The Paradox of Dumb Money

“As they say in poker, ‘If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy.'”

—Warren Buffett (1987)

In the summer of 1968, Ed Thorp, a young math professor at the University of California, Irvine (UCI), and author of Beat the Market: A Scientific Stock Market System (1967), accepted an invitation to spend the afternoon playing bridge with Warren Buffett, the not-yet-famous “value” investor. Ralph Waldo Gerard hosted the game. Gerard was an early investor in Buffett's first venture, Buffett Partners, and the dean of the Graduate School at UCI, where Thorp taught. Buffett was liquidating the partnership, and Gerard needed a new manager for his share of the proceeds. Gerard wanted Buffett's opinion on the young professor and the unusual “quantitative” investment strategy for which he was quietly earning a reputation among the members of the UCI community.

Gerard had invested with Buffett at the recommendation of a relative of Gerard's who had taught Buffett at Columbia University: the great value investment philosopher, Benjamin Graham. Graham had first published the value investor's bible, Security Analysis, along with David Dodd, in 1934.1 He was considered the “Dean of Wall Street,” and regarded Buffett as his star pupil. Graham's assessment would prove to be prescient.

By the time Thorp met Buffett in 1968, Buffett had established an exceptional investment record. He had started Buffett Partners 12 ...

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