The Man Who Called His Work Happily Pointless Beat Wall Street for 30 Years
Claude Shannon said he pursued useless things, then treated the stock market as another puzzle and outperformed almost every professional.
Founders · How Claude Shannon Invented The FutureCome downstairs in the morning in the Shannon house and a child was put to work.
Peggy Shannon, the daughter of Claude Shannon, the Bell Labs researcher whose 1948 paper founded information theory and made modern digital communication possible, would be handed the newspaper because her eyesight was better than her parents'. She read stock prices aloud from The Wall Street Journal while her parents listened. Later, computer printouts of stock quotes floated around the house.
It was a strange second career for a man who claimed not to care about money. Shannon summed up his life's work as happily pointless. Shannon said, "I've always pursued my interest without much regard to financial value or value to the world. I spent lots of time on totally useless things." To him, building a unicycle was as serious as building a theory about information.
What this happily pointless tinkerer did next is why Wall Street should know his name. Between the late 1950s and 1986, Shannon's personal stock portfolio returned about 28 percent a year for 30 years. He did it not to get rich, but because the market was just another puzzle, a problem that could be analyzed and played out.
Investing became a family hobby. His wife, Betty Shannon, played the markets obsessively with him. Daughter Peggy recalled that much of the conversation at home was about what the market was doing. Eventually the couple set up a small home computer to pull quotes during the day and review the closing prices at night.
In 1986, Barron's ranked the recent performance of 77 professional money managers and reported on 1,026 funds. Shannon was not mentioned in the article. But Fortune's Formula later wrote of Shannon: "Claude Shannon, though not mentioned in the article, had done better than all but three of the pros." The book noted he had beaten 1,025 of the 1,026 funds. The rival firms employed as many as a hundred staff, while Shannon teamed only with Betty and a home computer.
He had company in treating games as research. With a young gambler named Ed Thorp, who had written about counting cards in blackjack, Shannon built the world's first wearable computer to try to beat gambling.
The printouts kept floating around the house, and the money kept compounding.
Questions people ask
Did he use information theory to pick stocks?
Not in any direct way that is public. Shannon never published an investing formula, and biographers describe his edge as patience, independent thinking, and concentrated long-term holdings rather than a code-breaking system. He treated the market the way he treated engineering, as a puzzle to simplify and test.
What was the world's first wearable computer for?
Shannon and Thorp built a small, shoe-worn device to predict where a roulette ball would land by timing the wheel and the ball. It was meant to give a gambler a slight statistical edge before the bet closed. It worked in principle but was never used to make a fortune in casinos.
How good is 28 percent a year for 30 years?
It is extraordinary. The broad U.S. stock market has returned roughly 10 percent a year over long periods, and Warren Buffett's Berkshire Hathaway compounded at roughly 20 percent a year from the 1960s to the 1980s. At 28 percent a year, money roughly doubles every two and two thirds years, before taxes and fees.