Strange tale of Jim Simons: Despite his investing genius, it’s of little use to investors While Buffett, Munger and Kahneman offered insights and knowledge that the average investor could adopt, Simons approach was different. His reliance on advanced mathematical models and statistical analysis was innovative and almost exclusive to his firms unique skill set
Dhirendra Kumar
CEO, Value Research
Charlie Munger, Daniel Kahneman and Jim Simon. The past few months have seen the passing away of these three people whose lives and work have been of great interest to investors. Of the three, Munger and Kahneman have often been the subjects of my writings over the years. However, I have hardly ever mentioned Jim Simon, even though his life has been the most interesting in some ways.
By all accounts, Simon, who passed away last week at 86, was an extraordinary genius. During the first half of his life, he was an academic mathematician or, to be precise, a geometer. Around the time he was 40, he decided that the equity markets could be understood and predicted using purely statistical techniques. He set up an investment firm and hired people from maths and maths-adjacent fields. They struggled for about a decade, but around 1987, their techniques had been developed to a point where they started succeeding.
From 1988 to 2018, the Medallion Fund, which was run by his investment firm, delivered annual gross returns of 66%. After considering the enormous fees, the average annual returns came to 39%. During this period, the only negative year was 1989, when the fund lost just 3%. These numbers seem completely incredible, and they are. Most readers must be thinking that these returns should have compounded to trillions of dollars over the years. They would have, but here’s the most interesting fact about this fund: it was not allowed to accumulate assets.
Simon capped the size of the Medallion Fund at US $10 billion, which meant that after a point, most returns were paid to investors every year. He did this because the statistical techniques that the Medallion Fund was using could only work to a certain scale. To help limit the size, the fund was closed to fresh investors in 1995—and has never been opened again. In fact, by 2005, all outside investors were bought out by the firm and, since then, the fund only has investments bits y employees and former employees.
In almost every way, this tale is the strangest in the world of investments. It is also the reason I have never written about Simon as an investment writer and educator. Simon and his team’s success holds no real lessons for you and me in our investing lives. Unlike Buffett, Munger, or so many other successful investors, there is nothing we can emulate.
Simon’s story is of extraordinary intellect and unconventional methods, setting him apart in the investment world. While Buffett, Munger and Kahneman offered insights and knowledge that the average investor could adopt, Simon’s approach was completely different. His reliance on advanced mathematical models and statistical analysis was not just innovative, but almost exclusive to his firm’s unique skill set. This is why, despite his phenomenal success, his methods remain largely inaccessible to everyday investors. Of course, one should be aware of some of the basic principles he followed, such as considering investments from the perspective of diverse fields, as well as formulating a system of investing. For anyone fascinated by the strange nooks of the financial world, The Man Who Solved the Market by Gregory Zuckerman could be an interesting read. Beyond that, despite the recent hype, we should ignore him in terms of any personal relevance to our investments.
There’s one exception though—Simon’s style of philanthropy. Unlike the ‘I’m going to save the world from itself’ obsession of some well-known billionaires, Simon poured an enormous amount of wealth into scientific and mathematical research. His contributions to the academia were vast, funding research that bridged theoretical and practical applications. Simon’s philanthropic legacy is a testament to his belief in the power of knowledge and innovation. As is his own life.
(The author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
