Beat the Market: A Scientific Stock Market System by Edward O. Thorp

Chapter 1
A SYSTEM IS BORN
On October 5, 1961, Sheen Kassouf began a series of investments which
averaged 25% a year over the next five years. Kassouf tells of his trial and
rejection of the usual stock market approaches and how he then discovered
the basis of our system.
First Venture into the Market
In 1957 I sought investment opportunities. The advertisements of brokerage
houses and advisory services implied that stock market profits were just a
matter of following their procedures. I subscribed to a respected advisory
service and received hundreds of pages of financial data, charts, and advice.
Emerson Radio was rated “promising” so I purchased 100
shares.
The stock market had been declining and now this general decline
quickened. Analysts and financial writers could not agree on an
explanation. They blamed Sputnik, the economy, credit and banking
conditions, foreign interests selling stock, deteriorating “technical” position,
and “wedge formations” in the stock averages.
I continued to buy Emerson. My broker * asked, “What shall I
* Most investors place orders with a registered representative, also known
as a customer’s man or an account executive. We replace these cumbersome
terms with the widely used but slightly inaccurate
“broker.”
do tomorrow for your account if it drops again?” The question jolted me.
My loss was now $1,500. How much further could it fall?
Early in 1958 Emerson rose, and I sold out at a profit of $500. A year later
Emerson tripled in price. The enormous profit that escaped and the sharp
price fluctuations tantalized me. By 1961, after similar experiences, I sold
my business and plunged into the financial maelstrom.
The Market Calls: Boardrooms and Chartists
I subscribed to services and publications, emptied entire library shelves for
evening and weekend reading, and spent the hours between 10:00 A.M. and
3:30 P.M. in boardrooms around the city. I was a “boardroom bum.”
High above the city was a carpeted, elegantly furnished Park Avenue
boardroom. But for the muffled clatter of the Western Union ticker and the
muted but persistent ringing of telephones, it might have been the drawing
room in a Sutton Place town house. A thin, dark man wearing a large jade
ring was seated at a small French provincial desk. He nervously turned the
pages of a chart book, pausing frequently to draw neat geometric patterns in
red and blue with the aid of a draftsman’s triangle. His head jerked up
periodically to watch the prices dance by. He was a chartist, convinced that
there are repetitive patterns in price movements.

Beat the Market: A Scientific Stock Market System by Edward O. Thorp