The Journal. - The Life of One of Wall Street’s Greatest Investors

Episode Date: May 16, 2024

Jim Simons pioneered a revolution in financial trading, embracing a computer-oriented, quantitative style in the 1980s well ahead of Wall Street. Following Simons’ recent death, WSJ’s Gregory Zuckerman unpacks his legacy from financial algorithms to philanthropy.  Further Reading: -How Did Jim Simons’s Firm Make $100 Billion? He Told His Secrets to Our Reporter  -Jim Simons, a Pioneer of Quantitative Trading, Dies at 86  -The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution  Further Listening: -Charlie Munger: Curmudgeon, Sage and Investing Legend  -Rise and Revolt at Renaissance, Part 1  -Rise and Revolt at Renaissance, Part 2  Learn more about your ad choices. Visit megaphone.fm/adchoices

Who's the greatest investor of all time? Our colleague Greg Zuckerman says the title probably belongs to someone you might not have heard of. Jim Simons. Over the course of his decades-long career, Simons and his firm, Renaissance Technologies, produced returns that were out of this world. 66% a year. No one's ever come close. I'm not sure anyone will come close.

So for all those reasons, he became really a groundbreaking individual, both in the world of finance, but elsewhere. I mean, there are household names out there like Warren Buffett, and he's better than him. There's a strong argument that he's better than Buffett. His returns are better than Buffett. His returns, his annual returns are unmatched. Simons was a mathematician, and he took those skills and applied them to Wall Street, becoming one of the first investors to use computers and computer algorithms to make investment decisions, ushering in a new era of technology-driven trading on Wall Street.

And he and his firm made over $100 billion in the process. Last week, Simons died at the age of 86. I did a lot of math. I did a lot of math. I made a lot of money. And I gave almost all of it away. That's the story of my life. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson.

It's Thursday, May 16th. Coming up on the show, how Jim Simons used math to make billions. Attention all soccer fans. From Orlando to Los Angeles, take to the fields of the USA for your next vacation. Ready to kick off? Discover exciting games and events. Plus, find amazing hidden gems in cities full of adventures, delicious food, and diverse cultures. You'll love it so much you'll want to extend your stay beyond the matches.

Get the ball rolling on your soccer getaway. Head to visittheusa.com. Jim Simons was born outside of Boston in 1938. He was the son of a shoe factory executive. Our colleague Greg wrote a book about Simons was born outside of Boston in 1938. He was the son of a shoe factory executive. Our colleague Greg wrote a book about Simons, and he spent a lot of time with him, interviewing him about his life, his math, and his money-making. And early on, Jim had a love of numbers and mathematics,

and one day he kind of shared that with his family doctor, and his family doctor said, don't even think about that as a career. You can't make money in mathematics. Don't be a mathematician, basically. Yeah, or teach or do anything with math. The irony, of course, is that Jim passed away worth about $30 billion.

So the doctor had it wrong. So never listen to your doctor. That's the lesson here. At least when it comes to career stuff. Jim didn't listen to his doctor later on in life, too. He was a chain smoker. So yeah, he generally ignored his doctor, it seems like. Despite his doctor's advice, Simons pursued math as a career. He got his PhD and went on to teach at several institutions, He got his PhD and went on to teach at several institutions, including MIT and Harvard. During the Cold War, Simons briefly worked for the U.S. government on code-breaking.

And by the end of his career in academia, Greg says Simons' work led to advances in physics, quantum computing, drug development, and even artificial intelligence. He goes down as one of the greatest geometers of the past 100, 200 years. If that was all he did in his life, he'd still be worthy of a lot of acclaim and the accolades. So as I wrote my book about Jim and his firm, I had this concept I had to explain to readers. And for the life of me, I couldn't figure it out, at least on a level where I could actually understand it so I could explain it. And he was kind enough to dumb it down for me. Let me read to you from his email.

I had asked him, what is holonomy? Quote, holonomy may be defined as parallel transport of tangent vectors around closed curves in multiple dimensional curved spaces. I'm sorry, this is dumbed down? That's what I was about to say. This is Jim Simons dumbing down a basic concept in geometry. So yeah, listen, quite seriously, he operates on another level.

He can have the drink with you and the smoke, but he leaves you in the dust when it comes to most areas of intellectual pursuit. By his late 30s, Simons had cemented his reputation in the world of mathematics. So his colleagues were baffled when in 1978, he decided to give it all up to try his hand at investing. So he ended up leaving academia for two reasons. A, he was getting a little restless and wanted to make more money. And B, he had an instinct that financial markets were operating with patterns, that there was an underlying pattern or patterns to markets that people didn't appreciate. Back in the late 70s, the conventional wisdom on Wall Street was more about following your gut.

If you liked a company's product, you should invest and hold the stock for years. Simon's approach was totally different. They had a thesis, and the thesis is that if we can understand what happened in the past, and if our computer systems can identify similar characteristics to today, then we have a jump on everybody else. Our computer can identify what will happen in the future. So in 1978, Jim leaves academia, and he rents an office space, and it's in a strip mall far out in Long Island. It's really modest, as modest as you can get. I've visited it. It's still pretty modest. It's two doors down from a

pizza store. There's a women's boutique. It's near the train station. And he starts trading, but also hiring people to help him. And he only knows the world of academia. He only knows mathematicians. So he says, all right, I'm going to hire some mathematicians. Once he was like, oh, we should use data to trade, how hard was it for him to get that data? And where did he have to look to collect it? So the data was out there, but it was much harder to obtain than today. Today, it's kind of a level playing field among Wall Street firms, among tech firms. You know where the data is, and even this alternative data, which people talk about, let's say, I don't know,

how many cars are at Walmarts around the country. There's satellite data, there's other kind of data you can collect and analyze to death. Back then, there wasn't, so they had to go out and get it. Here's Simons reflecting on his career at a TED conference in 2015. The real thing was to gather a tremendous amount of data, and we had to get it by hand in the early days. We went down to the Federal Reserve and copied interest rate histories and stuff like that

because it didn't exist on computers. We got a lot of data. And it meant getting gold prices, going back centuries, and then writing it all down and then checking it, cleaning it, making sure there weren't aberrations, make sure someone didn't enter it incorrectly that day. And it was painstaking work that took him a long time. Early on, his system for relying on computers to make investing decisions had some issues. on computers to make investing decisions had some issues. For instance, in 1979, the firm's algorithm decided to buy as many potato contracts as possible. Soon, they got a call from regulators,

who were concerned that they'd purchased so many potato contracts that they'd basically cornered the potato market. They were forced to close out their position at a loss. Eventually, Simons ironed out the kinks in his system and started making money hand over fist. So it took them a while, but they did by the sort of late 1980s, again, they started in the late 70s, about a decade or so later,

they had arrived at their approach and they had concluded that the relatively automated, you couldn't do it all automated at that point, but as much as you could back then, approach was the best one. And they had the data that helped them make money in almost every market. Simons and his firm, Renaissance Technologies, cruised through the 90s, generating massive returns and raking in hundreds of millions of dollars in profits. And they mostly kept it a secret from everyone else on Wall Street. No one really knew too much about Jim. They heard these rumblings, little hints that some firm out in Long Island

was doing really well. But throughout most of the 90s until the early 2000s, no one knew the numbers. They were very secretive and no one knew too much about what they were up to. Part of the reason people didn't know much about Simons and his firm is because Renaissance usually didn't take money from outside investors. Its main fund, called the Medallion Fund, was primarily just for Simons,'s his employees and their families. He had no need to talk about his returns. If anything, he didn't want competition

in what they did, so he didn't want people to know what they were doing or how well they were doing, so there was zero reason for him to publicize what they were doing. After the break, the rest of Wall Street starts catching on to Simon's strategy.

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And he started appearing on some of the lists, like, you know, the Forbes kind of lists. And, you know, he started giving away some more money and being a little more active politically and that kind of thing. So people were like, wait, who's this Jim Simons guy out in Long Island? Like, people vaguely knew what Jim was doing. They had no details,

but they knew he was turning the decisions over to computers. They knew he was gobbling up any kind of data, inputting it and relying on it. And he was looking for patterns, short-term patterns. And suddenly people started saying, I got to do that as well. I don't know how Jim's doing it. I got to figure out some way to do something similar to what I hear he's up to. People still haven't figured out what exactly Renaissance's algorithms were. But just knowing that algorithms were involved was enough. Firms all over Wall Street started building their own. It's funny. He, in in some ways broke the mold. He did break the mold. And he was a pioneer and a leader, but not a leader in that

he taught people or he wanted people to follow him. He actually didn't want people to follow him. And yet there were enough hints, just these returns that were getting out that people said, my gosh, whatever he's doing, even if I could come close, I'll be rich, I'll be famous. How big did this sort of quantitative investing, the so-called quant investing become once the genie left the bottle a little bit and people started to figure out that this is why Simons was so successful? Oh, everybody got on board. And partly also was the case that computers became much more powerful.

Today, about a third of trading is automated and quants dominate. And if you take a tour, like when they give me a look around the office, whatever the investment firm, oh, Greg, over there are our PhDs in that corner there and that office over there, those are our PhDs. The reason why they've hired all these PhDs is because of Jim and his success. So he was like one of the

first mathematicians to go out and try to invest. And now there are mathematicians all over the place. Yeah, people from the world of math, people in the world of data science. That's kind of the pedigree people want. And it's because of Jim Simons. One of the most amazing things about Simons Fund was how consistently it produced results, even when the overall market was down. For instance, in 2008, the year of the financial crisis, it gained 82% according to investors. From 1988 to 2018, it averaged a return of 66% a year before fees. So Jim became one of the wealthiest people in the country, but even junior people, dozens of others who made tens of millions, hundreds of millions of dollars, there are

big philanthropies around the country that are funded by mid-level people at Renaissance. So yeah, a remarkable amount of wealth. They've made over $100 billion in profits and all along Long Island where they tried to keep it secret and they were hoping no one would find out. Renaissance employees have used their wealth in different ways. Simons became a major donor to the Democratic Party, including to Hillary Clinton's and Joe Biden's campaigns. Meanwhile, Bob Mercer, a longtime Renaissance executive, was one of Donald Trump's most important backers in 2016. When did Simons begin to step away from Renaissance

and the world of investing? In 2010, he stepped down as CEO. Then he became chairman of the firm. And then in the last few years, wasn't involved at all. So it was a slow process, a gradual process. And so Jim Simons had different chapters in his career. He was the academic. He was a mathematician, a codebreaker, an investor.

And the last chapter was philanthropy. And I would argue he broke the mold there as well. But I made a tremendous amount of money from this hedge fund. Now, my lovely wife, Marilyn, said, let's give some of it away. wife, Marilyn, said, let's give some of it away. So I said, okay, fine. So we gave some charity. And then she said, well, why don't we start a foundation? And, okay, we started a foundation. Simons died with a net worth of around $30 billion. Throughout his life, he gave away more than $6 billion. He funded research into autism treatment. And he spent $75 million to build an observatory in Chile to learn more about the origins of the universe.

Each year, he also gave money to 1,000 math and science teachers in New York City. He gives them, I think, about $15,000 additional salary each year. The idea was to, or is to, ensure that they don't leave teaching to go work for firms like Renaissance. I raised that irony with him once, but he didn't really appreciate it so much. Greg went to Simon's funeral at a synagogue in Manhattan,

and he said that while Simon's legacy has so much to do with investing, most of the speakers talked about his passion for math. At the funeral, there was much, much more talk about math than there was investing. As much talk about math as his family. He loved his family too, but he really loved math. So yes, his passion, and he returned to it later in life. He went back to doing, working on problems that he never got to

and working with some colleagues and publishing papers as well. Now that Simons has died, how do you think people will remember him? So Jim Simons is a pioneer, and I think people will come to appreciate what he did and how far ahead he was in so many different areas. And part of the issue, part of the challenge is he was so secretive. So it took a while for people to realize, wait, he's working on algorithms and he's got all this data and he's turning the decisions over to computers. Is that really what he's doing? So it took a while for these lessons to kind of reverberate and be shared. But I do think he, in some ways, was an inspiration for different revolutions. And obviously, the one on Wall Street in the world of finance, where everything is becoming quantitative,

you want to be a quant, you want to hire a quant. You want to turn the decisions over to computers. So in so many different ways, he anticipated revolutions. That's all for today. Thursday, May 16th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.