
You'll learn about
How the world works and a lot about life too.
The things you learn.
From
What seems like a narrow specialized field.
Generalized very widely.
Do all kinds of things. If if you're the kind of person who can
Take a lesson in one part of life.
Yeah.
Transport it to another part of life.
What are some of those transferable
Lessons.
In your mind.
Let's take a risk.
as a good example. You learn about investment risk.
And
How?
You want to avoid
Very great risks or minimized them.
Great investment risks can take you out of the game altogether.
So you might have a a thing where you
Multiply your money by ten times.
But you might also lose it all.
Some things that are highly volatile.
Like buying cryptocurrency.
are in this category where you you may have
The chance of a very large game.
But also the chance of a very large loss. And if you lose most of your capital, it's very hard to climb back out. For instance
If you lose
Ninety percent of your capital?
You gotta multiply what's left by ten.
In order to get back to even.
Which means you've gotta make nine hundred percent.
To offset that ninety percent was.
That's
Not gonna be easy to do.
It takes a long time.
So you want to avoid really bad outcomes.
So
I applied that, for example, to uh
Covid.
I thought about
What to do and how to deal with it.
I said.
You know, at my age.
The
Stats from China which came over in early twenty twenty showed that
People eighty five and up.
Yeah.
Dying at the rate of
If they were male, eighteen percent.
Of those who got it.
Yeah.
Even now the death rate is very high.
For those who get it. If they're unvaccinated, it's probably pretty close to that.
If they're vaccinated, it's maybe a tempt that.
So
I consider that a risk that can uh take me out of the game.
With uh fairly high probability.
So I'm going to avoid getting covet if I possibly can.
I'm going to mask up.
I'm gonna avoid crowds.
I'm gonna think about
What the risks of various activities are.
That I do.
And decide whether it's worth it.
So I
Done.
My own analysis.
Of Covid and its risks.
And
Uh trying to be very careful th from then on.
I think it's paid off then.
Uh it's paid off for my family too. I've passed this information around to people around me.
Do you have any recommendations for
And this might sound a little meta, but how people should think about
long term thinking or the long term.
Because the the recommendation
For
Say an equity index or
Index ETFs.
was
Predicated on.
investing in holding for a long period of time. What would you consider sort of the minimal viable long period of time?
If you have an answer to that and
How can people become more aware of their own
Weaknesses related to
short termism or short term thinking and switch to more long term.
I tend to be
A long term thinker, you might say, Well, if you're eighty nine.
How can you be a long term thinker?
Well I have uh
Children.
And grandchildren.
I also
Feeling pretty good. So I
Eighty nine may not be all that old at this point.
In any case.
I would say that if
You're looking out.
Fifteen or twenty.
Years or more.
Maybe you have uh
A dynasty trust or something like that. Or you have descendants.
And you yourself.
I expect to live?
Fifteen or twenty years or more.
The best investment.
I think is
The bye.
Almost entirely equities and hold it. You might have wanna have a little cash around. I think Abford recommends ninety percent index and ten percent.
Bonds or
short term intermediate term bonds for cash.
That does just about as well as a hundred percent equities. I just put it all in equities because I have enough so I don't have to worry about
Fluctuations up and down.
If you have a
Shorter time horizon.
You may want to do things differently.
Yeah, it depends on how much you're going to need.
And how much you have.
I have a set of rules that are a little bit helpful here.
There's
I'll start with the uh what I'll call the four percent rule.
Suppose that you're going to retire.
And you want
Enough.
Two last year.
From your capital.
Throughout the rest of your life.
I would say a pretty good working rule.
But mostly inequities.
And spend four percent of your capital each year.
Or less if you can.
And that ought to last you.
Um
Say.
The sixties.
Till the end of your life.
It's not guaranteed.

Pretty good chance it will.
Then I have the two percent rule.
Which I found by
Studies both mathematical.
And by simulation of
Stock returns.
If you
Only drain two percent out per year.
Then
That money will
Probably grow in perpetuity.
There's a small chance it'll be extinguished by really bad downturns, but it's very small.
There is
An organization that
Bruises people.
And they asked me for
Advice about
How to invest their endowment fund.
Freezing meaning cryogenically freezing people.
And so I said
For the endowment fund.
Which is going to get people out.
Oh.
Uh being frozen sometime in the far future. Fifty, hundred, two hundred years out.
Well that's fun.
You're going to want to
Invest long term and let it run because that's gonna get you the most money down the road.
Yeah.
If you're going to
Attempt to reanimate somebody.
There's no
Specific timetable.
If you don't have enough money to reanimate'em at a certain time, you can wait a few years and let the money a little more.
So you want money to grow.
to as big an amount as possible in the far future.
And so
The
Two percent rule.
For the endowment fund.
I think was a pretty good rule.
Yeah.
Spending.
Because
All simulations showed that it were growth.
To a very large amount.
Over a period of time.
So
That's long term thinking.
Uh intermediate term.
I think of that as maybe uh
Five two.
Fifteen or twenty years.
Yeah.
There somewhat the four percent rule that I described might be good.
And for short term.
It's just a matter of
what your needs are and what you're going to have to uh come up with.
Yeah.
People
are in various uh ranges of wealth.
There's what you might call poor work.
You don't have very much to save or put aside.
And you're gonna be hard to retire and hard to make it?
Then they're maybe middle class people.
Who can put a moderate amount away? I know somebody, for example.
She has saved about it.
A million and a half.
And she is uh in her mid fifties.
I think she'll be fine.
So I've explained to her.
Pile it all inequities and let it rip.
She gets scared every so often when there's a downturn and she calls me and I tell her uh
Well fast.
And then it goes back up. She's like, I'm really glad I held fast.

A lot of people are what I call scared rabbits.
Yeah.
My marks goes up.
Do you get confident they start buying?
And then it drops and they get really scared at the bottom and they sell out.
Then it goes back up there by again.
And it drops and they get really scared at the bottom and they go back out again.
So they seem to have the worst of it.
All the time.

Yeah.
Doesn't feel good to go through life as a scared rabbit. It certainly certainly hurts your financial standing.
That's where thinking for yourself comes in.
You won't hold fast to something unless you understand it yourself.
There's no saying
Give a portion of fish and they eat for a day.
Teach a person to fish and they eat for a lifetime.
And that's a simple thing for thinking.
If you give somebody advice
About a problem.
They might solve that one problem.
If you teach them how to think about problems.
They can solve problems for the rest of their life.
And so that's the way to go. And also if you give them advice and they don't know understand what the advice is or how to think about it.
There's a good chance they won't take their advice.
I'll give you an example.
Back in nineteen ninety one.
I was invited to review the portfolio.
Oh.
McKinsey and Company.
Back in.
New York.
And so they had a profit sharing and a uh
Pension plan.
And I came and I
What?
And all the things they had things.
The headwork.
But there was one very strange.
Investment, yeah.
It printed out.
One or two percent a month. Every month. They've been doing it for years.
Yeah, the record going back.
Into the late sixties, supposedly.
Yeah.
I said, How do they do this?
Um
They said well uh
We don't know exactly they tell us that they won't explain what their method is.
But we can show you our accounts.
So I looked at their accounts.
Yeah.
I saw that.
This account.
What stock?
Damn it.
But
Option positions aren't called collars.
N
Had to put option a little below the stock price and they bought a call option a little bit above.
And that
The uh two things pay for themselves or self financing.
So they didn't have apparently a whole lot of risk.
But I could show that.
in a down market they would lose in a down month.
In enough months they would win. But they won every month.
And the reason they won every month.
was because a mysterious trade was put on.
Involving.
S P index options.
And it was always in the right direction.
So if they were gonna lose.
It would be a winner.
If they're gonna win, it'll be a loser.
So I said this is not possible.
I said I want to go over and look at this place.
So they called
The person in charge, who happened to be at that time Peter Madoff.
The brother of Bernie made off. Bernie was off in Europe raising money. This was nineteen ninety one, mind you.
So
When Peter Mayoff heard I was coming, he said no, I won't let him in the front door.
So I held my nose and I said I want to take a better look at all this.
So I look at all the trades.
And I saw that.
Half the trades never happened when I researched them.
That is.
There was
No trades occurred on any exchange.
At the prices they were making them at for these options.
Another
quarter of the trades.
Yeah.
So much volume.
Yeah.
The volume couldn't have happened because there wasn't that much volume on the exchanges where they traded.
The last quarter of the trades or
Which consisted of forty. There were one hundred and sixty to start with. The last quarter of the trades.
Didn't
Happen anywhere.
There was no explanation.
So I said okay.
Let's
Look at some of the trays.
That actually could have happened.
So I want to uh a vice president of
Bear Surns.
Rest in peace.
And
Said you know?
We do a lot of business together.
I'd like to ask you a special favor, which you might or might not be able to grant.
I'm gonna give you ten options, Trades.
I'd like to know
Who was on the other side?
Of these trades.
In particular was
Made off the company.
On the other side of any of them.
So they researched the trades and they came back and said, No, can't find any trace of any mate off in company.
So I said to McKinsey
This is a fraud.
And they said, But we're making twenty percent a year.
I said, Well you're making sixteen percent of your currently in your other investments.
If I'm right.
This twenty percent's not real and the roof's gonna fall in some day.
And
You might lose your jobs.
On the other hand.
If I am right.
And you move.
You have saved this problem.
If I'm wrong and you move, you're only going from twenty percent to sixteen percent.
So you know it makes a lot of sense.
To just
Exit.
So they exited in two months.
And
We inquired.
Of everybody we knew. I through my network, they through their network.
To find out.
Who had investments with Madoff?
And how much they had.
No, we could only cover a small part of the territory because our network was not comprehensive.
And
It turned out that
About
Half a billion.
We're able to identify.
No.
That meant that there was a lot more than half a billion out there. How much more we couldn't say.
But
Things were looking very bad.
On the other hand, how could you challenge Madoff? He was a pillar.
A V
National.
Association of securities.
Thank you, Brah.
Past president, he been on on committees there. He was the biggest
Third market that is not the exchange maker in the country.
So
A respected person.
And uh well known to everybody. And he had thousands of investors, as it turned out.
Yeah.
Because he had so many investors.
Everybody knew it had to be right because
Surely those people have checked it all out.
No.
No.
Finality of the story is
Yeah.
When I was doing this the person who invited me
Who was uh Hedgefront Manager
Himself.
Who invited me to
do this for McKinsey. He had been an advisor to them.
This person.
Believed and made off.
It continued to go out.
And raise money for him.
And
In two thousand and eight.
When the news came out that
Made off was a fraud.
My son called me up and said, You know, Dad?
The stuff you've been telling them be about for seventeen years. It finally happened.
It blew up.

So anyhow just follow who we've been running.
A fund of funds.
And include madoff in that fund of funds. They uh that's a special type of hedge fund.
Then invest in other hedge funds.
He had been doing this and had a very big fund of funds.
He was raising money for Madoff.
The same week.
Yeah.
The bad news came out.
And he had his own
Personal money.
And his family's money.
Um
Trust for money.
With me do.
But I had explained everything to him in great detail. I knew him quite well.
At the time back in nineteen ninety one.
Yeah.
McKenzie and Company.
had this analysis explained to them and decided to pull out.
So the whole point of this is
Here's the person.
Mm.
Had all the information.
It was explained very clear.
And he just
Didn't believe it.
And he himself was in the investment business.
And was very successful.
But
He was reporter.
In time's past.
Um
His family made a lot of money.
In the thirties he was
Came from a rich family in Chicago.
And the way he
Figure things out was he would pull people.
And he would ask.
People.
What they thought about something.
It would be like I asked you what's the uh
Best diet pill I can take. You'd probably say there aren't any good ones and I'd probably agree with you. Right.
He'd ask a hundred people.
Amen.
They would in fact be a pole.
And he'd go by the poor.
So
Just imagine that you
Yeah.
Ten thousand people.
Whether
They thought
You could travel faster than light.
Um
All but one said.
Yep, you can do it.
I saw it on TV.
Um
Only one guy said no, you can't do it, Albert Einstein.
So
A guy like him would
overwhelmingly reject Einstein and believe the the ten thousand
Average people who just
Said yeah, you could do it.
Because
The poll was
Nine thousand nine hundred and ninety nine to one.
On one side.
So
He doesn't think for himself.
He lets the crowd think for him.
And
I think is
A fundamental mistake.
Yeah. Many people make. They let the crowd do their thinking.
They don't figure it out for themselves.
Let's talk about toolkits.
And
Bring in.
We don't have to focus on him necessarily, but we've since Warren Buffett came up earlier.
You have then his partner Charlie Munger, who is well known for
Mental models.
And I think
Buffett describes him as having the best sixty second mind he's ever met. Something like that. What
Mental models.
Do you find helpful?
Yeah.
Would you teach?
in that class that I mentioned earlier.
And you can really approach it in any way that you think is
Is sensible. But how should people
Think about mental shortcuts or mental models and are there any that come to mind that you think are particularly valuable?
I'll tell you about a few.
And I'll tell you where to get more.
Perfect.
What's take?
A notion that economists
Call by
The
Priestly name.
Externalities.
Have you heard of that term?
I have. I have heard the term.
Okay.
Good. Most people have not, as it turns out. So you're you're way ahead already.
Well externality. We'll see where we go.

Simplistically is
A consequence that
Of somebody's action.
That's generally
Not intended.
And it's usually bad.
But it's sometimes good.
I'll give you examples of each of varying sizes.
Here's a bad one that happened to me, uh
Actually last week.
I go out to get my car and I find out that
The tire's flat.
I look
And I see a sheet metal screw.
In the sidewalk.
Which means
Yeah.
This tire's gonna have to be replaced.
So I I end up taking care of the problem.
Where did the problem come from?
Most likely, I think.
Down the road from me, there's been a lot of construction going on.
I've noticed as I go for walks.
Yeah.
Pieces of metal.
Are often lying in the road.
Sheet metal screws.
Nails.
Other
Things that aren't good for tires.
I think I'm up when I happen to walk by.
But
I don't get'em all.
And the workers are carelessly
depositing more. Not very many.
But it only takes one to give me a flat.
So
This is
An unintended
Bad consequence.
Of the work going on there.
Who benefits?
Well the homeowner does because he doesn't have to police his guys to clean up carefully and sweep the streets afterwards. He doesn't have to spend another
Five dollars.
A day.
Um
Sweeping labor.
To make sure that none of these things are there.
But it cost me
Five hundred dollars for new tires. Unfortunately it's a Tesla playout.
With a ten and a half inch wide Michelin tire, so the tires are not cheap.
So th this is an unintended bad consequence for me.
That saves a very small amount.
Yeah.
The
Guy who's doing the construction.
Few doors down.
Let's take a little bigger one.
When I was a
Chemistry.
Student back at age fourteen in nineteen
Forty.
Six.
Teaching myself. I mean the
It wasn't
Wasn't a decent chemistry class around. I came across a fellow named Sfonte.
Oranius.
A great Swedish physical chemist from
The latter part of
The nineteenth century.
Mm-hmm.
At that time.
And I learned it then.
Did study.
Uh
How?
Gases.
In the atmosphere trap. Heat.
And he explained.
how much the heat trapping power was of various gases, including
Carbon dioxide.
He explained very clearly.
How much.
Carbon dioxide.
would contribute to global warming as it increased.
So this was normal way back then.
Well, I knew it as a fourteen year old.
And the mechanism is obvious.
You can sit
Behind a uh
Plate glass window.
When the sun is shining.
And feel
Everything heat up around you, the greenhouse effect.
So it's simple, it's obvious, it's got plenty of science behind it.
What do people do now?
Well.
They create
A negative externality by polluting.
People drive around in cars and dump
CO two into the atmosphere.
And each individual
is convenienced by being able to drive around in his car.
But he
Contributes.
To a global problem.
A problem that won't come back.
Perhaps to haunt him.
If he doesn't live long enough.
Yeah.
Maybe gradual So gradual that he doesn't notice it.
But
Everybody together is busy.
Contributing this major externality.
To the world.
Which leads to a second little mental model.
It's called the tragedy of the commons.
That's so.
Pretty famous thing by a guy named Gerard Hardin.
Yeah.
The simple example is you've got a village.
With a little green in the middle.
And it's got a lot of grass growing.
Um
Only a few people live in the village.
So one guy has sheep and he that's his sheep.
Grays on the green and there's plenty of grass, so that's not a problem.
Few more people move in.
They get some sheep.
They turn'em loose on the green.
Pretty soon.
There are too many sheep for the green. It's all eaten up.
So
Each person acts in his own self interest.
But
Collectively.
What they do is against the common good.
So that's another little mental model or idea.
So there's a whole collection of these
things that are out there that are very uh valuable.
Work.
Thinking purposes.
One collection is um there's a fifty item collection that came out
Under
INC period on the internet uh b from Elon Musk.
It's quite good.
There's also
Charlie Mungers.
Book.
Poor Charlie's alminic.
Yeah, which has a lot of these things embedded in it.
One of my favourites.
Yeah.
It has a strange name.
of uh fundamental attribution error.
Yeah.
I didn't like anyway. I said, Charlie, why are you calling this fundamental attribution error?
Well
Charlie actually just
Picked it up.
From
Sociology and and psychology. That's what they call it.
Yeah.
I thought it's a terrible name. You should call it something else, but as I thought about it some more, I decided it's actually not a bad name after all.
Roughly speaking.
What it does.
is
It's a human tendency.
Two
Make assumptions.
That are not
Fully justify by the evidence, for instance.
You go to lunch.
And the person you invited doesn't show up.
So you begin to
Speculate. Well
Maybe he just forgot. He's a f forgetful guy.
Or
Maybe.
Since we had a little quarrel.
Two weeks ago, maybe that was it.
Maybe he's just mad and he's gonna show me.
Or something of that sort. You start making up stuff to try to explain it.
But you don't have the evidence for it.
It turns out.
Yeah, on the way.
He's busy dealing with all the fall off from a car accident.
And two hours later you
Find out what actually happened and
It's too bad. He apologizes profusely.
But
You didn't have any idea what actually happened. You just started making stuff up.
That is something that we humans do over and over and we're wired for it. It's evolutionary.
It ties into a famous book.
Thinking fast and slow.
Daniel Kahneman. Yes, exactly.
Yeah.
So he has an example there of
You're in the forest?
And
You hear a roar.
You don't stop to find out where the roar's coming from. You run up the nearest tree.
Because it might be a lion.
In fact it might be something entirely different.
But you don't take any chances. You you react.
And if it's not a line.
You've made fundamental attribution error.
You attributed to being lion when it wasn't.
But it saved your life.
Often.
When it wasn't uh an attribution error.
Baptizing with something else, which is learning how to think.
If you
Think fast.
Kind of emotionally from the gut.
Responding without really reflecting.
You will make a lot of mistakes.
Sometimes though, it's a way of
Saving your life.
For example, somebody yells fire. You're at you're at the door of the theater.
You run out the door.
Mediaway.
Before you find out whether there is a fire.
There might or may not have been.
But running out the door, he
Before the time to reflect, in which case it might be too late.
Is a good thing to do.
I hold it all for everybody else too as I run out.

Just wanna mention a few things on the externalities piece.
And thinking about the say unintended
secondary or tertiary effects on the collective there can also be
Positive.
Externalities.
Or externally benefit like if you were to buy fire insurance for your house, your
neighbor might be a little bit safer. Right. So it can it can go both ways.
That's a good example, and it's one that actually
Was a real life experience for me right here.
We had a fire. Wildfire.
Couple of months ago, we all had to evacuate.
And uh
I have chub.
And they have
Wildfire insurance.
And so I have that.
And so Chubb actually had a water truck out here, which protected not only me, but lots of other people in the neighborhood.
Uh.
So is the next step after identifying these externalities, for instance in the case of the construction site
Thinking about
How to
Somehow create and enforce
Incentives.
Such that.
Someone is acting.
to the benefit of the collective. For instance, the construction site where someone's not spending five dollars but it costs
individuals.
Who are affected five hundred dollars to replace
I give entire
I'm sure there are a million different examples of this. Does that then lead to a study of incentives?
Yes, that's a good point.
The
If somebody creates an externality.
That's negative.
A good thing to do.
Just to tax it.
What we've learned is if you tax something you get less of it.
So

Let's take carbon for example.
If you tax carbon.
You get less of it in the air.
So a carbon tax.
Is the rational logical solution.
To the whole pollution problem.
All you have to do is make the tax big enough and
People find other ways to do things than uh pollute with carbon.
However.
That leads to another.
Thought principle. Which is
The
Difference between rational solutions
To social problems.
A rational solution is one that
Is generally good for almost everybody.
As opposed to a select few.
You can have rational solutions to social problems.
But you often can't.
Get them implemented.
So
You also have to think about
What can you actually accomplish politically?
And there's a great book about that.
There's a professor at Yale.
The strolling professor
Oh.
political science Ian Shapiro. I happen to listen
I listen to the podcast.
Yours included when I go for my walks.
Yeah his course was one of the ones I listened to was absolutely great. It talks about how to actually
Get something done politically.
Yeah.
We've seen
For example, the Biden administration has had great difficulty.
Getting very much of what it wants to do passed.
And they could learn a lot.
From this professor who has a lot of good things to tell them.
He has a book called Uh
The wolf at the door.
Which.
And fairly recent.
Which
Basically explains the things that I learned in his uh political science course uh
A few months ago.
Yeah.
It tells you how to form coalitions.
That can win.
And how to pass things that will stay in place.
For example, social security stayed in place.
Because
It had
A strong constituency that created right away.
In that constituency.
was going to defend it forever after.
And it's
Politically.
Even though
Some politicians and
occasion political parties have tried to destroy it.
They have not been successful because the constituency is so embedded and so strong now.
So anyhow, he has
A clear description of how you can actually get things done.
And he believes I think that
You can make incremental progress.
Discouraging as though it seems these days.
By doing
the right way of putting uh coalitions together.
Yeah.
Defending against
Blocking coalitions.
So it it's a very insightful course anybody who wants to get something done evolutionarily.
I would recommend uh reading his book.
And I might say.
We're in a crisis of uh democracy now, in my opinion.
And simplistically we have three paths. There's devolution.
Which I think.
Oh, or undergoing now.
There's evolution.
Which I hope.
Is the way things
Work out in which we fix things and things get better.
And then there's revolution.
Which is extremely ugly and unpleasant.
And one of your uh
A previous interviewees, Ray Dalio.
As a book.
That I would
I think it's very well worth reading, even though it's a tough vlog.
And uh maybe I
Change the writing a bit.
But
You know, it's
It's uh a real contribution to thinking about the
crisis that we're going through now.
And it talks about the
Changing world order.
I think that's the name of the book.
And
The rise of
China as an empire.
And the decline of the United States as an empire. And I think that uh
We have some serious thinking to do. We can't just sit back on our laurels and say we've been so great.
We've been uh the world superpower.
And hope that it's going to last.
We have to do things differently.
I'd recommend that.
I also would second that recommendation. Francis Fukiyama has also some fantastic writing.
that is worth exploring. And I I have that Dalio book
within fifteen feet of me here where I sit right now. And speaking as someone who
Studied also.
in China myself, uh at a pretty pretty fascinating time to be there. I was around uh
in Beijing at two universities in nineteen ninety six.
have tracked things pretty closely since that it's definitely worthwhile to read up also on the
history of China because that is going to and is coming to bear as we speak on
The entire three dimensional chess of uh geopolitics which is uh
fascinating and also at times terrifying, certainly.
Let me ask you if I may
What other investors aside from Warren Buffett
Impress you.
And they could be
People who are no longer actively investing.
They could be current. But are there any other investors who come to mind who have particularly impressed you outside of
Buffett and the reason I ask for people who are wondering is
related to what you said earlier, that by studying investing, by participating in investing, you get to stress test
and look at how other people stress test.
thinking and cognitive biases and so on. Is there any anyone who comes to mind for you outside of outside Buffett?
There are people in the hedge fund world who have done remarkable jobs at various times.
But they're not.
Accessible.
To most people, for example, let's take uh Jim Simons of Renaissance.
Response partners is basically uh
Uh private operation at this point.
But it's been extraordinarily successful.
PH and computers.
And math.
And code breaking and so forth and
It has
From around nineteen
Eighty nine or ninety on.
Been spectacular in his performance.
Probably the best.
Risk adjusted record.
In the world.
From that time forward.
And for people who want to read more about Jim Simons, there's a book called The Man Who Solved the Market.
Which is a good read.
Uh, although you're y you're probably not gonna be able to, as you mentioned it.
emulate the sort of quant approach that that he is taking for a million and one reasons, but
Absolutely fascinating story.
Any other names who come to mind?
I'm trying to think of who I would
Give money to to invest.
I don't have anybody now that I'd get money to to invest.
There are a few good hedge funds around.
But
They take too much.
For the general partner.
And leave too little for the limited partner.
And they also
Generate
Income that is
Highly taxed.
If you're a taxable investor.
So
They're only good for non profits at this point.
Tax exempt investors.
What about past investors say
In decades past who you would have given.
Money to, willingly.
Does does anyone come to mind? Well I I did give money to
Ken Griffin's Citadel. Mm-hmm. For
From the time it started, I think.
I was investor number one.
After Frank Meyer who was the uh
Other general partner with Ken Griffin?
Frank Meyer was a longtime friend of mine from the past. So that's how I learned about it.
Actually have Jim Gerson out to the house.
When he was about to be able to do it.
Eighteen or nineteen and uh just starting up with Frank and talk to him about how
My headphone, Princeton Newport, worked.
One week.
Discuss it somewhere.
The idea of profit centers and subsidiary businesses.
And I handed him uh boxes of
Prospectuses were hard to get on all kinds of convertible securities. Uh these things would come out when the securities were issued.
Then they would no longer be findable anywhere. They were just like rare books.
So I handed him my whole collection of cartons of these things.
So I had a very good ride with him and I finally uh
Exited.
Recently because
The
Taxes take too big a bite.
out of the returns that I get.
It's just simpler to invest in an index fund. I end up better off than if I were to remain in uh citadel.
Also complicated you get all kinds of
Papers. I had four feet of paperwork.
When I finally uh boxed it all up at the end.
Ha ha ha.
That is a lot of paperwork.
introduction, but what was it at the time about
Ken Griffin and Citadel that made it pass muster for you.
Well, they were gonna follow the exact plan that
I was following when I shut down Trust Newport, so that was good.
And I knew Frank.
And he was smart and capable.
And uh can seem very smart and capable and energetic, so
They were doing what I would be doing if I had I stayed in business.
Ha ha
So let's let's talk about stay in business because I had a question.
that I wanted to make sure I touched upon.
And there are a million others.
That
I would love to talk about, but could you please speak to having
enough. You've spoken about or at least written about how your hedge fund could have taken over your life.
And you could have just ended up as a
Capital accumulator as your full time full time job plus
How did you make the decision?
to wind it down.
And how do you think about having enough? Because it doesn't strike me as
Something I come across.
often with people who are really good at investing.
The way I got into the investment world, I was an academic
And I was curious. And I found things interesting.
I wasn't really in there.
To get rich. I was in there
To deal with interesting math problems that kept coming up.
Black track.
Well, that was a math slash physics problem.
Investing was uh
For me, lots and lots of math.
So
I enjoyed that.
I just do things I like.
Yeah.
I don't worry about money.
As my uh former sister in law once said.
Do what you love and the money will follow.
She wrote a book with that title.
And uh
I said, you know that's
That's right.
Yeah.
Do what you love and the money may follow. And if it does, that's fine. If it doesn't, you're still doing what you love.
Yeah.
What's important in life, I think.
Is the journey.
And
The people
You know and you spend your time with.
And
How you spend your time otherwise also.
That's how I looked at things.
Yeah.
I started out.
As a child of the Great Depression.
So I knew what it was like to have
They say no money.
I used to sleep.
Four or five hours a night in high school.
And get up at two or three in the morning and fill over newspapers.
And
I made twenty five dollars a month, which seemed like really big money.
Right.
Save part of that for college. Yeah.
Invest of it in
Science equipment.
Chemistry, telescopes, electronics, and so forth. Just because I like
Playing with those things and learning about them.
My goal wasn't to make money. It was to have
A good life and enjoy myself and have fun.
Yeah.
It just so happened that it turned out a lot of money too.
What I found though in the investment world is
Lots of people go in it for the money.
And when they do
They keep going and going and going.
Yeah.
It's a validation.
of them.
They can't stop.
They end up with
Oh.
Five or ten.
Villas.
A yacht?
A jet?
Yeah.
Let's imagine you have five houses, just to take an example.
How much of your time you're gonna spend on each house? It can't be, on average, more than a fifth.
But my mass.
Um
You're not gonna be in
Your house all the time anyhow, you can be veganing, travelling, meeting, and so on. So maybe it's a sixth or seventh.
Of the time on average.
Now some houses are gonna you're gonna spend more time and some less. You may spend a tenth or fifteenth of your time.
Or none of your time almost in one of those houses.
So you end up with a whole lot of stuff.
To manage and take care of.
Yeah.
You end up hiring people to do that?
So you don't have to do it?
And then you have to manage those people.
And then you have to hire people to manage the people who manage the people, and so on.
It's like running your business. It's terrible.

You you don't get to enjoy the important part of your life, which is time.
Did you
Have a set point at
Which point you knew you were going to exit.
the business, so to speak, or was there a particular day
That prompted a particular experience that prompted you to say enough is enough.
I want out.
Do you remember what the catalyst was if there was one?
I
Wasn't having fun anymore.
It was turning into work.
I said, Well
I don't need to do this.
I have enough wealth.
I'm never gonna spend it all.
Why?
Keep.
Doing this.
So
I decided to wind it down.
It was fun.
For a long time'cause there were challenging problems. It was uh
Challenging.
Two
Trying to figure out new things.
And to deal with all the issues that came up.
But when it became uh
bureaucratic and paperwork.
And a grind where I had to do things I didn't want to do.
That was enough. It was time time to go.
It was the same thing in academia. I loved academia.
But
There were aspects to it that became burdensome.
Committee meetings.
Endless reviews.
Grant proposals.
What I liked was research.
And teaching.
Um
The people.
That I met there.
The students and the faculty that were
Smart.
And uh challenging.
And if it was only that.
I'd still be there.
But it wasn't only that.
And I found other things that uh were equally or more fulfilling.
So anyhow, I just migrate to where
Where I want to be.
I don't have a set uh
Thing that I have to keep doing.
So let's explore that a little bit further. Not sim Talib.
How many people will know?
Because of books like Fooled by Randomness, The Black Swan, Anti Fragile.
wrote the forward to your memoir and in that he writes about your restraint not getting caught up in
Of the
Yeah.
The golden fetters of large structures, multiple offices, morning meetings, et cetera.
And he highlights
the value or the fact that you value independence. So what does independence mean to you? And
How did you spend your time after winding down?
The investment.
Side of things.
I spent my time.
Reading.
Travelling.
Exercising.
Enjoying my family and my friends.
And uh learning.
Things that I could learn. And then it's also entertaining too.
Casually manage my investments.
I might just interject here that
One of the things that makes you independent.
Is to accumulate capital.
Because of the capital.
Can grow on its own.
If it's up.
Simply invest it as I described before.
For example, an index one.
And once you have capital.
Then
You have the chance of independence.
The if you have enough capital.
It will support you indefinitely.
When you've achieved that goal, there's no point.
And spending time doing anything you don't like doing if you can help it.
You know, I have to do some things you don't like, like gather all your tax information together every year.
Or uh
Go in for routine medical appointments.
Is there anything that you are
particularly interested in learning more about now or in the process of learning about or looking forward to learning about?
What I've focused on for the last
A year or so.
Is reading about
What's going on?
In American society.
What may happen.
I don't think we can project
For sure was going to happen, but we can
Map out scenarios. We can map out possibilities. We won't get them all.
But we can map out quite a few of them.
And ask ourselves.
What will we do with
Scenario A, Scenario B, Scenario C materializes.
Um
Have some sort of preparation and readiness for that.
Yeah.
I won't.
Go into a list of extreme scenarios, except maybe a few.
You could have
An autocratic.
Country.
Where
A minority.
Pretty much rules everything.
And dictates everybody else.
You could have
Turbulent country work.
large part of the country, maybe a majority, is badly upset.
And just wants to bust everything up.
And start over somehow.
So you could have the choice I described, a devolution, evolution, or revolution.
I don't know how it's gonna play out.
But
It's worth thinking about.
What might happen.
And whether there's anything
Any of us can do about it.
Yeah.
I don't think there's much.
An individual can do.
On a grand scale.
Unless he happens to be in a position of great importance.
Or manages to get himself in a position of great importance.
But I think there's a lot that an individual can do on a small scale. And I think the best thing we can do
Is teach everybody to think for themselves.
So they don't just take
What they're told.
In the press, for example.
Or in the
Other forms of the media.
Internet.
Twitter. So on they don't just take that and sop it up.
And Bold Eva.
But say.
Question it.
And they ask.
Whether in fact.
It might not be true.
What the motives are of the people who are putting these things out and so forth. When you begin to think for yourself, the whole world changes.
And becomes much
Clearer in my opinion.
Yeah.
You can manage your life.
A much better.
Fundamental attribution error.
Learning about things like that.
Not
Putting your own thinking.
under examination. Ed, this has been so fun and I know that there are a million other things we could talk about and hopefully we'll have a chance to do a round two at some point.
But I wanted to be respectful of your time and
begin to bring this to a close. Is there anything else that you would like to
mention or call attention to any request of my audience that you would like to make.
people can certainly find
You online at Edward.
O Thorpe.com and I'll link to that as well as your books and everything else that we've discussed in the show notes at Tim.blog slash podcast. Uh is there anything else that uh you would like to bring up before we
And this round one.
Conversation?
I'll tell you one story.
You probably read my book.
It's about
Joseph Heller.
And uh
Kurt Vomigan.
Yes, please.
Joseph Hallow wrote this.
Famous book Cat twenty two.
Which they mean a movie.
Way back.
Maybe fifty years ago, I'm not sure exactly when.
But it was uh
Very well known and famous at the time.
And Kurt Follow me did.
Is well known too for a variety of books.
Yeah.
Joseph Heller died.
I'm not sure when maybe uh
Early two thousands.
And Kurt Fondigart was writing in the New Yorker about him and he said
Joseph.
Heller and I were at
A Hedge Fund Moguls.
House.
I'm not sure if it's hash from mobile, but
Somebody very, very rich in New York.
And I said to Joseph Heller.
You know?
You've made a lot of money out of uh Cash Twenty Two.
This guy makes as much money.
In a day.
Is you're ever gonna make.
He's got
And houses.
And yards.
And jets.
Angela's
And models falling off his arm, and so on.
And Justin Halloween looked back and said, You know, I have something.
He'll never have.
True phone like it was possible. He said, What's that?
Hell said.
I have enough.
And that's something that
People chase money to the end.
Don't figure out.
That you can have enough?
And it's better
Than not having enough.
It's certainly better than never being stated.
And
Staying on
That's sort of compulsive.
track and I am so endlessly fascinated by by you, your story, your lessons learned.
And I really hope we have a chance to have
Another
Conversation because I
Have still so many
Different notes.
and questions that I would I would love to tackle, but we'll we'll leave people wanting more and hopefully we'll we will make time to have that second conversation. But thank you so much for taking the time today, Ed. It's been uh it's been a real joy to spend this time with you.
Well, I enjoyed it very much. It was a pleasure to meet you and
No, I know.
That since I'm on your podcast, my wife will listen to me.
Yeah.
Well.
One can hope. One can hope. One can hope. And to everybody listening, thank you for tuning in, as always. And until next time, try not to act like a scared rabbit and be just a little bit kinder than you think you need to be. And
As always, thank you for tuning in.
Hey guys, this is Tim again, just one more thing before you take off, and that is Five Bullet Friday. Would you enjoy getting a short email from me every Friday that provides a little fun before the weekend?
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