Mind-Boggling Returns
If it sounds too good to be true, it probably is. This is generally a good rule to live by when you invest your money. If someone or something is promising high returns with no downside, it’s probably a Ponzi scheme or a fraud. The right course of action would be to run in the opposite direction.
Except if a chap called Jim Simons had come to you in 1988 and asked whether you had wanted to invest in his quant fund. He would have explained that he knows nothing about businesses or companies, or investing really, but that he is a code breaker for the government and a mathematician. He would have spoken about his team, who are all quantum physicists and scientists and mathematicians and other academics, and he would have explained that they don’t really know anything about business or investing either. He would have told you that he would charge you 5% management fees and that he would take 44% of the annual profits of the fund.
If that had happened, then you would have wanted to say yes. You would have wanted to say YES YES YES.
You would have wanted to say yes because Jim Simons and his Medallion Fund turned out to be the greatest money-making machine in modern history (perhaps in all of history).
The book ‘The Man Who Solved the Market’ by Greg Zuckerman has just been released.
The story of this secretive hedge fund has finally been told.
And this is it. Between 1988 and 2018 The Medallion Fund managed by Renaissance Technologies returned an average of 66% per year, gross of fees, with only one negative year.
Net of his 5% management fee and 44% of profits, the fund returned 39% per year.
Let me try and explain how mind-boggling those returns are.
If you had invested $1,000 in 1988, it would now be worth over $20m (net of all fees paid). $1,000 to $20m in 30 years.
There is nothing that has ever come close to that. This performance beats Warren Buffett by 200x.
Nick Magguilli shows in this piece that you could have paid a 40% management fee to have your money in the fund and you would still have beaten the S&P 500 over the period by over 25x.
I haven’t read the book yet (it’s on it’s way here), but have listened to several interviews with the author (you can listen here and here and here) and the story is fascinating.
As Zuckerman says, ‘the very people who figured out the market and conquered the market are pretty much the last people you would have expected because they are people that didn’t know anything about the market.’ Everything about investing is counter-intuitive and here is another great example of that.
Simons and his team figured out how to take advantage of human behaviour. They looked at hundred of years of data and saw that human behaviour is repetitive and that groups of stocks move in predictable ways in relation to each other, and to the indexes. What they didn’t do is have some secret sauce that told them when the market would go up or down.
One of the researchers at Renaissance said ‘our entire premise was that human actors will react the way humans did in the past and we have learned to take advantage of that.’
My favourite bit of the story is that a man who pulled over $100 billion from the market by taking advantage of human behaviour wasn’t immune from making behavioural mistakes himself.
At the end of 2018 the US stock market fell 20%. Zuckerman tells how Simons was on holiday with his wife and started to panic. He called his money manager who told him to hold on. The market bottomed the next day.
“He’s a guy who made his $23 billion on the scientific approach not on testing ideas and having systematic approach to investing, not on these narratives and nervousness and reacting, all these behavioral mistakes that we all make, he was about to make, too.”
Whilst us mere mortals will never experience returns like those of Jim Simons (and very few did experience those returns because Simons turfed out most outside money, even that of his family and friends, early on – the fund is almost exclusively run for employees of Renaissance), or anything even close, we can learn that it pays to take out instinct, emotion and intuition from investing.
Our investment process should always be based on data and science. And if Jim Simons needs a hand to hold when the market falls, then you probably do too.
Georgie
georgie@libertywealth.ky