3 Money Lessons From The Man Who Solved The Market
Jim Simons is one of the founders of quantitative trading. He began studying mathematics at MIT at the age of 17 and earned his PhD at the age of 23. He first joined the Institute for Defense Analysis (IDA) to break Russian codes to help the US government in the Cold War. After the Vietnam War, he wanted a bigger challenge, so he set out to solve one of the toughest challenges in history, the marketplace. It took him and his colleagues more than 10 years to create a secret and complex model that could find tricky patterns in the market and make billions of dollars.
Here are the main conclusions I have drawn from Jim’s philosophy that can help you too to achieve exceptional results:
Focus on the odds
Most investors would rather have a 99% chance of making $1 than a 1% chance of making $100.
Jim became obsessed with the odds he had of beating the market. It was the first time in history that anyone had used probability and statistical models to trade, which has many advantages over traditional trading.
“We’re right 50.75% of the time . . . but we’re 100% right 50.75% of the time. You can make billions that way.” — Bob Mercer
The obsession will make you exceptional
Jim Simons is a real obsessive of the financial markets, for more than 50 years he has tried to find the formula that beats the market, and this has made him one of the best investors in history. To do this, he has had to change the roadmap of his investment style several times, in fact, initially, the results were really bad compared to the indices, he did not manage to beat the market for more than 10 years. He learned from his mistakes and continued to evolve his investment style until he founded his hedge fund, Renaissance Technologies, which has an annualized return of more than 60%.
Currently, the market is full of young people who invest based on recommendations from Instagrammers and YouTubers while they do not know, nor understand, what is behind the money they are investing, which will cause them to panic as soon as there are market downturns because their initial conviction is not high enough to stay invested.
Therefore, investment is a process in which we have to evolve, where there is no one formula that fits all profiles and it is important that everyone finds their own, regardless of market conditions.
Use leverage to your advantage
“In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” — Warren Buffett
It is estimated that Simons Hedge Fund trades with 12.5x leverage on average, with up to 20x leverage accessible when the system is confident in the opportunities.
The historical unleveraged returns from Simons are similar to the S&P 500 Index. The leveraged performance, however, is legendary.
This does not mean that it is necessary to leverage to the index, since the losses are multiplied, and that is precisely what we should try to reduce. The optimal way to leverage is through options and generally by buying them, where the drawdown is limited.