Table Of Content

Other books by EDWARD O. THORP Elementary Probability Beat the Dealer Other books by SHEEN T. KASSOUF Evaluation of Convertible Securities A Theory and an Econometric Model for Common Stock Purchase Warrants BEAT THE MARKET A scientific Stock Market System Random House New York BEAT THE MARKET A Scientific Stock Market System Edward O. Thorp, Ph.D. Professor of Mathematics University of California at Irvine Sheen T. Kassouf, Ph.D. Assistant Professor of Economics University of California at Irvine 9 8 7 © Copyright, 1967, by E. O. Thorp and S. T. Kassouf All rights reserved under International and Pan-American Copyright Conventions. Published in New York by Random House, Inc., and simultaneously in Toronto, Canada, by Random House of Canada Limited. Library of Congress Catalog Card Number: 67:22624 Manufactured in the United States of America Designed by Betty Anderson Contents INTRODUCTION 3 Chapter 1 A SYSTEM IS BORN 7 First venture into the market. The market calls: boardrooms and chartists. The “circus”. Fundamentals: the “better” they are, the faster they fall. Textron and Molybdenum. The moment of discov- ery. Steady profits in bust and boom. 2 WARRANTS: OPTIONS ON THE FUTURE 15 Rediscovery of the system: Ed Thorp under a tree. What is a warrant? Get rich quick? The warrant-stock diagram. The two basic rules relating warrant prices to stock prices. Adjusted warrants and adjusted exercise price. Reading the financial pages. Checking the two rules. The warrant-stock law: predictability in the stock market. 3 SHORT SELLING: PROFITS IN BAD TIMES 33 Short selling. Selling warrants short. Molybdenum warrants and the avalanche effect. 4 THE BASIC SYSTEM 43 Hedging: high profit with low risk. Changing the mix. Deeper insight into the basic system. The basic system: preview. An in- credible meeting. vi Contents 5 THE SYSTEM IN ACTION: $100,000 DOUBLES 51 The Molybdenum story. Moly coda. Bunker-Ramo (Teleregister). Catskill conference: Sperry Rand. 6 HOW TO USE THE BASIC SYSTEM 71 Identifying the listed warrants. Picking short-sale candidates. Using the warrant-stock diagram. Which are best? Choosing the mix. How much protection: Dividing your capital among the candidates. Final points. Summary of the basic system. 7 FURTHER PROOF: THE HISTORICAL RECORD 91 A simplified mechanical strategy. The potential future for the basic system. Performance through the 1929 crash. 8 MORE ON WARRANTS AND HEDGING 103 Over-the-counter, regional, and Canadian warrants. What determines warrant prices? What is a warrant worth? Reverse hedging. Spotting candidates for reverse hedging. 9 CAN ANYTHING GO WRONG? 127 Short squeezes. 1929 again? Volatile price movements. Extension of warrant privileges. Banning of short sales. Extensive use of the basic system. 10 THE GENERAL SYSTEM: THE EVALUATION OF CONVERTIBLE SECURITIES 141 Scope of convertibles. Convertible bonds. Anatomy of a convertible bond. Reverse hedging with Collins Radio “warrants.” Picking convertible bond situations. Best candidates for reverse hedging. Basic system with latent warrants. The basic system with Dresser In- dustries “warrants.” Finding the best basic-system hedges with convertible bonds. Convertible preferred stocks. Call options. Puts, calls, and the basic system. 11 DECIPHERING YOUR MONTHLY STATEMENT 169 Your brokerage account. The cash account. The margin account. The short account. Calculations in a mixed account. Applicability to the basic system. 12 PORTFOLIO MANAGEMENT 181 Exploiting a rise in the price of the common. Exploiting a decline in the price of the common. Diversification? Having several ac- counts. Long-term gains. Contents vii 13 WHY WE ARE SHARING THE SECRET 189 They wouldn’t believe us. I want to do it myself. The threat of rediscovery. 14 WHAT THE FUTURE HOLDS 195 How much can be invested in the basic system? How much can be invested by the entire system? A general solution for the stock market. APPENDIX A Mathematics of the avalanche effect. 199 B Over-the-counter and Canadian warrants. 200 C Scientific proof that hedging can offer high expected return. 200 D The prediction of warrant prices. 201 E Basic-system hedge performance, 1946-1966. 204 REFERENCES 209 INDEX 213 BEAT THE MARKET A scientific Stock Market System Introduction We present here a method by which investors can consistently make large profits. We have used this method in the market for the past five years to earn 25% a year. We have made profits during two of the sharpest stock market drops of this century; we have made profits when the stock market soared; and we have also made profits in stationary and churning markets. We have used mathematics, * economics, and electronic computers to prove and per- fect our theory. After reading dozens of books, investigating advisory services and mutual funds, and trying and rejecting scores of systems, we believe that ours is the first scientifi- cally proven method for consistent stock market profits. This book analyzes convertible securities and their associated common stock. These securities are now held in the portfolios of several million investors. More than 300 of the 3,500 securities traded on the New York and American stock exchanges are convertibles. Our methods apply to these convertibles jointly with their more than 200 associated common stocks. (We emphasize * Some of the research which made this book possible is based in part upon mathematical research supported in part by Air Force grant AF-AFOSR 1113-66.