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In Episode 39, we welcome the legendary Ed Thorp. Ed is a self-made man after having been a child of The Depression. He\u2019s a professor, a renowned mathematician, a fund manager who\u2019s posted one of the lengthiest and best investment track records in all of finance, a best-selling author (his most recent book is A Man for All Markets), the creator of the first wearable computer, and finally, the individual responsible for \u201ccounting cards.\u201d\nMeb begins the episode in the same place as does Ed in his new book, the Depression. Meb asks how that experience shaped Ed\u2019s world view. Ed tells us about being very poor, and how it forced him to think for himself, as well as teach himself. In fact, Ed even taught himself how to make his own gunpowder and nitroglycerine.\nThis dovetails into the various pranks that Ed played as a mischievous youth. Ed tells us the story of dying a public pool blood-red, resulting in a general panic.\nIt\u2019s not long before we talk about Ed\u2019s first Las Vegas gambling experience. He had heard of a blackjack system developed by some quants, that was supposed to give the player a slight mathematical advantage. So Ed hit the tables with a strategy-card based on that system. At first, his decisions caused other players at the table to ridicule him. But when Ed\u2019s strategy ended up causing him to hit \u201c21\u201d after drawing 7 cards, the players\u2019 opinions instantly changed from ridicule to respect.\nThis was the basis from which Ed would create his own counting cards system. Meb asks for a summary of how it works. Ed gives us the highlights, which involve a number count that helps a player identify when to bet big or small.\nMeb then asks why Ed decided to publish his system in academic journals instead of keeping it hush-hush and making himself a fortune. Ed tells us that he was academically-oriented, and the spirit of science is to share.\nThe conversation turns toward the behavioral side of gambling (and investing). Once we move from theory to practice, the impact of emotions plays a huge role. There\u2019s a psychic burden on morale when you\u2019re losing. Meb asks how Ed handled this.\nThis dovetails into the topic of how to manage money using the Kelly Criterion, which is a system for deciding the amount to bet in a favorable situation. Ed explains that if you bet too small, won\u2019t make much money, even if you win. However, \u201cif you bet too much, you\u2019ll almost certainly be ruined.\u201d The Kelly Criterion helps you determine the appropriate middle ground for position sizing using probabilities.\nIt turns out that Ed was so successful with his methods, that Vegas changed the rules and eventually banned Ed from their casinos. To continue playing, Ed turned to disguises, and tells a fun story about growing a beard and using contact lenses to avoid identification.\nNext, we move to Wall Street. Meb brings up Ed\u2019s performance record, which boasts one of the highest risk-adjusted returns of all time \u2013 in 230 months of investing, Ed had just 3 down months, and all were 1% or less. Annualized, his performance was over 19%.\nEd achieved this remarkable record by hedging securities that were mispriced \u2013 using convertible bond and options from the same company. There was also some index arbitraging. Overall, Ed\u2019s strategy was to hedge away as much risk as possible, then let a diversified portfolio of smaller bets play out.\nThere\u2019s plenty more in this fantastic episode, including why Ed told his wife that Warren Buffett would be the richest man in America one day (said back in 1968)\u2026 What piece of investing advice Ed would give to the average investor today\u2026 Ed\u2019s interest in being cryogenically frozen\u2026 And finally, Ed\u2019s thoughts on the source of real life-happiness, and how money fits in.\nAll this and more in Episode 39.\nLearn more about your ad choices. Visit megaphone.fm/adchoices