Ed Thorpe – The Grandfather of Quantitative Analysis
When it comes to trying to make money investing in stocks and
shares, there are many big players who have made breakthroughs on the scene.
However few are such big names as Ed Thorpe – the man who originally 'beat the
system' and devised quantitative analysis. Here we'll look at who Ed Thorpe is
and what we can learn from him.
Ed Thorpe didn't start out trying to make money investing in
stocks and shares. Before this he started making money from gambling – and
seeing how he could get money from casinos. This made Ed Thorpe one of the
first people to count cards and to prove that it was possible to beat the house
with smarts. Specifically he did this with black jack when he realized that the
odds could sometimes change in the player's favor – specifically once all of
the 10s had left the deck. To beat the house then, all Ed Thorpe and his
followers would have to do was keep an eye on which cards left the deck and bet
low for the majority of the game. Then, once he realized that all the tens were
gone, he would start betting high and aggressively – and the laws of chance
would mean that once he'd done this for long enough he'd walk away with a
profit. Later Ed would go on to devise contraptions that could be used in order
predict where a ball bearing would land on a roulette wheel.
This didn't last for long however, and heat from Casino
security soon got Ed to change his tune – which is when he started to make
money investing in stocks and shares. Ed Thorpe realized that he could analyze
the stock market in the same way that he could analyze cards, and that it must
follow a logical mathematical pattern. He believed that by looking at enough
data he could get closer to the underlying mathematical truth behind the stock
market, or 'Alpha' as it is known among 'quants'.
Make Money Using Quantitive Analysis
The technique he devised to beat the system and to guarantee
he make money investing in stocks and shares was called quantitative analysis
and this looked at the difference in certain stocks in terms of the price at
which they were sold and their real value. This real value was calculated by
looking at data such as the amount of people buying, and at the rate of sale,
and using this information he would then be able to spot discrepancies – and
once he saw a stock being sold at below its real value he would buy big time.
Of course the system isn't flawless, but crucially it tips the
odds, and by doing this on a large scale it becomes possible to ensure that
overall more investments go in your favor than against... and that's where you
start making the profit. And it worked – quantitative analysis is now a big
part of the way many people choose their stocks, and it's also a big part of a
lot of software.
Using Quantitive Analysis To Make Money Investing
Quantitative analysis on its own won't guarantee you success when you invest in stocks and shares as a day-trader as you won't have enough capital. Furthermore many people blame the 'quants' and aggressive trading and hedge funds for the current financial crisis. However it will give you the edge and it pays to understand it. Furthermore though, it is an important lesson in how to 'beat the system' and it's a highly inspirational story that can hopefully inspire you on to success.
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