Jim Simon's Principles
Jim Simons, a mathematician of genuine talent and one of the finest practitioners of quantitative investing passed away in mid May.
Jim lived an extremely varied and interesting life - dabbling in South American manufacturing, building a world class maths department at Stony Brook, running a discretionary investment fund before finally landing on what evolved into a world class quantitative investing firm in Renaissance Technologies (Rentech) in his mid-40’s.
Renaissance's flagship Medallion fund, which runs solely the capital of its staff and ex-staff, is famous for returning a claimed 66 percent annualized before fees and 39 percent after fees over a 30-year span between 1988 to 2018; an incredible achievement.
What I found most interesting about Jim was his deep knowledge and life experience that he distilled down to a number of principles, outlined below:
1. DO SOMETHING NEW; DON’T RUN WITH THE PACK.
“I am not such a fast runner. If I am one of N people all working on the same problem, there is very little chance I will win. If I can think of a new problem in a new area, that will give me a chance.”
As an investors, we are subject to many bias perhaps the most insidious being ‘herd bias’. There is safety in numbers for the mediocre however, to achieve truly special and differentiated outcomes, one must break from the conventional.
In Rentech’s case, on particular example was that the firm started with a mixture of external and internal capital. Over time, external capital was returned as the highest ROI for the firm was the management of a limited pool of internal capital which preserved their ability to achieve high returns over a long period of time.
This is a very unique practice in the industry with most firms aiming to gather the most AUM (assets under management) as possible, which inevitably leads to herd bias rising with the growth in AUM.
Whilst limited capacity isn’t a panacea to achieving high returns over time, it certainly is an element that contributed towards achieving differentiated, superior outcomes.
Doing things differently in core areas can provide an edge and material improvement to your outcomes.
2. SURROUND YOURSELF WITH THE SMARTEST PEOPLE YOU CAN FIND.
“When you see such a person, do all you can to get them on board. That extends your reach, and terrific people are usually fun to work with.”
Rentech traditionally hired individuals ‘untainted’ by the finance and investment management; with the strong emphasis on recruiting world-class academics in their respective fields, ie. generally various branches of mathematics.
Everyone wants to work with clever, competent and motivated people; who are outliers of productivity. Harnessing and motivating the talents of the best in the field can result in enormous relative advantages over the competition.
3. BE GUIDED BY BEAUTY.
“This is obviously true in doing mathematics or writing poetry, but it is also true in fashioning an organization that is running extremely well and accomplishing its mission with excellence.”
Beauty needs no explanation. You don’t need to think to understand the beauty held within a flower. Rentech’s team designed beautiful mathematical constructs over time with clear practical utility and benefitted immensely.
Beautiful design, process and execution lead to beautiful outcomes - no further explanation required!
4. DON’T GIVE UP EASILY.
“Some things take much longer than one initially expects. If the goal is worth achieving, just stick with it.”
Notably, Simons experienced significant challenges over the course of his varied career, taking a path that meandered amongst a plethora of unrelated disciplines before launching Rentech in his mid-40’s.
Too often we mistake action for progress. Life is a series of small victories and defeats before one finds the path right for them. Life favours the persistent.
5. HOPE FOR GOOD LUCK!
I read this maxim as an encapsulation of the first four principles, which have the effect of maximising your luck.
Unique methods, smart people, beautiful design and persistence combined will increase the probability of achieving any objective over time.
Vale Jim, you were an inspiration!
Recommended reading:
https://www.amazon.com.au/Man-Who-Solved-Market-Revolution/dp/073521798X
https://www.simonsfoundation.org/2020/01/22/my-guiding-principles/
https://www.institutionalinvestor.com/article/2btfwtg2jyu7f6oj3i6f4/home/the-secret-world-of-jim-simons
https://matt-rickard.com/five-principles-from-renaissance-technologies
https://www.unicorngrowth.io/p/jim-simons-strategy