Some people just know talent when they see it. Edward Thorp, the mathematics professor who pioneered card counting strategies and went on to manage hedge funds, took one look at Warren Buffett in the late 1960s and thought: this guy is going to be the richest person on Earth.
Thorp shared the story on "The Tim Ferriss Show" podcast, explaining how their paths crossed at an interesting moment. Buffett was actually closing down his Buffett Partnership at the time, despite posting outstanding returns for years. He'd run out of opportunities in the market that met his standards.
Meanwhile, Thorp was generating steady 25% annual returns using a hedging strategy involving warrants. The dean of the graduate division at the University of California, Irvine wanted to invest with Thorp, but being prudent, asked Buffett to vet him first.
"He introduced me to Warren Buffett to check me out, to see if that might be a good place to put it," Thorp recalled. "Warren and I got along fine and apparently, I passed the test because the dean gave me his money to invest. I got to know Warren Buffett and I was sorry to see that he was going out of business because I thought, as I told my wife then, 'This is going to be the richest man in the world.'"
That's quite a call to make. Buffett had established his partnership in 1956 and posted a compounded annual return of 29.5% over 13 years, according to the New York Times. But what made Thorp so certain?
What Thorp Saw That Others Missed
When the podcast host pressed Thorp on his prediction, his answer was beautifully simple. It came down to two things: consistent performance and deep analytical skill.
"He was very smart and that he really knew a tremendous amount about companies," Thorp explained. "He was a good evaluator of companies. He demonstrated a very edge already, he'd been running his partnerships from 1956 to 1968 and had about a 30% before fee annualized return rate."
Thorp, who used math and computer programming to beat casinos at blackjack, recognized a kindred spirit. Someone who had found a genuine edge and could execute on it repeatedly.
Betting on Buffett at $982
After their initial meeting, Thorp lost track of Buffett as the Oracle of Omaha began taking control of Berkshire Hathaway and transforming it into an investment powerhouse. Years passed before Buffett came back on Thorp's radar through an article about Berkshire Hathaway, which had grown enormously.
By then, the stock had climbed from $12 to $982. Most people would look at that move and think they'd missed the boat. Not Thorp.
"I happened to see an article about Berkshire Hathaway and I saw that he was running it and then I decided to take a look and I said, 'Oh, it's gone from $12 to $982. So is the opportunity gone?'" Thorp said. "And I said, 'I know what he's doing. I know this man, I know what he's going to do. I'm buying at $982, even though I missed out the move from $12 to $982.' And of course, buying at $982 turned out to be a good move."
That's the understatement of the century. Berkshire Hathaway Class A shares now trade at over $600,000 per share. Thorp's conviction in the person behind the company paid off spectacularly, proving that sometimes knowing the investor matters just as much as knowing the investment.
