Remember South Sea Company, the grand success and an equally grand failure of Isaac Newton in it?

At the end of this saga Newton had this to say:

Since then it is a very common knowledge and a notion,  in fact a strong belief that intelligent minds and high IQs are not suited for the markets.  Geniuses often fail in the world of stock markets. But, there was one man who in his entire life kept breaking such notions & beliefs for fun. Well, what else can you say about a Doctorate in Mathematics, a head of Department at a University, who then goes on to become a stock market genius. We all say one can’t predict the market, but this man used mathematics to prove all of us wrong. So much wrong that he has a biography titled “The Man Who Solved the Market!”

We are talking about Jim Simons.

Now, you would have seen the news of his recent demise at a ripe old age of 86 years. So, let us learn about Jim Simons, his life & his investing philosophy in our article in the Legends of Investing series.

Early life of Jim Simons

Jim Harris Simons was born in Newton, Massachusetts, USA in 1938. He was particularly interested in Mathematics and no wonder he pursued a degree in the same field. He graduated from MIT (Massachusetts Institute of Technology) in 1958 with a Bachelor’s degree in Mathematics and then went on to earn a PhD in Mathematics from University of California in 1962 at a young age of 23. This is when he started a business with his schoolmates producing vinyl floor tile and PVC piping. The business ran well yet Jim went back to academics to teach at Harvard University. Being a natural at mathematics he then worked as a code breaker at Institute of Defence Analyses (IDA) during the Cold war to help US Govt decode Russian messages.  He used the freedom provided by IDA to analyse price data in the stock market with a sophisticated mathematical tool.

He then reentered academia to become Chair of Mathematics at Stony Brook University and went on to lead the department, where he created path breaking work in Mathematics. He even won awards and accolades for his contribution. Simons realised that he could use his mathematical skills to deduce pattern recognition strategies to predict stocks. Thus was born his hedge fund Monometrics in 1978, which saw huge growth in the initial years. This later became Renaissance Technologies, an investment firm ran by people in academics..

“We didn’t hire anyone who had worked on Wall Street before,” he told California magazine. “We hired people who were very good scientists but who wanted to try something different. And make more money if it worked out.”

The hedge fund relied heavily on quantitative analysis and algorithmic investing producing some great results for its investors. This is when the world gave him the famed title of Quant King in the late 80s.

The mathematics and pattern recognition applied by Jim Simons is what is today known as Quantitative or Quant investing.

So what is the investment philosophy and the guiding principles of Jim Simons?

Guiding Principles:

• Don’t run with the pack
• Hire the smartest people
• Don’t give up easily
• Be guided by Beauty!
• Hope for Good Luck!

Don’t run with the pack

In the 1980s it was the norm to employ Wall Street veterans and experts to run an investment fund. However, Jim Simons, an academician himself setup a hedge fund that employed mathematicians, scientists & astronomers. Pattern recognition & predicting the market using algorithms were also unheard of during that period. However Simons created mathematical models & algorithms to predict stock movements and gave birth to a new form of investing called Quant investing. He used these to trade in currencies, commodities as well as in stocks.

“I have one guy who has a Ph.D. in finance. We don’t hire people from business schools. We don’t hire people from Wall Street. We hire people who have done good science.”

Jim Simons investing philosophy is unique as it broke the then stereotypes of the Graham, Buffett’s way of valuing companies based on their intrinsic values.

Hire the smartest people

As we have seen earlier, Jim Simons’ Renaissance Technologies employed expert mathematicians & scientists who were accomplished in their field. 

There is an interesting story about Simons’ first hire. Leonard Baum, a fellow mathematician and a former colleague of Simons. He liked making short-term predictions out of chaotic environments. Simons in March 1977,  requested Baum to just spend a day with him in his Monometrics office to set up a trading system to speculate on currencies. Baum knew little of the world of trading, but agreed to do this once a week as a favour to his friend. By 1979, Baum, who was then 48 years old, got so immersed in trading that ultimately led to him ditching his academic career. 

In 1993, Renaissance approached two of the smartest minds in IBM’s speech recognition team, again from outside the world of finance. They joined Renaissance since they felt Simons’ firm had the right scientific focus. The success of his fund boils down to managing the hundreds of number theorists, quantum physicists and artificial Intelligence PhDs.

The following quote highlights Jim Simons’ thought process.

Math: The method to market’s madness

Simons believed that financial markets have discoverable patterns through mathematical models. He did not believe in the efficient market hypothesis and always looked to capture the market inefficiencies using mathematical models. Using applied mathematics the Medallion fund under Renaissance technologies compiled data from the World Bank and Federal Reserve since the 1700s to identify trading movements that repeat over time. 

Simons’ fund relied on statistical arbitrage that is a process to buy and sell securities  simultaneously, according to predefined models. This strategy was incredibly successful in volatile and liquid markets.

The Medallion fund returned an average of 71.4% before fees between the period of 1994 to 2014. In the year 2000, the fund returned a whopping 128% before fees, where they had executed about 1.5 to 3 Lakh trades per day. In 2008, this return was 140% before fees! Simons also had formed the hedge fund Limroy that used mathematical models, charts & human intuition to trade currencies commodities and bonds.

This performance is far superior than funds run by modern day greats such as Warren Buffett and George Soros. The longevity of Simons’ success is a result of innovation and development that continuously changed and adapt his models to the dynamic market environment.

Persistent efforts

Jim Simons embodied the never give up attitude. On the journey of his fund’s success it suffered many near death experiences. Initially the investors were not ready to believe and buy into the fund’s approach. Again Simons had to hire smart & creative brains to win the investors.

As said earlier, managing the smart brains who were distinguished in their fields was a challenge. There were differences of opinion which Simons with his able man management resolved. He gave his team freedom to do their work and also ownership in the fund as a performance reward for their work.

Be guided by Beauty

Although Jim Simons a mathematical genius turned hedge fund manager got his fame from Wall Street he always kept devoting time & wealth to philanthropy. He took good care of his team members arranging exquisite vacations for his team and encouraged them to bring their families. Even when he was head of department at Stony Brook he adopted an informal dressing style to make his students comfortable. 

Even while running the Renaissance Technologies & after stepping down in 2009, Jim Simons kept spreading his love for maths & science. Simons and his wife established the Simons Foundation in 1994 and have given away billions of dollars to philanthropic causes. This New York based foundation supports research in mathematics, science and autism. Simons also founded Math for America that extends fellowships to maths and science teachers in New York city public schools. He has also established Simons Institute for the Theory of Computing by given away $60 million in 2012.

His quest for beauty in life can be summarised best in his own words:

“I worked on maths a lot. Simons said at a 2022 event honouring Abel Prize winners who had been singled out for their mathematical achievements, “I made a lot of money, and I gave almost all of it away.”

Summary

Dear Reader, John Simons was himself a mathematical genius. His love for mathematics led him to bring a revolution in the field of investing. His life is a series of left turns or pivots. From academia through code breaking, teaching, running an investment firm to philanthropy Jim Simons has lived many lives. 

Simons’ contribution to develop a quantitative strategy for trading led him to be known as the Quant King. Inspired from his success many young and budding investors on Wall street started implementing a quantitative analysis in their investments. 

By 2020, quantitative or quant investing accounted for almost a third of Wall Street trading operations. Even the traditional investment firms relying on fundamental investing, corporate research, scuttlebutt felt compelled to adopt Simons’ methods. Quant funds now account for more than 20% of all equity assets, according to an estimate by JPMorgan

Even in India today we have the Quant mutual fund that utilises computer based algorithm driven investing decisions. Although their methodology is not the one that Jim Simons employed, yet the the Quant King is definitely an inspiration!

The investing community lost this genius on May 10th, 2024. We hope this article to be a tribute to the life and achievements of Jim Simons. 

We at Zen Nivesh & Smart Sync Services aim to bring forth the learnings from the Legends of Investing for you. While we follow up this article with another equally interesting one, you can Follow us on Twitter, Instagram & Youtube for more interesting content.