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Beat 1,025 of 1,026 funds
A family affair
Investing was a family affair in the Shannon house. Claude and his wife, Betty, played the markets obsessively, and their daughter Peggy learned to read the Wall Street Journal and its stock pages early, because her eyesight was better than her parents'. Later they set up a small personal computer to run the quotes during the day and again at the end of it, and printouts of stock prices floated around the house.
The numbers
Over 30 years, from the late 1950s through 1986, his portfolio returned 28% a year. In 1986, Barron's ranked the recent performance of 77 money managers, mostly firms with up to 100 people. Shannon was not mentioned in the article, yet he had done better than all but three of those professionals.
The Teledyne bet
One large investment went into Teledyne, the conglomerate built by his college friend Henry Singleton, whose board Shannon sat on. It compounded at 27% a year over 25 years. He made it because he had a good opinion of Singleton. Money interested Shannon the way every other puzzle did, as a set of problems that could be analyzed, interpreted, and played out.
Why did investors admire Henry Singleton?
Singleton co-founded Teledyne in 1960 with George Kozmetsky and ran it for decades with a tiny headquarters staff and wide freedom for its unit managers. In the 1970s and 1980s he bought back large amounts of Teledyne stock when he judged it cheap, which was unusual for a company at the time. Warren Buffett has praised Singleton's handling of capital in Berkshire Hathaway shareholder letters.
How did Shannon's math reach Wall Street?
In 1956 John Kelly Jr., a Bell Labs colleague of Shannon, applied information theory to betting. His result says the best long-run growth comes from wagering a fraction of capital that depends on your edge and the odds. Edward Thorp, who knew Shannon at MIT, used the Kelly criterion in blackjack and later in running a hedge fund. William Poundstone tells the story in his 2005 book Fortune's Formula.
Why do so few managers beat the market?
S&P Dow Jones Indices publishes a recurring study called SPIVA that compares actively managed funds with their benchmarks. Over 15-year periods it has repeatedly found that most active US large-cap funds trail the S&P 500. Fees take a steady bite from returns, and competition from other skilled professionals leaves little mispriced for any one of them to exploit.
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