The world around us is made up of a variety of different systems. Many of these systems are invisible and you won’t notice them, but in reality even the most complex seeming behaviours and processes can ultimately be broken down into predictable inputs and outputs and various structures. As game theory proves and behavioural psychology, even human interaction can be boiled down to various predictable systems and processes, and the same is particularly true for the social structures, organizations and processes we make ourselves.
The secret to success in life, as any successful business man or woman will tell you, often comes down to understanding and operating these systems. Once you can illuminate the underlying patterns that make something successful, that’s when you can then exploit them to either find shortcuts or to automate your success. At this point you can ‘beat’ the system and use it to generate income, which is the idea behind many different business strategies (and once you’re in that position you can also create your own new processes). This applies to investing and trading more than anything else, and every investor is constantly looking for ways to beat the system and to anticipate which stocks will go up and down with certainty – this theoretical algorithm is often referred to as ‘The Truth’ or ‘Alpha’ and is a kind of ‘Holy Grail’ in the world of investing. And while it hasn’t been achieved with complete certainty yet, there are certainly techniques and programmes that can help to make highly profitable businesses on trading with essentially what is an unknown entity.
Of Ed Thorpe
Ed Thorpe is the man who created ‘ quantitative investing’ and the father of quantative analysis. This is a system of playing the stock market that looks at stocks in terms of the price they are being sold at, and comparing this to their ‘real’ value. This real value was created by looking at things like the rate of sales and the number of people buying and selling. Thus a ‘real’ value could be compared to the value they were being sold for and this would generally be a good determiner of what was a good investment and what wasn’t. Unlike some other ways of playing the stock market this takes no interest in the ‘psychology’ of shares, or second guessing the thought processes of business executives, but rather looks at differences in quantitative statistics and uses this to predict the outcome with a high probability of success (which when repeated on a large enough scale becomes simply success).
Subsequent systems have been built on top of this, as have other methods of investing. For instance companies will invest in futures which means investing in stocks likely to have opposite outcomes, so that the failure of one equals the success of another which covers them for any losses. Contingency plans like this make strategies based on probability such as quantitative analysis make this a profitable way to earn money. Software packages have also been released which can help to automate this process on the behalf of investors so that the element of human error is all but eliminated.
This wasn’t Ed Thorpe’s only success though interestingly. Before turning his attentions to the stock market, he focused primarily on the Casino. Here he noted that there was a flaw in the game of 21 which could be exploited and thereby invented card counting. 21 is by nature a game of chance, but those odds change throughout the duration of the game. Thorpe noted that once the royal cards were removed from the pack, there was a higher chance of success. Thus the strategy was simply to bet low until each of the King, Queen and Jack had been dealt and then to suddenly bet high. While this wouldn’t work every time, over a long enough duration the odds are skewed in the players’ favor enough that over a long enough period of time it would eventually lead to a profit.
Ed Thorpe unsurprisingly became as wealthy as he is revered. Learn to beat the system and you can make huge profits.