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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

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? 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 incredible meeting.

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