The Untold Story of Jim Simons - the Man who Solved the Markets
Few stories in finance are as captivating as that of Jim Simons, who recently passed away. He was a math professor who went on to start the most successful hedge fund in history.
His flagship Medallion Fund returned 66% on average every year, for thirty years - triple that of Warren Buffet’s Berkshire Hathaway.
If you invested in his Medallion Fund in 1988, for every dollar you put in - you'd have $14 Million today!
But I wanted to focus on four lesser-known lessons, from his personal journey as an investor:
Money buys freedom
The value of side hustles
Dare to reason
Compounding takes time
Money buys freedom
Everyone wants more money. But some people want it more badly than others - often because they have some deeper desire for the freedom that money brings.
Simons doesn’t fit our mental image of a finance bro, or a Wall Street exec. If anything, he loved math more than money. In fact, he spent most of his career studying and teaching math.
But Simons’ interest in making money might have come from the desire to buy himself the freedom to live on his own terms.
In 1968, Simons was fired from his first job out of college: a 4-year stint as a codebreaker for the Institute for Defense Analyses.
His dismissal came after voicing his protest against the Vietnam War in a letter to the editor of The New York Times, and later telling a Newsweek reporter that he’d stop working on Defense Department tasks until the war ended.
Little is known about Simons’ reaction to being fired. But it is easy to imagine how this experience strengthened Simons’ desire for financial freedom.
A 2017 New Yorker profile later recounted, "Simons smokes constantly, even in enclosed conference rooms. He pointed out that, whatever the potential fine for doing so is, he can pay it.”
But more importantly, having this intellectual freedom was also important to how they ran their business.
As Simons’ explained: “The only rule is that we never override the computer. No one ever comes in any day and says the computer wants to do this and that’s crazy and we shouldn’t do it. You don’t do it because you can’t simulate that, you can’t study the past and wonder whether the boss was gonna come in and change his mind about something. So, you just stick with it, and it’s worked.”
The Medallion Fund eventually closed to outside investors in 1993, ensuring that they would not face external, short-term pressures from investors that might hamper their work.
The value of side hustles
Whether in entrepreneurship or investing, learning how to take on, and manage risks is critical. Risk-taking is a lot like a muscle. It has to be cultivated through regular, repeated exercise.
In his early 20s, while pursuing his PhD, Simons took a $5000 wedding gift and set out to grow it by investing.
He drove from his university in Berkeley to San Francisco every morning to the Merrill Lynch brokerage office, where he tried his hand at investing. He earned thousands of dollars trading soybean futures, only to lose it all within a few days.
But rather than being deterred, this experience hooked the young mathematician, who became fascinated with financial markets, and the possibility of scoring short-term profits.
During his graduate days at MIT, Simons motorbiked from Boston to Bogotá with a Colombian classmate. He eventually took a gap year to become a co-founder of a floor tile manufacturing company in the country.
A few years later, the business scored an exit, which gave Simons $4M in seed capital to start trading commodities while running Stony Brook’s math department.
The side investing was good enough that Simons — also going through a divorce — decided to leave academia and launch his own money management firm in 1978: Monemetrics.
Despite having the basic idea for a quantitative fund nearly a few decades ago, he was not able to raise any outside capital for it before.
Once again, learning to take risks had earned him the money, which bought him the freedom to take on even more opportunities.
Dare to reason
Few people dare to reason for themselves, and instead default to hearsay, or outdated mental models of what to invest in, how to behave, or what their careers should look like. Not Jim Simons.
From investing his wedding gift, to taking a gap year to start a business in a foreign country, it’s clear that Simons had cultivated the self-confidence to think for himself.
Jim Simons also ran the Medallion Fund very differently from other Wall Street funds:
They were the first to use mathematical models and computer algorithms to find and trade opportunities, while the rest of Wall Street looked at fundamentals, or charting.
They hired academics instead of finance professionals. “It’s easier to teach smart people the investing business, than teach investing people how to be smart.” Just like during his code-breaking das, they just focused on getting signal from noise - and you get that in different scientific fields (astronomer or natural language processing)
They had a very collaborative work culture vs. the competitive one that is prevalent in Wall Street. They also had everyone collaborate to build one model only, whereas other multi-asset trading firms often had multiple running at the same time. This collaborative culture led to low turnover, and smart people hiring other smart people work with.
Compounding takes time
We’ve all heard about the value of compound interest.
But few people seem to be able to use it to their advantage. Why? The thing about compounding is that nothing seems to be happening for a very long time. This is true both in investing and in life.
“I was an overnight success all right, but thirty years is a long, long night.”, quipped Ray Kroc in his autobiography, Grinding It Out: The Making of McDonald's.
It took about 25 years for the Medallion Fund to start working, from the original research paper, to testing the models to actually executing the strategies. When Simons founded the Medallion Fund in 1988, he did not experience immediate success. In fact, within six months, the fund was suffering.
Key employees like researchers and traders came and went, while Simons doggedly built his business.
Concluding Thoughts
Jim Simons’ story as an investor, and entrepreneur is a tremendous inspiration to many, including fellow UC Berkeley alumni like myself.
If you’re reading my blog, you might know that I’m trying to build something different in the world of personal finance.
The financial advisory industry today is staffed by salespeople - who make money from sales commissions and trailer fees, not the quality of their advice.
We’re trying to use AI models to build Peek: your own personal CFO to help you manage your financial life.
Just as Jim Simons was the first to use novel approaches to change the world of investing, I hope to do the same for your personal finances.
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