The Man Who Solved the Market

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Published: 11/5/2019
Jim Simons is the greatest money maker in modern financial history. No other investor--Warren Buffett, Peter Lynch, Ray Dalio, Steve Cohen, or George Soros--can touch his record. Since 1988, Renaissance's signature Medallion fund has generated average annual returns of 66 percent. The firm has earned profits of more than $100 billion; Simons is worth twenty-three billion dollars.

The Man Who Solved the Market By. Gregory Zuckerman

Key Insights

Jim Simons observes patterns in the financial market. And he understands behind these ups and downs is the science of mathematics.

Because of his ability to understand the market, he can predict it, which in turn, makes him a lot of money.

Simons is the most successful market investor in today’s world. But, Simons is even more than that, he is the founder of the hedge fund firm, Renaissance Technologies, a geometer, a code-breaker, and a philanthropist.

“We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.”- Gregory Zuckerman

In, “The Man Who Solved the Market” by Gregory Zucker you will get a good look at Simon’s life and learn some valuable information along the way.

Key Points

  • Simons Always Loved Math

Jim Simons was born loving numbers. He was born in 1938 in Brookline, Massachusetts. Jim was an only child in his Jewish-American family. His parents were named Marcia and Matthew.

At the age of three, Simons was solving complex math equations. His parents discovered him dividing numbers by two as a toddler, all the way up to the number 1024.

Another example of Simon’s early love of math was when he was shocked, at the age of four, when his father pulled over to fill up the car with gas. Simon concluded that if the tank was half full then it would never run out, there would always be half of whatever was remaining left, no matter how small.

“Scientists and mathematicians are trained to dig below the surface of the chaotic, natural world to search for unexpected simplicity, structure, and even beauty.”- Gregory Zuckerman

Without his knowledge, four-year-old Simons had begun questioning a classic math problem. This was a problem that the Greek philosopher, Zeno, had puzzled. The question is: If you always have to travel half of the remaining distance before you get to where you want to be, how will you ever get there?

When Simons finished school he was encouraged to go into medicine by his family’s physician. However, Simons wasn’t too keen on that idea.

He decided to attend MIT to get a B.A. in mathematics. At first, he struggled and ended up failing a few tests. He decided to stop for one summer and really learn to understand the more complex mathematical theories.

“‘When I heard MIT didn’t have a football team, I knew it was the school for me,’ he says.”-Gregory Zuckerman

After that, he gained a better understanding of everything and he began to notice the universal system of math. He thought he was looking at a code that could help to explain all of life’s vast and mysterious occurrences.

  • Simons’ Work With Codes

Simons had many academic achievements at both MIT and Berkley. After that, he went on a lookout for a lecturing post.

Simons completed his Ph.D. at Berkeley in only two years. His degree focused on work about geometry and multidimensional curved spaces. This secured him a teaching position at Harvard University.

Simons was a well-liked professor at Harvard. He was very informal and enthusiastic, not to mention, a casual-dresser.

However, Simons got tired of teaching. He felt bored with his routine schedule and lectures on the same old topics. He wanted to be challenged.

In 1964, Simons gave up teaching and went on to work for an intelligence group helping to fight the Cold War. He was apart of the Institute for Defence Analysis, a research organization full of mathematicians, like himself, that worked in cracking Soviet codes.

This company was quickly falling apart as they hadn’t cracked any codes in over a decade. The company hired Simons, even though he had no experience cracking codes, because of his brainpower and ambition.

The motto of the company was, “bad ideas is good, good ideas are terrific, no ideas is bad.”

Through the work in this company, Simons learned to create mathematical models to interpret patterns with data that would normally seem meaningless. And with that, Simons invented a fast code-breaking algorithm.

After Simons developed this algorithm, experts in Washington found a coded message sent by the Soviets with an incorrect setting.

Discovering that information, Simons and the rest of his team utilized this glitch to understand the Soviet’s internal messaging system. This made Simons a big shot in the field of code-breaking.

  • Simons’ Work in Geometry

While Simons worked at IDA, he had a lot of time on his hands. Instead of wasting it, he did further research as he was always curious. One of his main research focuses was global finance.

He also did research on geometry. He focused on questions about the theory. His specific area of research was called “minimal varieties.” This was a very hard-to-understand subject that dealt with the idea of surface area.

An example of a classic case concerning this subject is a soap film stretched across a wireframe that has been dipped into a bucket of a soapy makeup. The soap film has the smallest surface area compared to any other substance that could be stretched across this same wireframe. And because the surface of the soapy film is so smooth, no matter which way you look at it, or how twisted the wireframe gets, it looks the same.

With that idea in his mind, Simons questioned whether that theory would still hold true in higher dimensions, rather than just in the two-dimensional wireframe.

In the year 1968, Simons published the findings from his research in “Minimal Varieties in Riemannian Manifolds.” This helped him to be recognized as one of the world’s greatest geometers.

Simons began using his talented brain to make money from stocks.

He tested investment methods. He approached the markets the same way he approached his mathematical theories. Simons developed a model that looked at the individual “moves” within stocks, without applying any outside context to them.

Simons concluded that the market had eight “states.” “High variance” was when something moved without reason. And “good” meant that the stocks rose generally.

This system was not concerned with “why” the market hit these “states.” It was more concerned with observing them.

After Simons, predictive theory that copied his would pop up throughout different fields.

  • Simons Founds A Hedge Fund

In 1968, Simons was fired from his job at IDA because he shared his opposition for the Vietnam War.

While looking for another job, he decided to go back to the education system. He took a job at Stony Brook University in New York as the chairman of the mathematics department.

At the age of 40, Simons left the academic world once again and founded a hedge fund called Monemetrics. He was determined to find the pattern in the market as he hoped to become rich.

Simons invited an old co-worker from IDA, Leonard Baum, to work as his partner. Baum was the co-author of the Baum-Welch algorithm. The Baum-Welch algorithm was a huge part of Simons’ hedge fund. The algorithm predicted outcomes from a series of events without the knowledge of any outside context or underlying variables. The series of events observed are called hidden Markov chains.

The Baum-Welch algorithm was designed to make predictions using a chain of events and estimating outcomes. The design theory was intended to monitor and analyze the moves happening in the financial market.

At first, Simons and Baum traded only in currency. And they soon began to make a lot of money very quickly. Their hedge fund began to grow at tens of millions of dollars.

  • The Origin of Monemetrics

Monemetrics was made up of friends and colleagues that Simons had met throughout his journey. Once he had his team of mathematicians established, he set up a hedge fund to manage their investments.

The hedge fund was named “Nimroy.” This silly name was actually a clever anagram of Joseph Conrad’s novel, “Lord Jim and the Royal Bank of Bermuda.” This was the bank that handled the firm’s money transfers.

The name was based on finance and the character of the novel who has internal battles about the ideas of honor and morality. It is a story about a man fighting his own conscience as he is haunted by the past.

Simons related to the main character in the novel as he left his honorable job as a teacher in order to find a way to become rich.

Monemetrics did have its rough spots in the beginning. The company was buying low but it wasn’t selling high. For example, they experienced an instance when they bought into gold when the price had skyrocketed. However, they missed their chance to sell when it was high by not acting fast enough.

Losses like this became much too common and they began losing millions a day.

Simons began to doubt his knowledge of the financial market.

  • The Introduction of Computers

In order to fix their losses, Monemetric needed a more accurate system to analyze the movements happening in the financial market.

Simons decided to incorporate new technology into their current method of predictions.

Simons renamed the company, “Renaissance Technologies” to give homage to their new system.

The process began by Simons plugging in huge amounts of historical data into his computer. He collected this information by buying books from the World Bank and records of currency prices.

His reason for doing this was so he could try to see if there were any obvious patterns in the market. But, it as very difficult to see if there were any patterns present that were relevant to the current market.

While trying to perfect this new technology, Simons bought expensive computers and data storage. Renaissance Technologies was now functioning at a level that no other hedge fund was at that time.

The data collected by the computers was then combined with Baum’s mathematical prediction theory.

James Ax, another mathematician on the team, improved Baum’s theory so that they could better analyzing the fluctuating market in the ‘80s. This proved successful and helped them to generate more returns.

Simons and Ax then decided on another name change and the hedge fund became “Medallion.” And this fund was the company’s most profitable.

Down the line, this fund would hold the title of “best record in investing history.” It returned 66% in annual returns and had trading profits of more than $100 billion dollars.

  • The Great Controversy

Renaissance started to expand, which means they needed more brainpower. Robert Mercer was recruited as he had a good track record at the company IBM.

Mercer was a brilliant coder. His fascination with computers started as a young child. When he was a young man, he was inspired and motivated after meeting Neil Armstrong while he was studying at a science camp in West Virginia.

After Mercer graduated college, he began work in a weapons laboratory as a computer programmer. Mercer began disliking his work. He realized his company was only concerned with checking off tasks and using every ounce of the government’s research budget. This made Mercer dislike the government.

At Renaissance, Mercer used his talents to discover and identify flaws in the system. This led them to success during the ‘90s.

However, Mercer was much more well-known for his politics. He funded right-wing political campaigns and publications. He helped fund the campaign to elect Donald Trump as president.

“Truth in life is broad and nuanced; you can make all kinds of arguments, such as whether a president or person is fantastic or awful,” he says. “That’s why I love math problems—they have clear answers.”- Gregory Zuckerman

Simons was on the opposite spectrum. He was a democrat, who had been donating millions of dollars to fund campaigns for years.

However, working together in finance they didn’t have any issues politically until Mercer funded Donald Trump. When that happened, he was forced to step down as co-CEO because of the anger of their investors.

  • Jim Simmons In A Nutshell

Simmons’s achievements in the market are inspiring. He is the most successful trader in the history of modern finance.

In fact, not one company comes close to the profits he made under Renaissance. The Medallion’s funds total around $100 billion dollars. And even now, Renaissance still hits around $7 billion dollars a year in profit. To put that into perspective, that is more than the yearly revenue of names such as Levi-Strauss, Hasbro, and Hyatt Hotels.

“Simons and his team are among the most secretive traders Wall Street has encountered, loath to drop even a hint of how they’d conquered financial markets, lest a competitor seize on any clue. Employees avoid media appearances and steer clear of industry conferences and most public gatherings. Simons once quoted Benjamin, the donkey in Animal Farm , to explain his attitude: “‘God gave me a tail to keep off the flies. But I’d rather have had no tail and no flies.’ That’s kind of the way I feel about publicity.”- Gregory Zuckerman

The trading methods that Renaissance used greatly influenced the way trading in the financial market is done. And other markets as well! For example, sports teams utilize the mass statistic crunching that Renaissance introduced to the world.

Another example is the health world and military turning over tasks to computers, just like Renaissance did.

After becoming financially successful, Simons decided to put his money to good use becoming a philanthropist and creating organizations. He established the Simons Foundation for Education and Health as well as the Math for American initiative. He also donated to Nepalese healthcare and gave generous donations to Stony Brook University.

The Main Take-Away

Simons began as a talented mathematician at a young age. He then worked to break codes before founding his hedge fund management firm, Renaissance Technologies. Simons changed the way global finance works. And with his successes came profit, much of which he donated to charity.

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