ebook – Beat the Market A Scientific Stock Market System

ebook -Beat the Market:

A Scientific Stock Market System

Edward O. Thorp, Ph.D.
Sheen T. Kassouf, Ph.D.

ABOUT THE AUTHORS

EDWARD O. THORP
is the author of the best-seller Beat the Dealer: AWinning Strategy for the Game of Twenty- One, published by Random House in 1962 and in revised form in 1966. It presented the first scientific winning system ever devised for a major casino gambling game. He has also written Elementary Probability (1966) and numerous mathematical papers on probability, game theory, and functional analysis. He completed undergraduate and graduate work at U.C.L.A., receiving the B.A. and M.A. in physics, and the Ph.D. in mathematics in 1958. He has taught at U.C.L.A., M.I.T., New Mexico State University, and is now Professor of Mathematics at the University of California at Irvine.He acts as investment counselor for selected clients.

S. T. KASSOUF,
Assistant Professor of Economics at the University of California at Irvine, completed his undergraduate work in mathematics and graduate work in economics at Columbia University and received the Ph.D. in 1965. His dissertion involved an econometric model for common stock purchase warrants and was under the sponsorship of Arthur F. Burns. He is the author of Evaluation of Convertible Securities, published by Analytic Investors, Inc., an investment advisory firm. He served as editor and investment counselor for this organization, from its inception in 1962 until 1965. He acts as investment counselor for selected clients.

Content

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 discovery.
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 incredible
meeting.

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 Industries
“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 accounts.
Long-term gains.

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…………………….99
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

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