Monthly Newsletter

June 1st, 2018

-Wolf Trails-

 

The Duke of Norfolk: Oh confound all this. I'm not a scholar, I don't know whether the marriage was lawful or not but dammit, Thomas, look at these names! Why can't you do as I did and come with us, for fellowship!

Sir Thomas More: And when we die, and you are sent to heaven for doing your conscience, and I am sent to hell for not doing mine, will you come with me, for fellowship?

A Man for All Seasons – Robert Bolt
 
I am often asked what it takes to be a successful card counter. I’ve found that an academic understanding is not enough. You need to think quickly, be disciplined enough to follow the system, and have a suitable temperament, including the ability to switch your mind into the here and now and stay focused on the cards, the people, and your surroundings. Better still is to have an “act” or persona that makes you seem like a type of player with which casinos are familiar.

A Man for All Markets – Edward O. Thorp
 

I breezed through the very much recommended A Man for All Markets by Edward Thorp this past weekend (who also wrote Beat the Dealer back in 1962).

The title is a pun on a famous play written by Robert Bolt in 1960 on the life of Saint Thomas More; the above quote is in reference to More’s trial, in which he is ultimately sentenced to death for refusing to swear allegiance to Henry the VIII as the rightful heir to the English throne, following the king’s break from the Catholic Church.  The parallel in this context is that Thorp’s fame can be attributed to his refusal to acknowledge that games of supposed “chance” could never be beaten.

Besides the various incredible insights and tidbits from a very successful money manager, a particular investment strategy Thorp discussed was purchasing equity in “pre-sale” mutual savings and loans institutions prior to them going public, which sounded not at all unlike our modern day ICOs -  

“The giant slow-motion collapse of the US savings and loan industry, starting in the late 1970s and continuing through the 1980s, created a need for capital to buoy weakened institutions, capital to exploit the new opportunities to fill the void left by failed institutions, and capital to compete with the new larger consolidated savings and loans that were appearing.

The mutuals could raise capital only by attracting more depositors, a slow and uncertain process, but their rivals, the “stock” savings and loans, were corporations owned by shareholders. They could get more capital from the marketplace, as they needed it, by selling shares. Facing such competition, some of the more entrepreneurial managers of mutuals decided to “convert” to stock companies, and this began the process of extracting billions of dollars that no one could previously claim.

…Many of the players in this game, so-called flippers, take their profit in the first few days and move on. On the other hand, I will hold a well-managed company for months or years. If the stock continues its rise toward book value, this gives further gains. Also, waiting more than a year to sell gives a long-term capital gain, with less tax to pay. Overall, S&L IPOs have been profitable for the buyers, but most deals aren’t as good as… The short-term profit has been in the 10 to 25 percent range, with a few small losses.”

These institutions were offering equity for said amount of dollars, whose value would then pump dramatically when listed.  This is strikingly similar to the way current decentralized projects raise capital through ICOs (although quite arguably, S&Ls have a standard cash balance as well as fundamental business metrics, but the investment strategy – as well as returns for that matter - are the same).   

More importantly, A Man for All Markets delves deeply into Thorp’s quantitative strategies for not only beating the dealer at the blackjack tables but beating the financial markets while running his multiple investment firms – Princeton Newtown Partners (PNP) and later at Ridgeline Partners. 

In today’s traditional financial markets, such quantitative inefficiencies are nearly impossible to exploit as the playing field has been evened out - since Thorp’s beginning in the ‘60s - thanks to the internet and mass adoption of computers and the resulting proliferation of data. 

However, in the case of the current cryptocurrency and derivative markets - specifically BTC options and futures - opportunities are beyond ripe due to their vastly uncertain nature and the resulting inherent volatility therein. 

Thus is our mission at Austere Capital – “A Strategy for All Markets” if you will - contact us here to find out how we do it.

 

Brian Koralewski is the Founder and Managing Member at Austere Capital. You can reach him directly at brian@austere.capital

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