If you’re interested in markets, investing, and beating the odds, few stories compare to Jim Simons and the rise of Renaissance Technologies. Simons has a legendary tale showing how the compounding effects of extreme intelligence, curiosity, and determination can lead to victory in the fiercest area of the financial markets.
Since 1988 he’s the world’s greatest investor averaging more than 39% per year, crushing the competition of Warren Buffett with 18% and Ray Dalio returning 12%. His returns have totaled over $100 billion. One of the firm’s flagship funds, The Medallion Fund, which is closed to outside investors, had only one year showing a loss in 1989. Regarded as one of the greatest investors of all time, his net worth is an estimated $21 billion making him the 21st richest person in the United States.
Over the years, few people have been able to figure out exactly how this dominating performance in the markets is possible. Many people were unaware Renaissance Technologies even existed, and those that did were unaware of the astounding track record Jim Simons was building. When you start to read a little more about Simons, it’s pretty clear the rise of Renaissance Technologies was less about luck and more about curiosity and intelligence applied over a long period of time.
A Curious Mind
In a speech Simons gave about his childhood, he said he learned he wanted to go into the math field at a rather early age. His parents sent him to see the family doctor one day, and the doctor told him he too should aspire to one day become a doctor. There was no interest in becoming a doctor for young Jim, he wanted to do something with mathematics but wasn’t sure what that was exactly. Young Jim enjoyed working, so he took up a job as a stock boy at a retail shop. He recounts he was not a good stock boy because he could never remember where any of the products went. None of the shelves were organized in any order that made sense to Jim.
Later, when the owners of the shop asked him what he wanted to do with his life, young Jim told them he wanted to go into mathematics and study at M.I.T. The owners of the shop laughed; they could hardly imagine a kid who couldn’t remember where products belonged on a shelf going on to one of the top schools in the world to study math. Nonetheless, Simons eventually did go to M.I.T. and studied math, where he learned many things he would later apply to the investing world, but not yet.
Upon early graduation at M.I.T. in 1958, he remained there for graduate school. During this time, he met a friend who was not a math student but was from Columbia. He and his Colombian friend decided it was time to go on a little adventure. They set their sights on Central America and conjured up a plan to ride Vespa motor scooters from Boston, Massachusetts, to Buenos Aires, Argentina. They ended up only making it to Bogota, Colombia, and admitted afterward; the trip was not his most magnificent display of common sense. Maybe the trip wasn’t the smartest thing Jim decided to do at the time, but the experience he had and the relationship he developed with his friends would change his course for the rest of his life.
When Simons was 21, he ended up at Berkeley partly because of the well-known mathematicians teaching there. During this time at Berkeley, Simons also toyed with trading in the stock market. One day he wandered into a Merrill Lynch brokerage and asked to open an account. He began trading stocks but found the pace of the exercise to be a little slow. The daily movements of common stocks didn’t have the excitement he was looking for. Asking around for some advice, he was told if you want excitement go check out soybeans futures, so he did. The price activity provided much more excitement, and Jim would actually travel to San Francisco each morning to check the prices of soybeans as his account gained and lost according to the price swings.
His better judgment told him he needed to either concentrate on his thesis or trade soybeans, one or the other; it was not possible to do both. He gave up soybean trading for the time being and dedicated himself to mathematics. His Ph.D. thesis was written under Bertram Kostan and gave a new proof of Berger’s classification relating to Riemannian manifolds. His work in this field let to Simons becoming the 1976 recipient of the Oswald Veblen Prize in Geometry.
Don’t Run With The Pack
After his thesis and Ph.D. from Berkeley, Simons found himself back at M.I.T. as an instructor. Teaching math was enjoyable, but he found himself with the urge to do something different. He returned to his friends he took his Vespa scooter trip to Columbia with and asked them to start a business. He got heavily involved with starting this manufacturing business in Columbia and moved there to work on the operations of the factory with his friends. While working at the factory, he decided he belonged back in the math world teaching, so he once again returned to teaching.
He then took up a job at Harvard but did not particularly like the place; he described it as “stodgy.” He left Harvard and moved near Princeton, working for the N.S.A. Simons was on the research staff for the Institute for Defense Analyses cracking code. During this time, he ended up solving a difficult math problem within “minimal varieties.” This turned out to be a published paper which he was proud of and ended up with a math award for his work.
His work of cracking code happened to be during the Vietnam War, and Simons didn’t necessarily support everything that was going on in Vietnam. He found himself in hot water due to a letter he wrote to a newspaper responding to comments his boss made on the war. A short time later, he was fired for an interview he gave to a reporter looking for dissent among people involved in government work. During a speech he gave recounting his past, he said he found being fired “exhilarating” and goes on to say you shouldn’t make a habit of getting fired, but everyone should go through the process. I couldn’t agree more.
Simons moved on to Stony Brook, where he was the chair of the math department. He enjoyed his time there and enjoyed the process of building the department at the school. The school’s math department was in disrepair and needed someone to help right the ship. Simons accepted the challenge. His time at Stony Brook was a positive experience, but he still owned part of the business in Columbia with his road-tripping friends. The company was thriving, and Jim and his partners made some money. Simons recalls during an interview that he wasn’t sure why his friends had this crazy idea, but they wanted him to invest their money for them. He said, “fine. I’ll do that.”
Partner With Wonderful People
Simons approached a friend who managed money and asked if he would handle the money for them. The friend in the investment business said he would manage the money, but one detail remained. What would the fees be for such a task of managing money? Simons recommended the manager take 25% of the profits, whatever that may end up being, and keep for himself. Jim also thought it would be a good idea that if losses exceeded 25%, then he would need to stop and get out. The group didn’t want to lose any more than 25%.
One more detail Simons added at the end of the negotiation was that if the money manager made too much, he had to stop and get out. If there were gains of ten times the original investment, he would need to stop his trading. Ten months later, the money manager had to stop. He had made more than ten times the initial investment. Simons calls the results “incredible” and “completely lucky.”
Simons had followed along with his money manager friend during the entire ten months and “kept the books” on his trading. It was at this point that Simons was going through a divorce and decided he wanted to get more involved in trading, so he did. With his math background, it’s not surprising that Jim navigated toward creating models and looking for patterns in his trading. With him and his partner and ten times the capital he had ten months before, Simons began searching for the system he would use in his new trading endeavor. He recalls one of the early frustrations was not having a system to rely on. One day he felt like a genius for the investing moves he was making, and the next day everything changed, and Simons couldn’t figure out why he could have made the moves he did.
One story he recalls in a speech he delivered a few years ago was that he and his partner had a position in gold. As the gold moved higher and higher, Simons decided to sell his gold and take his profits. His partner decided to keep the position in gold, and it continued higher still. Simons had a feeling that gold prices were ready to fall but didn’t know exactly when. He wanted his partner to realize the gains they had made and sell the position in gold. His partner pushed back.
During a phone call with one of his stockbroker friends, Simons recalls the friend mentioning his wife frantically searching through their house looking for any gold to sell. Since the wife was a jeweler, she wouldn’t need to stand in the longest line of people ready to sell their gold; she could stand in the shorter line since she had connections. It was at this moment that Simons realized people everywhere were selling their gold because prices were so high. He knew it was time to get out. He convinced his partner to sell the gold, and the next day gold plunged 25%. Jim uses this example to describe sheer luck. Plain luck as he says, but there was a bit of common sense involved as well.
Simons eventually hired Jim Ax, who was an outstanding mathematician and interested in using models for trading. Ax brought in computers and programmers to work on their models and began pursuing a trading system using math systems. At the time, Simons was also trading using fundamentals, which didn’t involve models. The models won out, and it was clear the path to success was with mathematicians trading based on rules carried out by computers. A few years later, the rise of Renaissance Technologies was clearly on track as their trading models would prove correct time after time. The hedge fund would go on to hire 90 P.H.D.’s and employ over 300 people.
Simons would be approached and asked, “what’s the secret?” Everyone wanted to know the secret to the rise of Renaissance Technologies. He says the number one secret is hiring the smartest people. Knowing who the best thinkers were and pursuing them was a key not only to his early success but continued success. He also gives credit to the infrastructure they built, which would be incredibly crucial to carrying out the trades and forming the models they would use to trade. Roughly nine terabytes of data would come in every day, which would need to be stored, sorted, and analyzed. Simons also gives credit to the structure of his firm and the fact that it was completely open. Everyone knew what everyone else was working on; therefore, smart people were able to contribute to the problems others were having. Good ideas would rise throughout the company and be shared.
A few other factors Simons believes contribute to their success is that everyone owns a share of the profits, so the incentives are aligned for each employee. They also trade a variety of assets around the world, so the trading models are running 24 hours a day. Another huge factor in the rise of Renaissance Technologies is obeying the golden rule, which never override the computer. You cannot show up one day and say the machine is wrong for wanting to make a trade. Changing or altering the model is prohibited; they never overrule the computer.
Simons retired from Renaissance Technologies in 2009 but stayed involved with the company he founded. In a speech he gave a few years ago, Simons shared a few of his guiding principles.
1. Don’t run with the pack. Try to do something original. People tend to rush to do similar things. If you’re able to think about things that people aren’t thinking about, you have the chance to be great.
2. Partner with wonderful people. Simons chose the smartest people he could find to work with and felt he made good choices. The people you partner with will determine how far you can go.
3. Be guided by beauty. As a mathematician, Simons was able to see beauty in the work. Equations, patterns, and challenging math problems are beautiful. He says it’s not just true in Math. A well-run business can be a beautiful thing. Beauty can be a useful guide.
4. Don’t give up. He says discretion is essential, and it’s good to know when to move on, but persistence has a tremendous amount of value. Something worthwhile will take a long time. If you have persistence, then there’s a chance you can see something great take form.
5. Hope for good luck.
Jim Simons is one of the most interesting people I’ve come across in markets or any other domain. The lessons he’s learned and shared over 80 plus years will provide others with much wisdom. Not only did the rise of Renaissance Technologies create enormous levels of success and wealth, but it also created a charitable foundation focused on tackling some severe problems in education. His generosity will be remembered for many years into the future.