I have been thinking about Jim Simons’ mind-blowing achievement at his Medallion hedge fund:
"From 1988 to 2018, Medallion returned 66.1% annually before fees. Net of fees, the gains were 39.1%." – Gregory Zuckerman, The Making of the World’s Greatest Investor
How did he do it?
Here’s Zuckerman:
“A radical investing style was behind Mr. Simons’ rise. He built computer programs to digest torrents of market information and select ideal trades, an approach aimed at removing emotion and instinct from the investment process. Mr. Simons and colleagues at his firm, Renaissance Technologies LLC, sorted data and built sophisticated predictive algorithms—years before Mark Zuckerberg and his peers in Silicon Valley began grade school.”
No security analysts, chart readers, economists, etc. He marshaled the power of mathematics and computers to create a mill for turning out money. And it seems he was the first to do so with great success.
Hold that thought.
Anton Howes: The Rise of the Mathematicians
Around the same time I was reading about Simons, I came across an interesting thesis by Anton Howes. He’s the historian-in-residence at the Royal Society for the Encouragement of Arts, Manufactures and Commerce in London.
In a blog post, he argued that the accelerated innovation in England c. 1550s-1650s began with the publication of various treatises on geometry in English and the subsequent application of Euclidean geometry to surveying, navigation, artillery, etc.
He writes:
“Almost all of the late sixteenth-century English innovations seem to involve the application of geometry, following the maxims set down almost two thousand years earlier by Euclid of Alexandria.”
Why didn’t they adopt these maxims earlier? Because, Howes contends, these maxims were largely buried in Latin, ancient Greek and/or Arabic texts.
But a mathematician named Richard Recorde began to bring Euclid’s ideas to English speakers. “He started in 1543 with The Ground of Arts, a basic introduction to arithmetic,” Howes writes. “In 1551 he followed up with The Pathway to Knowledge, an introduction to geometry.”
This latter book was the first book on geometry in English:
“The effect was revolutionary. He created the market for books on mathematics, opening the way to books on its applications by common gunners and navigators and makers of navigational instruments, as well as by scholars. And geometry began to creep into invention after invention.”
Basically, it seems the English made a great leap forward by applying geometry. By the 1570s, such knowledge was essential for a number of fields. The English made it part of the education of their “elite.”
Of course, as with any history, this idea is a product of one person trying to make sense of events, choosing what to emphasize and what to ignore. But maybe he’s right, or at least partially right.
I like it because Howes shows how knowledge can be almost like a commodity – a bit of something that you can transmit. And it can be trapped, or lost; its flow disrupted by human elements (like language and national borders). I wonder how much of history one can tell through this lens.
You can look at investing knowledge itself this way. A transmission of sorts passed from Benjamin Graham to Warren Buffett and on to countless other people. It’s not a pure transmission. Each “node” in the network changes something. But nonetheless one can see “investing trees” grow from the trunks of major thinkers such as Buffett, Marty Whitman, Seth Klarman, et al.
Anyway, I digress. You can see Howes full post here:
Simons Again
Is there a connection between Simons and early geometers in England? With the increasing role of "robots" and "algos" in markets, was Jim Simons kind of like the first guy (or guys) to use geometry as a navigation tool? Will he be remembered as the first and perhaps greatest practitioner of a new age of finance dominated by mathematics? What does it mean for those who do not use such tools or are incapable of using them? Or will this seeming advantage merely be competed away like every other "innovation" in finance -- especially now that it's proven itself and is getting a lot of publicity?
I suspect the latter... after all, the English may have been early adopters of geometry, but others soon followed. Eventually, it became common knowledge.
Today, there are, of course, a number of other quant shops. And bots already handle a lot of trading, even the vast majority of trading (depending on how you figure it).
So, the analogy is not perfect. Geometers discovered timeless rules that revealed hidden relationships among forms and shapes. Stock market trading seems unlikely to ever have such predictable and timeless relationships. Things change so much. And people are too weird.
Whatever the case, the juxtaposition of these two ideas made me think again about where I want to compete in markets. It’s like the old joke about Tiger Woods: “How do you beat Tiger Woods?” Answer: “You don’t play him in golf.”
In the same way, I don’t think you want to try to compete with Simons and all those bots. You can’t try out trade them. The biggest advantage for us probably lies in our ability to hang on – to look past the next quarter or two and instead look out 3-5 years, even longer. A related advantage is our ability to uncover insights that haven’t yet manifest in price action or earnings reports. That stuff is invisible to bots.
The market ecosystem is big enough to support a variety of styles, of course. While I am amazed at Simons’ track record -- the word "amazed" seems inadequate -- there is no way I can ever replicate what he’s done. But the good news is I don’t have to. As I showed in my book 100 Baggers, plenty of people have enjoyed extraordinary returns simply by holding to the stocks of good businesses. Investing can be that simple - and still very effective.
One last note on the power of simple tools: Howes thesis reminded me of the story of Eratosthenes, which I first read about in Cosmos by Carl Sagan.
Eratosthenes was one of those great ancient Greek polymaths. And he puzzled over a strange phenomenon: In a distant frontier city, at noon on June 21, vertical sticks cast no shadow. But in Alexandria, where Eratosthenes was, they did. Why was that?
The only answer he saw was that the Earth must not be flat, but curved. He hired a man to pace out the distance from Alexandria to this distant outpost. And then, using angles to the sun, he deduced the circumference of the Earth with an error of only a few percent. He was, so far as we know, the first person to do so. Pretty good for over 2,000 years ago without computers of any kind. As Sagan wrote: “Eratosthenes’ only tools were sticks, eyes, feet and brains, plus a taste for experiment.”
Earnings
I’ve been working through earnings reports. I try to play down the importance of any quarter. In almost every case, one quarter just becomes a blip in a long string of quarters. It’s rare you look back and say, “Yeah, Q3 in 2019. That changed everything!” It just doesn’t work that way.
Yet, I can’t help but get a charge of excitement before a release – a strange mixture of anticipation, excitement and, I must be honest, a bit of fear. (Like, please don’t drop an unexpected bomb on me).
Mostly, this season has been kind. I’ve been cheered by good results (and surging stock prices) from Fairfax Financial and Echostar, two names I’ve written about here before (and which I still own). I have Air Lease upcoming after the bell.
I may write about a name or two next week once things settle down a bit.
Thanks for reading!
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Published November 7, 2019
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