How a Mathematician Became the Greatest Trader of All Time

How a Mathematician Became the Greatest Trader of All Time
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generated average annual  returns

Mathematician When it comes to investing, nobody  holds a candle to Jim Simons:  Not Warren Buffett  Not Steven Cohen  Not George Soros  Simons’ company Renaissance Technologies has  a signature hedge fund called Medallion that  has generated average annual  returns of 66% for 30 years.  To put this another way, renowned economist  Bradford Cornell points out that if you had  invested $100 in Medallion in 1988, 30 years  later, that would have turned into $398.7 million!  What’s even more remarkable is that Simons hired  people who didn’t know a thing about investing!  Is it true that you never hired  people from the investment industry?  Never (laughter)  He hired mathematicians and  scientists, just like himself. 

Mathematicians considering geopolitical events

Mathematician While traditional investors rely Mathematician on their intuition to make trades:  chatting with executives, analyzing earnings  reports, gleaning insights from articles,  and considering geopolitical events,  Simons walked a different path.  As a trained , he  believed markets moved in logical ways.  So, he took a scientific approach to investing.  Harnessing the power of vast  data sets, computer models,  and algorithms to make decisions, inspiring  a revolution that has swept Wall Street.  This is the story of how a became the greatest trader who ever lived.  Jim Simons is always restless.  Building a storied career as a  brilliant wasn’t enough. 

Mathematician elite research  organization\

Mathematician Neither was teaching at MIT and Harvard  Neither was working as a Cold War code-breaker.  He left Harvard to join an elite research  organization that helped America’s most  secretive intelligence agency, the NSA,  decode Soviet messages during the Cold War.  But the work didn’t satisfy him.  As his first wife Barbara recalled in Gregory  Zuckerman’s book The Man Who Solved the Market,  “Jim understood at an early  age that money is power.”  Growing up an only child in  Brookline, Massachusetts,  near Boston, his family doctor encouraged  him to consider a career in medicine,  remarking, “You’re a bright Jewish  boy, you should be a doctor.” 

Mathematician protesting the Vietnam War

Mathematicians But when Simons shared his passion  for mathematics, the doctor replied,  “Look, you can’t make any money doing that stuff.”  Simons always wanted to be rich.  When he was fired from his code-breaking  job for protesting the Vietnam War,  he wanted to join an investment bank.  He had three young children to support,  including a son who was born with a rare  hereditary condition that affected the development  of his skin, hair, sweat glands, and teeth.  But, he opted to stay in  academia for the time being.  He was offered a job heading  the math department at Stony  Brook University on Long Island at the age of 30.  While it wasn’t as renowned then, here he was at  the age of 30 with the opportunity to  shape his own mathematics department. 

quantum computers designed

While at Stony Brook, he developed a  mathematical theory that is foundational  to the work of Microsoft and other companies  to create special quantum computers designed  to tackle challenges beyond the reach  of current systems, including in AI.  As his professional life took  off, his personal life suffered.  He and Barbara were young when they  got married, he was 21, she was 18.  They divorced, and she headed west to complete  her PhD in computer science at UC Berkeley. 

leaving a tenured position

A few years later, a lingering urge  nudged Simons to leave academia and  venture into the world of finance  by starting his own investment firm.  His father thought he was making a huge  mistake by leaving a tenured position.  Mathematicians were shocked and  felt he was wasting his talent.  But Simons was always unconventional  – evidenced by small gestures like  not wearing socks because they  took too much time to put on.  At the age of 40, he left his  position at Stony Brook to open  up a small office in a strip mall across  from a train station near the university.  And so began Renaissance Technologies in 1978.  Back then, it was called Monemetrics,  a play on money + econometrics, the use of  statistics and math to study economic data.  Just as he once unscrambled enemy code, he  aimed to decode hidden patterns in the market. 

Simons recognized the limits

.  As much as Simons dreamt of this kind  of trading system – computers in the  eighties weren’t sophisticated enough  to handle a fully automated system.  So, at the start, Renaissance relied on math  models AND human intuition to  trade…which proved problematic.  His code-breaking colleague Leonard Baum  who now worked at Renaissance liked to buy  low but often clung to positions too long,  like in 1984, when he heavily invested in  U.S. bonds. But as the Reagan administration  began issuing so many bonds, prices plummeted.  Simons recognized the limits of human judgment and  brought in James Ax, a friend from his PhD days at  UC Berkeley whom he recruited to Stony Brook to  build more sophisticated math models for trading. 

Simons told a colleague

The team collected data from  as far back as the 1800s,  feeding them into computers,  to uncover overlooked patterns.  Simons told a colleague: “If we have enough  data, I know we can make predictions.”  Simons and Ax launched a  new hedge fund, Medallion,  in honor of the prestigious  math awards they’d received.  It would eventually become the most  successful hedge fund of all time.  But at first, it struggled to make a profit.  It didn’t help that Ax isolated himself  in his seaside estate in Malibu.  His preference for the West Coast led  him to spearhead his new company Axcom,  a separate entity yet closely  connected to Renaissance.  The turning point came when Elwyn Berlekamp who  had worked to crack codes with Simons  bought up Ax’s part of the business. 

Many investors prefer long-term trade

He rebuilt the system to focus  on short-term trades which Ax  had resisted due to concerns over commission fees.  Berlekamp figured “If you trade a lot, you  only need to be right 51 percent of the time.”  Many investors prefer long-term trades,  a sentiment Zuckerman describes  in his book this way :  “…like fishermen ignoring the guppies  in their nets, hoping for a bigger catch.”  Unlike these investors, Medallion honed in  on these ‘guppies’ — seeking to capitalize  on subtle inefficiencies that others overlooked.  Don’t give up easily. Stick with  it. Stick with it. Not forever,  but really give it a chance to get where you’re  going. The final principle is: hope for good luck!  After a decade of adjusting their algorithms  aided by improved computer processing power,  Renaissance turned the corner in 1990.  The Medallion fund posted gains after fees of 58%. 

just Renaissance Technologies

But Simons believed they could do  even better; he wanted 80% returns.    Simons bought Berlekamp’s share of the company.  Axcom, which had been a separate entity,  disbanded. Going forward, it was  just Renaissance Technologies.  Simons beefed up the team some more.  Henry Laufer, a mathematician from Stony Brook,  divided the trading day into five-minute intervals  instead of hourly, allowing Renaissance to quickly  detect and act on even shorter-term price changes.  Their models were so successful at making  trades that they trusted their computers  to make decisions that didn’t even make  sense to them. There was however one issue.

  regardless of your profession

.  Its Observatory under construction in Chile’s  Atacama Desert will search for gravitational  waves from the Big Bang – hoping to unravel  the mysteries of the universe’s first moments.  Perhaps history will not remember  Simons solely for being a master  of markets but as the master of the universe.  Jim Simons would never have become the greatest  trader of all time had it not been  for his background in mathematics.  Strengthening your math skills is  invaluable, regardless of your profession.  And there’s a FREE way to boost your skills. 

puzzles to improve my analytical thinking

I highly recommend Brilliant, a website  and app where you can learn math,  data science, and computer science interactively.  I personally take a few minutes out  of my day to go through Brilliant’s  logic puzzles to improve my analytical thinking.  You can start at your own comfort level  and then progress to more advanced lessons.  And if you get stuck, you can view the  explanation to discover the correct approach.  You can try out Brilliant for  FREE for 30 days using my link  in the description: brilliant.org/newsthink.  If you’re one of the first 200 people to  sign up via my link will get 20% off, you’ll  get 20% off your Premium subscription,  unlocking all of Brilliant’s courses.  Thanks for watching. For Newsthink, I’m Cindy Pom.  

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