Beat the market by Edward O. Thorp, Sheen T. Kassouf

By Edward O. Thorp, Sheen T. Kassouf

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An Incredible Meeting In Chapters 1 and 2 we saw how the authors were each led to large, consistent profits through warrants. By coincidence they came from their separate universities to the new Irvine campus of the University of California in the summer of 1965. There they met, perfected the basic system, and extended their methods to the whole area of convertible securities. (Convertibles are securities which can be changed into other securities; the addition of cash may be required. ) This book is based on that research.

Many investors are surprised to learn that they can in fact do precisely this: they may sell a stock first and buy it later. If we told our broker in March of 1962, “Sell short 100 shares of American Tobacco at 47,” he would have borrowed 100 shares from a lender and sold it in the marketplace at 47. The $4,700 would be credited to our account. However, we are now short 100 shares of American Tobacco, which means that we must later buy and return the 100 shares to the lender. Meanwhile, the $4,700 is deposited as collateral with the lender of the stock.

However, the house that handled the bulk of our transactions assured me that there would be no buy-in. They still had several thousand warrants available for selling short. The incident led me to learn in detail how short sales are executed. 56 Recall from Chapter 3 that when a security is sold short, the seller must borrow the certificate from an owner. When an order is placed to sell short, your broker will first search his inventory of securities (mainly those held for his clients). These securities are generally kept in a secure room with walls of steel wire mesh (cage room) and the custodian of these securities is the cage man.

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