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Saturday, March 22, 2008

Blackjack and investing

Edward Thorp and Bill Gross talk about their investing philosophy, and its relationship to blackjack.  Mr. Thorp ran two hedge funds, Princeton-Newport Partners and Ridgeline Partners, which went nearly 30 years without a down year, and averaged 19%-20% annual returns.
[Thorp and Goss]
(source: wsj)
 
 
"....(the) basic thrust concerns the idea of gambler's ruin, where you lose everything by over-betting. In the context of blackjack, you can never bet more than 2% of your stake without the possibility of eventually losing your entire pot".
 
Bill Gross, "Here at Pimco, it doesn't matter how much you have, whether it's $200 or $1 trillion. You'll see it throughout our portfolio. We don't have more than 2% in any one credit. Professional blackjack is being played in this trading room from the standpoint of risk management, and that's a big part of our success."