The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

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Summary

Former mathematician and intelligence agency employee Jim Simons solved the market and became the most successful money manager in modern history. This story reveals how his fund beat the market with computers and averaged annual returns of 66% since 1988.

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Key Takeaways

You don’t have to be right 100% of the time

“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.”

Simons’ trading strategy did not require him to be right 100% of the time. You just have to be right 50+ percent of the time, and with this strategy, you can make a lot of money.

Incentives influence outcomes

“Simons shared a few life lessons with the school’s audience: ‘Work with the smartest people you can, hopefully smarter than you . . . be persistent, don’t give up easily. Be guided by beauty . . . it can be the way a company runs, or the way an experiment comes out, or the way a theorem comes out, but there’s a sense of beauty when something is working well, almost an aesthetic to it.’”

Surround yourself with people who are smarter than you. Be tenacious in the face of adversity. Find the beauty in something working well, even if that something is an area as abstract as theoretical mathematics. Your orientation toward elegant solutions will be a lucrative and enjoyable orientation.

Life is nuanced

“Truth in life is broad and nuanced; you can make all kinds of arguments, such as whether a president or person is fantastic or awful,” he says. “That’s why I love math problems—they have clear answers.”

Whereas fields like mathematics and physics often have clear answers, life is more nuanced. There are many ways to live, and none of them is particularly right. Finding the balance between the ambiguity of truth in life and the precision of truth in certain disciplines can help you carve out a unique philosophy.

A culture of secrecy

“Simons and his team are among the most secretive traders Wall Street has encountered, loath to drop even a hint of how they’d conquered financial markets, lest a competitor seize on any clue. Employees avoid media appearances and steer clear of industry conferences and most public gatherings. Simons once quoted Benjamin, the donkey in Animal Farm , to explain his attitude: “‘God gave me a tail to keep off the flies. But I’d rather have had no tail and no flies.’ That’s kind of the way I feel about publicity.”

Investing is often a zero sum game. Each trade has two sides (buyer and seller), and you want to be on the profitable side of that trade if your goal is to make money. While Simons built an antifragile trading empire, he understood the importance of keeping winning strategies secret. As soon as information leaks and other traders begin using your strategy, it stops working.

How to stop being embarrassed

“existing mantra at Renaissance: Never place too much trust in trading models. Yes, the firm’s system seemed to work, but all formulas are fallible. This conclusion reinforced the fund’s approach to managing risk. If a strategy wasn’t working, or when market volatility surged, Renaissance’s system tended to automatically reduce positions and risk. For example, Medallion cut its futures trading by 25 percent in the fall of 1998. By contrast, when LTCM’s strategies floundered, the firm often grew their size, rather than pull back.”

Renaissance survived over the long-run by avoiding infallible trust in the trading models. Models can be more accurate and powerful than human judgment, but it’s important to recognize their limitations to survive new environments and potentially fatal risks. Surviving the investing game over decades requires the ability to abandon your strategy and preserve capital if the world rapidly changes.

Leveraging price patterns

“The strategies were often based on the idea that prices tend to revert after an initial move higher or lower. Laufer would buy futures contracts if they opened at unusually low prices compared with their previous closing price, and sell if prices began the day much higher than their previous close. Simons made his own improvements to the evolving system, while insisting that the team work together and share credit.”

Simons’ team leveraged patterns in price movements to predict future price movements. They slowly honed this skill over time and cultivated unique strategies based on historical patterns. The result was a wildly successful trading operation that has stood the test of time.

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