A Man for All Markets

In those days the exam began with a series of written questions on radio theory. Next was a test on Morse code. That hurdle, since relaxed, was a major obstacle for most, and Mr. Carver warned me about the long, tedious hours of practice needed for proficiency. We had to copy code as well as send it with a telegrapher’s key at an error-free rate of thirteen words per minute. A word meant any five characters, so this was sixty-five characters a minute, or a little faster than one per second. I thought about it, then went out and bought a used “tape machine” for what was then the enormous sum of $15, almost three weeks’ income from delivering newspapers. The machine looked like a stubby black shoe box. The lid unclipped to reveal two spindles. It came with a collection of reels of pale-yellow paper tapes. These tapes had short holes for the “dots” and long holes for the “dashes.” You could look at them and read off the code for letters, and thus “read” the tape. The machine wound the tape from one spindle to the other, like the old reel-to-reel high-fidelity music tape players and the later cassette-tape machines. For power, you simply wound up the machine with a crank. It was simple, low-tech, and effective. When a hole moved past a spring contact, the circuit closed for the length of time its journey took. Long holes gave dashes, and short holes gave dots. The box was hooked to a simple device, an “audio oscillator,” that emitted a fixed tone such as the piano middle C. As the tape ran, the contact in the box switched the oscillator alternately on and off, sending dots and dashes. (Location 489)

The great thing about the machine as a teaching aid was that its speed was adjustable, from the slow rate of one word per minute up to fast rates like twenty-five words per minute. My plan was to understand every tape at a slow rate, then speed the tapes up slightly and master them again. To motivate our class and give us a benchmark, Mr. Carver showed us a chart of the rate of progress of World War II army trainees in radio code. These students were at least a few years older than we were and under wartime pressure to learn quickly. Previous classes found it a difficult standard to match. So did our class—but my plan worked for me. I drew a graph of the hours I spent versus my speed and found that using my method I learned four times as fast per hour spent as did the army trainees. I (Location 500)

Looking back, I realize that I had always been irritated by what I viewed as petty, rigid mediocrities. Later I would understand the stupidity of butting heads with them. I would learn to avoid them when I could and finesse them when I couldn’t. (Location 961)

Yet for me it was science play, just as when I was younger. It was relaxing, much as others might find a book or a movie. I certainly wasn’t motivated by the hope of making big money. What drew me was the chance of doing something people thought wasn’t possible, to be a bit prankish—the fun of just pulling it off. (Location 1126)

the great statistician Karl Pearson (1857–1936) discovered that the roulette numbers being reported daily in a French newspaper showed exploitable patterns. The mystery was resolved when it was discovered that rather than spend hours watching the wheels, the people recording the numbers simply made them up at the end of each day. The statistical patterns Pearson detected simply reflected the failure of the reporters to invent perfectly random numbers. (Location 2176)

We were now living beyond the means of most of our faculty friends. This had the unintended consequence of distancing us somewhat from the smart, funny, and educated people with whom we felt the most rapport. (Location 3169)

From the 1980s on, some of these techniques came into usage by modern investment banks and hedge funds. They also adopted a notion we rejected, called VaR or “value at risk,” where they estimated the damage to their portfolio for, say, the worst events among the most likely 95 percent of future outcomes, neglecting the extreme 5 percent “tails,” then acted to reduce any unacceptably large risks. The defect of VaR alone is that it doesn’t fully account for the worst 5 percent of expected cases. But these extreme events are where ruin is to be found. (Location 3294)

We ended 1979 with a grand dream for the 1980s: to expand our expertise into new investment areas. For me this meant more interesting problems to solve in quantitative finance. (Location 3350)

Dow Jones Index was down four hundred points, or 18 percent, already the worst day ever, amid widespread panic. Vivian wondered whether I needed to skip the rest of our lunch and race back. PNP and we personally could be suffering massive losses. I told her there was nothing I could do in the markets that day. Our investments were either safe, thoroughly protected by hedging as I believed them to be, or not. “What will you do?” she asked. I told her that first we would relax and finish lunch. Then, after a brief visit to the office, I was coming home to think. (Location 3408)

rational incorporation of information into the price? (Location 3903)

Gerry Bamberger was a tall, trim Orthodox Jew with an original way of looking at problems and a wry sense of humor. We worked together for several weeks in Newport Beach to test his system exhaustively. If I was satisfied, we would bankroll a joint venture with Gerry. He brought a brown bag for lunch, and it always contained a tuna salad sandwich. I finally had to ask, “How often do you have a tuna salad sandwich for lunch?” Gerry said, “Every day for the last six years.” He was a heavy smoker and I’m extremely sensitive to tobacco smoke—to the extent that we did not hire smokers or allow smoking in our office—so we negotiated how to handle this. We compromised. Whenever Gerry needed a cigarette he would step outside our ground-floor garden office. This is not the ordeal in Southern California that it could have been during an East Coast winter. (Location 4067)

to $900 million long and $900 million short, which had to drive (Location 4109)