Episode 35 : The story of one of the greatest moneymaker in history and how he did it!

I can’t better this NYT article opening so will use this –

There are few books in the investing world as well known as Burton Malkiel’s “A Random Walk Down Wall Street.” . That is not what we will talk about Its thesis is that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.”

To put it another way, the market is so efficient that even professional investors have little chance of beating it on a regular basis.

Jim Simons is not a blindfolded monkey. A former code-breaker for the United States government and a brilliant mathematician, Simons founded the most successful investment firm the world has ever seen.

As Gregory Zuckerman notes in today’s book we are going to review  “The Man Who Solved the Market,” even Warren Buffett’s track record — 20.5 percent annualized returns since 1965 — doesn’t approach Simons’s average of 39 percent gains over a three-decade span. And that’s after his company has taken a 5 percent management fee and 44 percent of the profits.

The question has always been: How does Simons do it?

Jim Simons is the greatest money maker in modern financial history. No other investor–Warren Buffett, Peter Lynch, Ray Dalio, Steve Cohen, or George Soros–can touch his record. Since 1988, Renaissance’s signature Medallion fund has generated average annual returns of 66 percent. The firm has earned profits of more than $100 billion; Simons is worth twenty-three billion dollars.

Thus reads the introduction to one of the most thought provoking books that I have read this year – The book we are talking about is “The Man Who Solved the Market: How Jim Simons Launched the Quant revolution”

A veteran Wall Street Journal investigative reporter, tells the gripping story of how a world-class mathematician and former code breaker mastered the market.

Simons pioneered a data-driven, algorithmic approach that’s today is sweeping the world. And he did so at an age that it was first ridiculed.

Here are three tropes that characterize the book for me

1. “All animals are equal. But some are more equal than others”

What struck me the most about this book beyond the wild figures of money people made and a male dominated field was the different bubbles’ people occupy around the world.

I couldn’t but help recollect a conversation I had with my government employee retired mom who was so keen that I recheck her savings to ensure she was paying taxes on her fixed deposits to the last penny. ‘We don’t evade taxes’ she said surreptitiously.

And then there are people at Renaissance who run out of ideas with what one could do with massive amounts of wealth.

And what keeps people out. Knowledge and access to growing wealth

2) Driving the shift from manual financial expertise to leveraging math to understand market mechanics

Looking at companies or sectors is irrelevant. Renaissance enjoyed huge returns by simply sifting Big Data. Humans are irrelevant. The companies they command are mere replaceable cogs in a language of financial numbers.

“We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.”

Jimmy Simons and Robert Mercer were mathematicians.   Neither knows all that much about financial markets, but they know about data, raw information from a staggering array of sources, within which are hidden patterns

He helped pioneer quantitative investing, relying on complex computer programs rather than human judgment, to make trading decisions

3) How one could be a scientist and yet question climate change and impact the world beyond the financial markets

As the book introduction reads – as Renaissance became a market force, its executives began influencing the world beyond finance. Simons became a major figure in scientific research, education, and liberal politics.

And then there is the question of how the the liberal leaning Jim Simons, , thought of the co-head of his firm, Robert Mercer.

Senior executive Robert Mercer  who apart from questioning climate change is more responsible than anyone else for the 2016 presidency

In conclusion, I’ll conclude with these thoughts from the NYT article on the topic –

“When you get right down to it, Simons makes money because human behavior will never be completely “efficient.” Those short-term anomalies Simons — and other quants — unearth exist because humans have always acted emotionally.

I’ll leave you with one of Zuckerman’s final thoughts:

“For all the unique data, computer firepower, special talent and trading and risk-management expertise Renaissance has gathered, the firm only profits on barely more than 50 percent of its trades, a sign of how challenging it is to try to beat the market — and how foolish it is for most investors to try.

In other words, stick to index funds”

Such an absolutely fascinating book!