One of the great Shannon legends goes like this: in a fit of inspired mathematics, Shannon cracked a code for gaming the stock market. Huddled over old copies of the Wall Street Journal, Shannon put the full force of his mind to developing a series of algorithms that would make order of the market’s chaos, giving him special insight into the tides of finance. It made him rich, and it might have made him the nation’s leading investment guru, had he chosen to publicize his strategy.
As with most of the legends surrounding Shannon’s life, it grew from a small grain of truth: in the 1960s and 1970s, Betty and Claude did play the markets obsessively. The process became a family affair, recalled Peggy Shannon:
Much of the conversation around home would be about the stock market, because . . . much of my parents’ focus was what was the market doing. They taught me to read the Wall Street Journal and the stocks very early. You’d come down and open the newspaper, and they’d have me read because my eyesight was better than theirs. And it was a way to engage the kids. . . . Then eventually they set up a small personal computer to carry the quotes during the day and then check again at the end of the day, so there were computer printouts floating around the house with stock quotes on them.
By then the family had no need of the additional income from stock picking. Not only was there the combination of the MIT and Bell Labs pay, but Shannon had been on the ground floor of a number of technology companies. One former colleague, Bill Harrison, had encouraged Shannon to invest in his company, Harrison Laboratories, which was later acquired by Hewlett-Packard. A college friend of Shannon, Henry Singleton, put Shannon on the board of the company he created, Teledyne, which grew to become a multibillion-dollar conglomerate. As Shannon retold the story, he made the investment simply because “I had a good opinion of him.” If there can be said to have been an old boys’ club of Silicon Valley in its initial days, then Claude Shannon was a card-carrying member—and he benefited from all the privileges therein.
The club benefited from Shannon as well, in his roles as network node and informal consultant. For instance, when Teledyne received an acquisition offer from a speech recognition company, Shannon advised Singleton to turn it down. From his own experience at the Labs, he doubted that speech recognition would bear fruit anytime soon: the technology was in its early stages, and during his time at the Labs, he’d seen much time and energy fruitlessly sunk into it. The years of counsel paid off, for Singleton and for Shannon himself: his investment in Teledyne achieved an annual compound return of 27 percent over twenty-five years.
The stock market was, in some ways, the strangest of Shannon’s late-life enthusiasms. One of the recurrent tropes of recollections from family and friends is Shannon’s seeming indifference to money. By one telling, Shannon moved his life savings out of his checking account only when Betty insisted that he do so. A colleague recalled seeing a large uncashed check on Shannon’s desk at MIT, which in time gave rise to another legend: that his office was overflowing with checks he was too absentminded to cash. In a way, Shannon’s interest in money resembled his other passions. He was not out to accrue wealth for wealth’s sake, nor did he have any burning desire to own the finer things in life. But money created markets and math puzzles, problems that could be analyzed and interpreted and played out. Shannon cared less about what money could buy than about the interesting games that money made possible.
The missing part of the story, as it happens, is Betty. The stock market intrigued her, and it was Betty, not Claude, who first drew the family into investing. She managed the family’s finances—“I run the checkbook,” she once told an interviewer. Peggy Shannon recalled that “their work in the stock market was completely a team effort. It is not the case that my father had these mathematical ideas about the stock market and then figured out how to put them to work to make money. . . . It was always a joint project.” And it was made possible by the Shannons’ shared tolerance for risk. As Peggy put it, “they were gamblers. They didn’t shy away from making risky financial decisions.”
Their kernel of interest in the market grew into a consuming hobby. The two of them, but Betty especially, began devouring books on trading, contemplating various market philosophies, and graphing possible scenarios for stocks. They studied many of history’s most successful investors, including Bernard Baruch, Hetty Green, and Benjamin Graham. They read Adam Smith’s The Wealth of Nations and studied Von Neumann and Oskar Morgenstern’s work on game theory. Claude, unsurprisingly, contributed a device that was said to mirror how money flowed into and out of the market.
When Shannon offered to speak on the stock market at MIT, word of his talk forced him to relocate to the university’s largest lecture hall, under its famous dome; even there, it was standing room only. Shannon proposed a theory that would allow an investor to profit from a stock whose value was declining, by making constant trades to take advantage of its price fluctuations. In answer to the very first question from the audience—Did he use this theory in his own investing?—he replied: “Nah, the commissions would kill you.”
This talk—probably more than any particular feat of financial wizardry—is the main source of the legend of Shannon as stock-picking genius. Later Shannon seemed astounded by the attention his lecture received and unusually tickled when the subject came up in an interview:
I even did some work on the theory of stocks and the stock market, which is among other papers that I have not published. Everybody wants to know what’s in them! [Shannon laughs.] It’s funny. I gave a talk at M.I.T. on this subject some twenty years ago and outlined the mathematics, but never published it, and to this day people ask about it. Just last year when we were over in Brighton more than one person came up to me and said, “Hi, heard you talked at M.I.T. about the stock market!” I was amazed that anybody would even have remembered it!
But for anyone searching for a grand unifying theory to explain the market’s fluctuations, Shannon was quick to put such speculations to rest. He and his wife were, in his own words, “fundamentalists, not technicians.” The Shannons had toyed with technical analysis, and they found it wanting. As Shannon himself put it, “I think that the technicians who work so much with price charts, with ‘head and shoulders formulations’ and ‘plunging necklines’ are working with what I would call a very noisy reproduction of the important data.”
Complicated formulas mattered a great deal less, Shannon argued, than a company’s “people and the product.” He went on:
A lot of people look at the stock price, when they should be looking at the basic company and its earnings. There are many problems concerned with the prediction of stochastic processes, for example the earnings of companies. . . . My general feeling is that it is easier to choose companies which are going to succeed, than to predict short term variations, things which last only weeks or months, which they worry about on Wall Street Week. There is a lot more randomness there and things happen which you cannot predict, which cause people to sell or buy a lot of stock.
From a lesser mathematical mind, this might have seemed like something of an evasion, but when Shannon used words like “stochastic processes,” he spoke from deep experience with the underlying math. And it was his view that market timing and tricky mathematics were no match for a solid company with strong growth prospects and sound leadership.
So the Shannons sized up start-up founders in person whenever they could. They sampled products and prototypes. When they were mulling an investment in Kentucky Fried Chicken, as William Poundstone recounts, they bought several buckets’ worth for a taste test with friends.
Beyond the research, there was another factor, one that Shannon was secure enough to readily acknowledge as key to his success. Asked if he was lucky in life, Shannon answered, “Far beyond any reasonable expectations.” By his own admission, Shannon had been fortunate in his timing, and privileged in knowing certain company founders and securing early investments. The bulk of his wealth was concentrated in Teledyne, Motorola, and HP stock; after getting in on the ground floor, the smartest thing Shannon did was hold on. His daughter, Peggy, summed it up with a statement that could just as well have come from her father: her parents “used common sense and connections and had good luck.”
If Shannon’s work in the field of finance can be said to have left anything of lasting note, it’s the memorable one-liners, many of which are among the best-known stories about him. “I make my money on the stock market. I don’t make it by proving theorems,” Shannon once famously told Robert Price. Asked what sort of information theory was best for investing, Shannon joked: “Inside information.”