If you were asked to list the top 5 greatest investors ever, would you be able to mention Jim Simons?
Forbes magazine puts Simons’ net worth at USD 21.6 billion and ranks him # 36 amongst the world’s richest. Bloomberg Markets has called Simons’ fund the “the world’s greatest money-making machine”. But money is not the driving force behind Simons’ success, it is mathematics and philanthropy.
Mathematics – The first forty years
Simons, now 82, spent most of his early life as a mathematician. He obtained his bachelor’s degree in mathematics from MIT in 3 years (it usually takes 4 years) and obtained a PhD from the University of California by the time he was 23.
Simons made important discoveries in mathematics, including in pattern recognition – an area that proved of great use when he turned to investing.
After spending many years as a mathematics professor and Chairman of the mathematics department at Stony Brooks University in the US, he left academia and became a full-time investor when he was 40.
Second stage – Making billions
Simons founded Renaissance Technologies in 1982. A summary of Simons’ approach to building a business and to investing is as follows:
- Returns: Renaissance’s flagship fund, Medallion, showed an amazing annualized 66.1% gross return for the 30 years from 1988 – 2018. A 100 dollars invested in 1988 would have become 408 million dollars by 2018!
- Investment strategy: The investment strategy is run entirely through computer models that use huge amounts of data as inputs and then come up with trading strategies.
The key for Simons is that the investment process should not have any direct “human element”. Simons believes that whatever the computer model provides as output must be used. Simons has said, “You either slavishly follow the model, or it isn’t going to work very well. We never overrode the model.”
Simons uses data going back to the 1700s and the algorithms look for patterns that are short term. The average holding period of Medallion is only two days.
- Employees: Simons has said that he hires mathematicians and physicists “out of universities, national laboratories; people who are very good scientists but who want to try something different.” In fact, the quality of the PhDs that Renaissance hires is so high that the company is also called the “best math-physics department in the world.”
Personal tragedies and third stage – philanthropy
Simons has faced two major tragedies. In 1996 one son died at the age of 34, in a traffic accident while cycling near his home. Another son died, when he drowned at age 24, while doing volunteer work in Nepal.
These tragedies as well as Simons’ natural generosity made Simons turn to philanthropy when he retired from active work in Renaissance in 2010. He is now the Non-Executive Chairman of the company.
Simons has donated more than a billion dollars to philanthropic activities, mostly in the areas of education and health care.
In 2016, in recognition of his mathematical and philanthropic contributions an asteroid was named “Jimsimons” by the International Astronomical Union.
A future world where computers entirely run our markets
Renaissance was the first major investment company to use big data and computer algorithms for trading. Since Renaissance started in 1982 a large number of similar trading firms have entered the market. It is now estimated that more than half of the trading volumes in US stock markets are a result of instructions from computer-generated algorithms.
What type of risks do we face with these large computer algorithms dominating the markets? Simons is not concerned. He says, “How we do it isn’t any more mysterious than how a great fundamental investor does it. In some ways, it is less mysterious because what we do can be programmed.”
© Kaikhushru Taraporevala