#387 Jim Simons Built The World’s Greatest Money-Making Machine

Transcript from https://podmenti.com/t/63e4f2a8721efe94

Jim Simons published a list of five guiding principles that he used throughout his career. The second
principle that he listed was surround yourself
With the smartest people you can find.
When you see such a person, do all you can to get them on board.
That extends your reach and terrific people
Are usually fun to work with. This actually reminded me of Jeff Bezos. From day one, in his very first shareholder letter, Jeff Bezos emphasized.
The importance of having the very best team.
And he wrote.
Setting the bar high in our approach to hiring has been and will continue to be
The single most important element
of Amazon's success.
Bezos's focus on talent is just like this quote from Steve Jobs that happened in an interview that Steve gave that very same year in nineteen ninety seven.
Steve said.
I think that have consistently figured out who the really smart people were to hang around with.
You must find extraordinary people.
The key observation is that in most things in life, the dynamic range between average quality and the best quality is at most two to one.
But in the field that I was interested in.
I noticed that the dynamic range between what an average person could accomplish and what the best person could accomplish was fifty or a hundred to one.
Given that you're well advised to go after the cream of the cream.
And build a team that pursues the A plus players. That is exactly what Ramp did. Ramp is now the presenting sponsor.
of this podcast and Ramp has the most talented technical team
in their industry. Becoming an engineer at ramp.
is nearly impossible.
In the last twelve months they hired only point two three percent.
of the people that applied.
This means that when you use ramp, you now have top tier technical talent.
And some of the best AI engineers working on your behalf twenty-four-seven to automate and improve.
all of your business's financial operations and they do this all on a single platform.
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Automated expense reporting and cost control.
Ramp's corporate cards are fully programmable.
The longer that you use ramp, the more efficient your company becomes. This is very important because as Sam Walton wrote in his autobiography.
You can make a lot of different mistakes and still recover if you run an efficient operation, or you can be brilliant and still go out of business if you're too inefficient.
Ramp helps you run an efficient organization. In the end of that interview,
Steve Jobs added one thing. He said a small team
of A plus players can run circles around a giant team of B and C
Players.
Jim Simons and the team that he builds is a great example of this. They outperform everyone else in their industry.
And they do it with a small group.
of a players from a customer's perspective.
What does a team of A plus players sound like? It sounds like this customer review, which I read
Which said ramp is like having a teammate who you never need to check in on.
Because they have it handled. Make history's greatest entrepreneurs proud by going to ramp.
dot com to learn how they can help your business today. That is ramp dot com.
Jim Simons created
The world's greatest money making machine.
To do so, Simon chose a different approach.
A world class mathematician and former code breaker, Simon's had a hunch.
The financial markets moved in orderly ways.
Just not in ways that could be detected with human intuition and insight.
Simons believed that collecting and analyzing data could provide an advantage
And that automated trading was possible.
Working from a ramshackle office in a Long Island strip mall, Simon's hired mathematicians.
physicists and computer scientists to amass reams of historic records and develop algorithms to process it all.
His team hunted for patterns hidden deep in the numbers that might reveal long sought rules.
Governing markets.
After decades of struggle
His data driven approach.
Paid off.
Since nineteen eighty eight.
Renaissance signature medallion fund.
has generated average annual returns of sixty six percent.
They have made more than a hundred billion dollars.
And Simons is worth more than twenty three billion.
That was an excerpt from the book that I'm gonna talk to you about today, which is The Man Who Solved the Market, how Jim Simons launched
The Quant Revolution and is written by Gregory
Zuckerman.
So in addition to reading the book.
I also read every single long form piece that I could find on Jim, and I listened to every single interview uh that he gave when he was alive. He just passed away recently. I want to jump right into his early life, and we see right away this recurring theme that you and I talk about over and over again. It's in all these biographies, the fact that belief comes before ability.
By the time Jim is fourteen.
He starts to say out loud to other people.
That he's just really in love with math.
And his idea
was that I wanna go study math at MIT. And when he told people this
The people around him, some of the people around him actually laughed at him.
And that didn't seem to bother
Simon.
at all. So he was filled with exceptional confidence and an unusual determination to accomplish something special. He was like that when he was a kid. He's like that his entire life. That is gonna be another main theme that's that's a really important thing that runs throughout his entire life and his entire career.
This is what he was saying uh later on in life about him about the self-belief that he had when he was a young man. He says, I realized I might not be spectacular or the best, but I could do something good. I just had that confidence.
One of the most important things that he learned from his dad.
One of the last interviews he gave
A few years before he died.
talked about what a lovely man that his dad was and how much he learned from him and he admired him.
And one of the things that Jim learned from his dad was what not to do.
And his dad actually had a job.
Uh that he loved.
And he was a salesman at a movie studio.
Uh he loved the work, but then he left that
Because he went to go work in his father in law's shoe factory, and he did that because he said he felt obligated.
to join the family business. Later in life, the book says
He told his son he wished he hadn't forgone a promising and exciting career to do what was expected of him. This is what Jim said.
The lesson was do what you like in life.
Not what you feel you should do. It's something I never
Forgot.
And so what Jim liked to do most
was think and
Most of the time he was thinking about math.
And you also see that he has a very strong personality.
He had this when he was a kid, and we'll also see that
And he's wait till we get to what his future mother in law observed about Jim when Jim was like nineteen years old, twenty years old.
So what Jim would like to do says he sat with his thoughts for long stretches of time. When he was a kid, he would climb into a tree and sit there and think.
His mom would have to get him down from the tree.
and encourage him to play with the other kids.
Unlike his parents, specifically his dad.
Jim was determined to focus on his own
passions. So he does indeed go and study.
math at MIT. He graduates in three years.
He gets a degree in math from MIT and then he goes to the University of California, Berkeley.
to get his PhD in mathematics. And while he's working on his dissertation, while he's working on his PhD, this is when he starts getting interested in markets. And
He was obsessed with math. He knew he was gonna be a mathematician.
But he also had another obsession from early from an early age, and that was a an intense and persistent
Desire to get
Wealthy.
And that's what spawns this interest in market. So
While he's in grad school.
He actually starts getting up.
Uh, he says he began getting up early to drive to San Francisco, so he could be at the Merrill Lynch offices by seven thirty AM.
In time for the opening.
Uh of trading in Chicago. So he is interested
First in commodity markets.
For hours he would stand and watch prices flash on the big board.
Making trades while trying to keep up with the action. It was a rush, he said.
Yeah, his wife gets pregnant.
Yeah, he's working on his dissertation and eventually he has to reluctantly stop treating
But there's a great line in the book.
It says but a seed had been planted.
And then when I got to this section of the book, I left this note to myself. It's like there's no way that this guy was gonna stay in academia. He has this persistent and burning desire to be wealthy, and as it becomes obvious later, to be the best at what he is doing. But what I found
So interesting about this. He's around twenty three years old at the time.
It's over seventeen years from this point in his life.
that he starts he he actually leaves academia uh and starts trading full time. So I want to go back to this idea I've already mentioned a few times that Simon's
had a persistent and burning desire to be wealthy.
There is a bunch of quotes in the book.
In these interviews and these long New Yorker pieces.
Stuff he says when he's younger, stuff's when he says when he's older. This is v ever present. So I arranged all these different quotes from all these different sources to just give you an idea. He says, It's nice to be very rich.
I observe that.
I had no interest in business.
Which is not to say I had no interest in money. In fact
It's really funny. He gave this interview when he was about eighty four years old.
And he says, I enjoy being wealthy. I enjoy having my boat and my airplane and two houses.
This was also stated by him, but also people around him.
From his early age, they said he hungered for true wealth.
His first wife, he gets married really young.
Think his wife is eighteen at the time, I think Jim's like nineteen or twenty when they get married.
And this is what she said about Jim. She said Jim understood at an early age that money is power. He did not want people
to have power over him.
Another person This is again repeated across
Several people about Jim through the decades. Jim had this insatiable urge to make money.
He likes
Action.
And so we see very early on in his life
This was not a person that was gonna stay on a track. When they said, you know, he wants action, he has this insatiable urge to make money, when he f doesn't see a path that way, he kind of freaks out. In fact,
The book says that in his early twenties he actually experiences an existential crisis. So he's teaching at MIT. He's also teaching at Harvard, and it says Simons began questioning
His future.
The next few decades seem laid out for him all too neatly.
Research, teaching, more research, more teaching.
Simon's loved math, but he also needed adventure. He seemed to thrive.
On overcoming odds and defying skepticism. Remember that part?

For when he starts trading.
And he did not see any hop obstacles on the horizon.
Is this it?
Am I going to do this in my whole life?
There has to be more.
Again, we see that this persistent and burning desire to be wealthy, it's already pulling on him, realizing if I stay on this path, I'm not going to also achieve the other goal.
Now
There is a hint.
Here's a dishint I mentioned earlier that Jim had a very strong personality. I think this is also important.
Because one of the main lessons of the book is that and this is something that he repeats
Uh over and over again.
That you must, you absolutely must work with the smartest and high world class smartest best and world class people that you possibly can. And he's able to manage.
Really maybe better than almost anybody else in the world.
all of these world class, very strong personalities. I don't think you can do that without having a strong personality yourself.
And we see that he had a strong personality again when he was
w when people were laughing at his h what he wanted to do in life when he was fourteen. And then we also see it's noticed by his mother in law.
So he gets married early.
Uh his first wife, her name is Barbara.
I like I said, I think she's eighteen when they get married. Barbara was too young to wed her mother insisted.
She also worried about a potential power imbalance between Barbara and her self assured fiance.
Listen to what
His mother in law, the advice that his mother in law gives to her daughter.
Years later he's going to wipe
the floor with you later on the book.
Barbara says that her mother was right. They're married for thirteen, fourteen years, they wind up getting divorced.
So at twenty six
He decides to quit.
Teaching and he joins an elite.
research organization called the Institute of Defense Analysis.
It's also referred to throughout the book as the IDA. So he's going to talk about this over and over again. This is a very important

One, he said.
What was appealing about them? They paid him a lot more money than he was making teaching. And two, you could spend half your time pursuing your own interests. And so
The IDA, what they would do.
is they were hiring top mathematicians all across the country to assist the national security agency, so the NSA.
And what the NSA wanted the IDA to do is they wanted to break the Russian codes. So this is during
the Cold War. This is why they when they reference
Anytime you read anything about Jim?
they'll reference him as a mathematician and a codebreak. They're talking about this part of his life.
Now
the reason I wanted to include this and and tell you about this because this is actually
There's a lot of valuable lessons that you see that Jim
uh learns here when he's in his mid twenties that he'll use later in life. Now this is the second time
Uh I read the book.
I think the the first time I did it was episode one oh eight or something like that. So maybe like five years ago.
But there's ideas in
from the book that have stuck with me the entire time. And this is actually an idea that I lifted from the book that I used. And it's remarkable how well it works.
So
Wha w people would come into like Jim's office at the IDA.
And they would think th they he'd be like laying in the dark on a couch and they thought he was asleep.
And he realized this is the way he would think. He says
Simon's realized he had a unique approach, mulling problems over in his mind until he arrived at original solutions. Friends noticed him lying down.
Eyes closed for hours at a time. He was not asleep.
So the the idea that I took from him
is
I will sit in a room and I'll usually have an eye mask. He didn't have an eye mask. I'll put an eye mask.
And I'll put an earplugs so I don't hear anything, right?
And then all you do is sit there and just think. You have no input.
And when you're not looking at anything and you're not listening to anything, it's remarkable
How many ideas flow or how many solutions flow into your mind? He says he was a ponderer.
With imagination and the instinct to attack
the kinds of problems that might lead to true breakthroughs after he passed away.
His wife gave this interview and she would talk about you could notice when he wasn't there. He he you'd be in his presence.
But his jaw like his his eyes would just focus on the wall.
And you just look at he's staring at the distance.
And then like his jaw, he'd like grind his jaw. And she's like that's when he was in deep in thought usually about mathematics. So again, he was a little kid in the tree thinking about math. And you know, he's an eighty five year old man still thinking about math. So
While he was at the Institute for Defence Analysis, this IDA.
half the time he worked in his own projects.
Go back to what he was doing. You're supposed to be working on your dissertation and you're waking up early in the morning and you're driving, right, all the way to to the Merrill Lynch offices and you're trading commodities all day. So
He has this idea, he's like, Okay.
Is there they write this paper.
And they try to figure out it's like
Can we make money in the markets, not using the conventional methods? Let me just read this whole read this section too. The paper didn't try to identify or predict these states using economic theory or other conventional methods, nor did they seek to address why the market entered certain states. This why. Just remember that part as we go through this.
He he struggles with
Understanding he doesn't want to rely on human intuition. He wanted this from from even before there was technology existed to do this. He wanted this.
completely automated such a money making machine. This is really how I think about it.
That did not rely on human beings at all.
And yet over and over again over the decades, he's constantly can't wrap his head around hey, I build this automated system.
It's analyzing all this historic data, it's suggesting all these trades.
And then it takes him, you know, maybe decade, decade and a half to get comfortable realizing he's it's impossible to understand why the system is doing what it's doing.
But I have to put my trust in the system.
So it says for the majority of investors, this was an unheard of approach.
But gamblers would have understood it well.
Poker players surmise the mood of their opponents by judging their behavior and adjusting their strategies accordingly.
Players don't need to know why.
Their opponent is glum or exuberant to profit from those moods. They just have to identify the moods themselves.
Simons and the codebreakers proposed a similar approach
to predicting stock prices. So
Jim is twenty six, twenty seven years old at the time he is doing this.
It's gonna be thirteen years. He's going to be forty years old.
Before he finally
leaves and does this full time. So this is
I I always say true interest is revealed early. We see that he's really interested in math, that he loves this deep thought.
that he likes the these collaborative research environments working with the very best people.
Essentially he looks at the way the IDA
was organized. He's gonna do this when he builds Stony Brooks math department for 10 years. And you realize oh he's doing the same thing over and over again. He's just changing the goal.
So we'll get there in a minute.
This.
is really one of the most important Jim's most important skills. And it's just random sentence from a colleague that worked with him at the IDA. And again, once you h latch onto the sentence and you look at how he spends, you know, the next fifty years of his life, you realize he does this over and over again.
Simons was a terrific listener.
It's one thing to have a good idea. It's another to recognize when others do. There's a great line on this. If there was a pony in your pile of horse manure.
Jim would find it.
And then in a wonderful twist of irony.
at twenty nine years old, he is going to be fired for seeking publicity. The reason I think this is a wonderful trist of irony is'cause he's one of the most secretive people and Renaissance technology is one of the most secretive institutions.
secrecy is embedded into the company DNA. So
He winds up writing this is the time of the the Vietnam War. He was completely against it. He says over and over again, I thought this was very stupid.
Uh idea was a very stupid war.
of bad use of our resources. And so he writes a letter to the editor of the New York Times protesting the Vietnam War and then
a he gives a an interview for a reporter Newsweek.
And saying, Hey, I'm gonna stop working on defense department tasks until the war is ended.
Once his boss found out about this interview that he gave
Jim says I was fired five minutes later.
Now.
He also says something that's really funny.
That
This is a direct quote from Jim. He g he says getting fired can be a good thing.
You just don't want to make a habit of it.
And at the time he's kinda freaked out.
Because he has he's twenty nine years old.
Does not have a lot of money.
And he has three young children. He had little idea what to do next.
But getting fired so abruptly convinced him that he needed to gain some control over his future. He wasn't quite sure how to, though.
So
He kinda downplays he's like, you know, I'm not the best.
Mathematician in the world.
But he's one of the best. Yeah.
And so he's immediately this is very unusual.
Stonebrook is Stonybrook University is trying to build a world class
math department. So they hired Jim at thirty to build
They were uh
A large budget.
And it's
Essentially give him a mandate to like build a world class map department. This is what I meant, that he uses the same ideas over and over again.
This is where he learns how to recruit and manage top mathematical minds.
It's gonna pay pay dividends when he starts building renaissance technologies.
And he talks a lot about the kind of people he wants to work with.
This is what he says. Simon's developed a unique perspective on talent.
He valued killers.
This is how he defines killers, by the way.
Killers are those with a single minded focus who wouldn't
Quit.
Then he talks about this. There's guys and then there are real guys.
You want the real ones, and so
This is the crazy thing.
I think it's around two thousand ten.
They're making
Five billion a year, six billion a year, seven billion a year, four billion a year in cash.
Year after year after year. And it's not like they can reinvent th they they sweep it and they p they push out in dividends.
They're doing that with like three hundred people.
The estimates I've seen anywhere from f uh as low as two hundred fifty people all the up to four hundred and ten people.
That is not a massive company. And one of the way he does this is because it's so hard to get hired there. And then there's also low company turn uh low employee turnover, which will uh which is
as a direct result in my opinion on on how he d designed. He's a really
Genius.
systems designer and he has a fundamental understanding of
Like how powerful incentives are.
But
Again, it goes to like you can only do that if you have if every single person on the team is world class.
There are guys, then there are real guys. You want the real ones. He assembled one of the world's top centers, hiring twenty mathematicians while learning to identify the nation's best minds and
how to recruit and how to manage them. So
This skill again I I I cannot oversee this.
The skill of recruiting and managing the smartest people in the world is going to be one of the most important foundations for everything that's gonna happen in Jim's life.
Let's say he's thirty now, for the next fifty six years of his life.
In two thousand twenty.
Few years before he dies, he writes down his five guiding principles, which I'll go over later.
But I'm gonna introduce principle number two right now because this is directly related to what he's learning at Stonybrook, what he picked up on at the IDA as well.
He says surround yourself with the smartest people you can find.
When you see such a person, do all you can to get them on board.
That this extends your reach and terrific people
are usually fun to work with. So that is one of his guiding principles.
This is this also ties to something else he said on the podcast, the fact that he thought his father was a very lovely man and the most important thing, remember his dad was a salesman, okay recruiting his salesmanship.

you know, older, wealthier man. He goes, he says, It turns out salesmanship is very important.
And so he says I spent a lot.
And he emphasized a lot, a lot of time.

Talent.
talks about this over and over again throughout the decades. I like to recruit.
My management style has always been to find outstanding people and let them run with the ball.
This continues in another interview. My idea of leadership is of an organization is to hire the very best people you possibly can. I have good taste.
In people.
There's this great New Yorker piece I'd highly recommend reading.
But it talks about that Simons was an exceptional manager. So this guy named Peter Brown, who is now the the CEO. Jim recruits him.
I think in like ninety three.
Ninety two, ninety three. I'll talk about this guy.
Um it's really important w the the insight they had there.
But Peter Brown, who's now Renaissance CO, in this piece, he talked about what he thought like why was Simon so effective.
says Jim's genius was in seeing the possibilities for quantitative trading long before others did.
And setting up a company in which you provided outstanding scientists with the resources, environment, and incentives.

His role was more in setting the general direction of the company than in developing the technology.
He said, Working for Jim, this is such a great
Insight.
Working for Jim, you had the feeling that you had better produce because he had pretty much removed every excuse.
For not

Removed every excuse for not producing. So that is later on in life. We're not there yet.
At this point
He is still this is the most fascinating about this,'cause this guy's brilliant. And yet even for somebody this brilliant.
He's still fighting against what he really wants to do. And this he's he's a very much an outsider.
Very much, you know.
comfortable uh with trusting his own judgment, much more so than most people.
And yet
He's still doing
kind of what's expected of him. He's still a mathematician.
He's still running this department. He's still staffing up. He's still working academia, but he's fighting against this. He wants to be wealthy. He wants to do something great. He wants to do his something historic.
And this is not like I I'm not surmising it.
He says it over and over again. When he was a young person, he wanted to be the whatever he did, he wanted to be the best. He wanted to have adventure. He wanted to do something historic. I'll say it over again.
And you see that he's making a mistake that I think a lot of people do.
I've certainly done this when I was y younger as well, for sure.
You can't fight against your job.
So he's three years into
Building Stony Brooks.
math department, he starts at thirty, gonna leave at forty. He's thirty three w when he takes his sabbatical year.
Why does he take a spatical?
He wants to g undergo primal therapy.
Okay.
Why what is taking place inside your mind?
If you need to do this, right? You and I can read between the lines here.
So it takes us a year so he could go undergo primal therapy. What the hell is primal therapy?
It was approach involved screaming or otherwise articulating repressed
Pain.
Primarily.
As a newborn emerging from
The womb.
Simons, who sometimes woke up screaming at night.
was intrigued.
Bye.
The approach. He's fighting against his job. He is thirty three.
Finally, at forty, seven years later.
He makes
The jump.
This is something I I uh these notes, it's really fascinating'cause I think I've told you before.
I'll go through the book. I read my reread my notes, I don't know, five, six, seven times before I sit down and talk to you.
Um, because when you're reading the same thing over and over again, you notice how the story ends.
Y y you have you can have different interpretations. Now you know where this is going.
And so if you look at we look in the book
You look all the post it notes I left to myself, it's like, Oh, this guy's an outsider, he's very comfortable trusting his own judgment.
And
He loved his dad.
He admired his dad.
He said his dad was a lovely man, but this is good that he didn't listen to his dad here. Isn't this amazing how many times this is coming up?
On
These
uh the the people that you and I have been studying thus th the last few weeks, Michael Dell, Phil Knight. Now we see
Jim Simons, you know. No no don't
Don't take the risk. Like take the sure path in Michael Dell's case, like
State University of Texas.
Go to medical school. Do what's expected of you.
You know, fill fill night.
I didn't send you to Stanford graduate school business to be jackassing. This is what it did. I said jackassing around.
And being some shoe salesman, like what are you doing?
Again, I I'm not trying to insult his father by any means, but his dad would even say much even after Jim's starting to get wealthy.
You know I I much prefer saying
You know, my my son the mathematician, my son the professor, then my son the businessman. So nineteen seventy eight.
Simons leaves academia to start his own investment firm focusing on currency trading.
Simon's father told him he was making a big mistake.
Giving up a tenured position.
Mathematicians, this is why I keep talking about the importance of trusting your judgment.
The the fact that he was an outsider
Everybody around him.
Mathematicians kinda look down, especially people in academia, his peer group, right, his friends.
People they
They go to his house to spend time with his kids.
They they're like what are you doing? You're a true brilliant you're you're squandering your talent to go
Work in business. He thought it was like kind of gross. Mathematicians were even more shocked. The idea that he might leave to play the market full time was confounding.
Academics were convinced that he was squandering a rare talent. We look down on him.
Nuts. Like he'd been corrupted and he sold his soul to the devil.
Simons had never
Completely fit.
Into the world of academia. This is what he says. I always felt like something of an outsider, no matter what I was doing.
That's gonna be really important because even though when he jumps into the finance industry, he's an outsider in finance, he's not interested in what other people in the industry are doing. In fact, he kind of looks down upon them.
This is really important.
For decades other people told Jim what he was doing wasn't going to work.
that it was low status and that it was not important. Jim was a misfit. He was a rebel.
He's a an outsider, comfortable trusting his own judgment and the results of his own thinking. And I'm gonna go I'm gonna introduce another one of his five guiding principles.
C Guiding principle number one.
This is advice that you clearly took.
He's giving to others and he clearly took himself.
This is really important. Number one, do something new.
Do not run with the pack. I am not such a fast runner. This is still gym talking.
If I am one of N people working on the same problem, there's very little chance I will win.
If I can think of a new problem in a new area.
that will give me a chance. There is literally no one else doing
What
Jim wants to do. In fact, to this day, I talked to a bunch of other people in the f in finance. Like people still
Still don't even understand how he's done it. And this is he's in nineteen seventy nine.
But when I got to that guiding principle, do something new, don't run with the pack. It reminds me of you know Edwin Lan, he's Steve Jobs hero, become a personal hero of mine.
He had a personal motto. He said, Don't do anything someone else can do. If you were just copying somebody
By default, if you are copying something, you're admitting that you're already losing.
It takes so much courage to do what Jim is doing at this point in his life. This is an excellent line.
Bye.
Uh Gregory Zuckerman.
Describing this.
The odds were in favor of a forty year old mathematician embarking on his fourth career.
Hoping to re revolutionize the centuries old world.
of investing.
So
Why would he do this? We have it's so important to understand the personality, same personality type that he had when he was younger. He wants to do something special. He wants to do something important.
Whatever he did, he wanted to be the very best in it at the very best at it.
This is on his decision to leave academia and build
Affirm.
He needed a new challenge and a bigger canvas. Simon's told a friend that solving the market's age old riddle.
And conquering the world of investing
Would quote
Be remarkable.
There's another a few pages later. Says for something very similar.
Simon's told a friend.
That he wanted to do something that would go down in the record book.
Something historic.
And to do so you have to have some level of self confidence. Go back to
I love what Michael Dell said in his autobiography.
Talking about, you know, at nineteen years old.
with no money in his dorm room at the University of Texas decides to take on the most valuable company in the world. IBM was the most had the highest market cap.
Any company in the world at the time. And he says, Was I a little fool of myself at nineteen? Says Yeah, I was.
He goes, I think you have to be to do anything special.
I when I read that section of the book, I told you something that Nolan Bushnell, who was Steve Joubs' mentor and the founder of Atari, said.
said only the arrogant are self confident enough to press their creative ideas on others. We see a very similar
Uh theme with
Jim Simons. Until then, Simons had dabbled in in investing, but he hadn't demonstrated any special talent. Somehow, though, he was bursting with self.
Confidence is something he repeats over and over again. Remember what he said earlier.
I just had the confidence. I just had it.
So this is Jim's initial premise.
He says it looks like there's some structure here.
I just have to find it.
Simon's decided to treat financial markets like any other chaotic system. There must be some way to model this, he thought.
And so another thing I'm gonna get to is the fact that he's gonna have to churn through a series of several partners.
And I'll get to the fact that he possesses something that they don't and it's not intelligence, it's belief.
Conviction.
So he he's raising money at the at the very beginning, he's gonna have to raise money from outside investors.
He tries to raise four million, falls slightly short of that. They're like, Okay, well, whatever, we're gonna launch the fund.
And they're at the very beginning, they start the fund relying on a trading system that combines mathematical models, complicated charts, and still human intuition. Remember, this is nineteen seventy nine.
So h him and his first partner
They start trading currency. So they kept buying British pounds and the currency kept soaring. They followed that move with accurate predictions on the Japanese yen, the Dutch mark, the Swiss franc.
Gains that had investors calling Simons with congratulations and encouragement as the fun grew.
By tens of millions of dollars from a four million dollar start, okay?
Simons was having a blast exploring his lifelong passion.
For financial speculation while trying to solve markets, perhaps the greatest challenge that he had ever encountered.
The fun would not last. The fun would not last. Remember, this is nineteen seventy nine. So the medallion fun.
Which is really the way to describe it is a private money machine.
For Simons and his employees.
That doesn't start until nineteen eighty eight.
And then the historic run that the medallion fund will go on.
which still k uh is continuing to this day, doesn't start until nineteen ninety. So we are
Eleven years before that.
And the when I'm going through and and just how he churns through all these different approaches, all these different partners, all these different structures over the next you know, decade, decade and a half.
I I then left myself was like the man who solved the market. The book should be called called The Man Who Persisted. The man who was determined to solve this problem, the man who was determined to figure it out.
Because
Every time he'll he'll have he talks a lot about the the influence of luck.
He goes, I don't come to the office every day and think, Oh
How smart am I gonna be today? He says how I think of how lucky am I going to be today.
And
'Cause he'll he'll have these and you'll see uh different partners, different strategies.
They'll start out really, really well.
And then they'll
make a little bit of money or in some cases a lot of money, and then they just drop and they just l he'll in some cases he's losing millions of dollars a day.
And it's driving him crazy. He says losing money was
Gut wrenching.
He's probably still screaming. He doesn't d the book doesn't say it, but I guarantee at this point he's still waking up screaming.
So it says uh Simon seemed to take the down turn downturn hard, growing more anxious
As the losses increase. Sometimes I look at this and I feel like I'm just some guy who doesn't really know what he's doing.
In the following days, Sim has emerged from his funk more determined than ever.
to build a high tech
Trading system.
He shared a new goal.
Building a sophisticated trading system fully
on preset algorithms that might even be automated.
What he really wanted, he says, was an intelligent automated system.
The suggested and then executed
Profitable.
trades. This will take a few decades actually for the technology.
to catch up to the idea that he had. Remember in the late nineteen seventies still.
And this is why he wants to do this.
I don't want to have to worry about the market every minute. I want models that will make money while I sleep.
A pure system
Without humans interfering. So
One of the main lessons this is where we're this is some of the strategy what some of the strategies he has to employ to get to where he's wants to go, okay.
One of the main lessons of the book is something that happens over and over again.
starts in the late nineteen seventies, early nineteen eighties, and continues to this day is the fact that Jim had better historic financial data.
than anyone else and he went.
To great lengths.


They weren't available. He has to literally go and find this data by hand.
So it says the technology for a fully automated system wasn't there yet, Simon's realized. He suspected he needed reams of historic data.
So his computers could search for persistent and repeating
Price.
Patterns.
across a large swath of time.
Simon bought stacks and stacks of books.
From the World Bank and elsewhere.
Along with reels of magnetic tape.
from various commodity exchanges, each packed with commodity, bond, and currency prices going back decades.
This was ancient stuff.
That almost no one cared about, but Simons had a hunch it might prove valuable. Simons also hired a staffer.
To visit the Federal Reserve office to record interest rate histories and other information.
Not yet available electronic.
So
R this is a reminder.

Success as we see over and over again. This is why I think I've become this massive evangelist for reading biographies.
one of the most important things you get out of is like, Oh, success isn't a straight line. You're gonna go up and down and up and down and up and down, and you just have to keep going year after year after year.
This is what I mentioned earlier.
they start to have a lot of progress, they'll make a little bit of money and then they start losing it.
And there's so many times where it looks like he's about to quit.
And so they're building this partially automated system, but they don't understand why it's making the decisions that it's making. Sometimes it makes money, sometimes it loses money.
He does not want the crazy thing about the money making machine
That Jim
eventually succeeds with the medallion phone. It's like there are no down years.
From nineteen ninety till present day, he never loses any money. This is exactly what he wanted to do. That's not what's happening.
In nineteen eighty. So says they had soon lost confidence in their system. They could see the trades and were well aware when it made and lost money.
But they weren't sure why the model was making its trading decisions. Maybe a computerized model
wasn't the way to go after all.
They decided. So
This is such a a crazy thing. Remember, he starts the company at forty.
When he's forty four.
He's essentially just investing in trading, like
Everybody else'cause he can't figure this out yet.
Simon sat in his office staring at computer screens, developing new trades, while reading the news and predicting where markets were going, like most everyone else.
They're tr now here's the problem though.
And the this problem temporarily. The traditional trading approach was going well.
And the issue is they're having success. Like we're making so much money the normal way. Why do we even need this computerized trading system? And we'll get to why what is gonna have to happen. You've already guessed what has to happen.
To for them to get it back on the path. Oh oh, we're not actually we're making money temporarily. So Jim's partner
Is
He does he's telling Jim, I don't see the point in developing these automated trading systems. This is why. His name his this his part of his time is a guy named Lemart Leonard Baum.
Bomb was making so much money trading various currencies using intuition and instinct that pursuing a systematic quantitative style of trading seemed to be a waste of time, Tim. Why do I need to develop these models? he asked him.
It's so much easier to make millions of dollars in the market than finding mathematical proof.
Besides, the firm's computer firepower was limited.
Making any kind of automated system likely impossible to implement.
Uh, they were able to rack up more than forty three million in profits between July nineteen seventy nine and march nineteen eighty two.
But

Good times don't last and there's a the the drop is so precipitous.
that it actually is going to end the partnership.
between Simons and Bump.
So in the late spring of nineteen eighty four, bomb's losses kept growing.
This cannot continue, Palm said one day, staring at his computer screen.
When the value of their positions had plummeted forty percent.
It triggered an automatic clause.
in the agreement with Simons, forcing Simons to sell all of Baum's holdings
And unwind their trading affiliation a sad end.
to a decades long relationship between these two esteemed
Mathematicians.
Bombs losses in the nineteen eighty four trading debacle left a deep scar on Simmons. This never happened. He may not have went back to what he originally wanted to do in the first place. This is really important.
I'm sure it did not feel great at the time. Definitely didn't feel great. Why?
Jim's fun.
Ninety four is losing milins of dollars.
Daily.
Simon's contemplated giving up trading. He was racked with self doubt.
He had to find a different approach.
Jim.
Was forty six years old.
And so now Jim has to recruit a new partner. He's going to recruit this guy named James Axe. This is very important because they're going to start this company called Axcom.
Axcom is what turns into the medallion fund. Now I thought it was very interesting how he recruited
James Axe. Remember he said in one of his principles you have to work with the best people and you have to put a lot of effort
into getting these people.
He talked about how important and how difficult it was to finally persuade and sell
James Axe on joining him and then once he was able to sell
James Axe that opened the floodgates to realize, oh, this guy's insanely talented. He's working there, so I'll go work there too.
the way he pitched because James wasn't they were mathematicians, so they weren't interested in finance. He's like, Why would I do this?
And the way that Simon successfully
uh sold him was that he portrayed investing as the ultimate
Puzzle.
So along with James Axe.
He hires this guy named Sandor Strauss. Sandor Strauss is a math PhD.
Now.
is a great line about what Strauss is gonna be doing. He's gonna want to collecting the this clear c collecting and cleaning the the data that they need to build their systems.
So Strauss builds a custom database of historical prices.
He combined data sources and cleaned it until they basically had more accurate data than
than anyone else. This was a massive advantage.
So you you recruit James Axe by saying, Hey
Come and solve this.
important puzzle.
It's the ultimate puzzle. If we solve the puzzle, we have unlimited money.
You go and recruit Strauss.
And
You convince him
That you're an explorer on the trail of untold riches with almost no one in pursuit.
That's a really great line. Some other traders were gathering and cleaning data, but no one collected as much as they did.
So again, there's this reoccurring theme. They have more historical data.
than anyone else in the world.
Some of the weekly stock trading data they later find went back as far as the eighteen hundreds.
Reliable information almost no one else had access to. The ability to search history to see how markets reacted to unusual events would later help Simon's team build models to profit.
For market collapses in different time periods of time.
So the way to think about this is he's studying the past to gain an information advantage.
And then Axe is using this data to trade. Axe is doing all the trading, which we'll get to in a minute. Axe had access to more extensive pricing information than his rivals, thanks to a growing collection of clean historic data.
Since price movements often resemble those of the past, that data
Enable the firm to more accurately determine.
when trends were likely to continue and when they were ebbing. So
That's how it's starting. You know, they're going down to the Federal Reserve. There there's a couple of people they're doing a lot of this by hand. They have very, very as I'll get to in one second, very pr what we would see is very primitive computing, right, at the time.
That's how it starts.
Fifteen to twenty years later.
This is what the data collection look like looks like, because I found this Jim describing this in this interview much, much later. And he says everything is grist for the mill.
Weather.
Annual reports, quarterly reports, historic data itself, volumes, you neighbor you name it, whatever there is.
We take in
terabytes of data every day.
We store it away and we massage it and we get it ready for analysis.
You're looking for anomalies. Again.
Big things start small. They're doing this by hand.
The funny thing is.
Actually, I'll get to it right now.
So that's how that's how Renaissance is doing it now, right?
Think about what they're always on the cutting edge of technology and you and uh you and I might look back and like think it's kinda funny.
Like their version of technology.
This is nineteen eighty five. So so a lot of the the reason I keep bringing this up is because I think so much of the really important part of the story is so much of Jim's story and their the success that that his team is gonna have is them just waiting for the technology to catch up.
And when they do
There's they're gonna be so far ahead of everybody else because of what they're doing.
And so they're like all right, we're we're collecting all this data, we're cleaning it.
We need the the best.
Compu computers to analyze it. So they go they order an immense gold super mini computer.
Okay.
This thing is the size of a large refrigerator.
It had to be put into their office.
By Fourkliff.
It was capable
Of storing
Nine hundred megabytes of data.
This is the cutting edge of technology. In fact, there's a few other people in the in the book that I'm not I I
I'm omitting, but
They were a bunch of other people, like in Thorpe.
Uh David Shaw, who's gonna start D E Shaw.
You might know that name because Je young Jeff Bezos actually had the idea for Amazon when he's working for D E Shaw.
And so there's all these other people trying to figure out how to do quantitative trading and doing going about different ways.
And so they interview this one guy that's the seed investor.
went to being David Shaw's seed investor, gives him twenty eight million dollars to start D. E. Shaw.
And they spent a bunch of money on computers and he had a great line about this. He goes, Well, David needed Ferraris, so we bought him Ferraris.
And so again, we see Jim and his team, like they're on the cutting edge of technology.
They just have to wait
for the technology to be developed to catch up and to actually enable the idea that they were gonna have.
Now they're getting closer.
As a result of, you know, this computing power.
of all this data, they're getting closer to this automated model for trading. And when I mean automated model
I I should point out.
It's automated trade suggestions.
They still have to because this is the eighties.
The the the system they've in the model they're building will spit out trade ideas. They have to like call them in a few times a day, which I thought was really funny. So it's gonna take a while before.
You can
Suggest the trade and then execute it electronically. I don't know why I was like chuckling when this was happening. I just love this idea. Dial the number. I don't know why I was laughing. All right. So
Even though they're getting closer.
And this is what Jim has said he wanted to do forever.
He still doesn't understand why the model is suggesting that
What the model's suggesting and he should know
I should say you should know better.
I th I don't mean to sound patronizing in uh in any way at all.
But
He should understand that it's beyond human comprehension. So of course you're not going to understand. You should just test is it actually a money making opportunity or not.
Um and so
I'm just gonna read this section. I just thought it was really, really funny.
Uh this method wasn't based on a model Simon's and
his colleagues could reduce to a set of standard equations, and that bothered him.
Uh the results came from running a program for hours, letting computers dig through patterns and then generate the traits.
But to Simons, it just didn't feel right. I can't get comfortable with what this is telling me, he said.
I don't understand why the program is saying to buy and to not sell.
Later, Simon's became even more exasperated. It's just a blo a giant black box, he said with frustration.
But he's got all his partners around him.
saying yeah, but this is what you have to trust the system. This is what we're sort we're
It is doing
And we are doing what we said we're going to do. So one guy said, Carmona agreed with Simon's assessment, but he persisted. Just follow the data, Jim. It's not me, it's the data.
It works, Jim, Axe told Simons.
And it makes rational sense. Humans cannot forecast prices.
Let the comput they urged.
It was exactly what Simons originally had hoped to do.
Yet S still wasn't конвіст.
of the radical approach. He still wanted to know. Humans love to know why.
And he still wants to know why.
Later on.
He gets very comfortable with this. In fact, he has a great way to describe
How he thinks about this and he says
I don't know why planets orbit the sun. That doesn't mean I can't predict them. So I don't know why planets
orbit the sun, but I can predict their location and where they're going. I already I already said this, but the funny thing is the trade suggestions are automated, but the actual trading isn't. So they're still having to call up these brokers a few times.
A day.
This whole thing is just an exercise in patience and persistence. They have to survive long enough.
For the technology to catch up.
And by the time it does
No one else can catch up to them.
So then as I'm reading this, it really like clicks for me. It's like oh wait.
I get to the section and
James Axe their their partnership's gonna fall apart.
He he's just complaining about Simons all the time. At this part they're still managing outside money.
So he's like, I'm doing all the trading and this guy's just dealing with the investors and he's also calling them out and
nudging him all day and you just James is getting very, very frustrated. James was also a very difficult person to deal with.
And I was like, Oh, so Simon's gift
is recruiting and management and system and incentive design.
The greatest money maker ever.
isn't doing the trading.
W mind when I read this.
But if you go back, there's this great called Meet You in Hell. It's about this bitter partnership between Andrew Carnegie and Henry Clay Frick.
It's pretty clear.
That
Henry Clay Frick was the better
manager and entrepreneur.
But Carnegie winds up with all the money. So Carnegie actually buys Frick's company.
And then realizes he has a rare talent and he lets him run Carnegie Steele.
Carnegie owns a majority of it when they sell to JP Morgan.
Carnegie's gonna have the largest liquid fortune in the world at the time.
And what is fascinating is he makes, you know, three or four times the amount that
F Henry Clay Frick makes.
But Frick is doing all the work.
So now we need to go to the state of Jim's business in nineteen eighty nine. This is going to be their last
Losing year.
Ever. And this also when his partnerships
uh with James Axe falls apart. This is really, really important.
So it says uh Simon said spent more than a decade remember the man this is not the man who sold the market.
Or maybe an alternate title is a man who persisted. Simon has spent more than a decade backing various traders and attempting a new approach to investing. He hadn't made much headway. Bomb, his first partner, had fla flamed out, another partner
Wasn't around much, and now his fund with Axe was down twenty million dollars amid mounting losses.
His colleagues became convinced.
That Simons might shutter the firm.
It was not clear.
If we would survive.
Or fold. So this is very important. This is
This is
Maybe the most important idea and change that they actually make.
There's something that Simons said in two thousand eighteen that was very fascinating. So Axe would have a much longer term
Strategy for the models.
And Jim is gonna bring in this guy named Elwyn Berlacamp.
And it's Burlecamp that comes up with the idea. It's like no no, we just need to shorten
Or holding period.
Later on.
The way Simons would describe this, he says that longer term trading makes algorithms less useful.
It's like the weather.
The nearer in, the higher the certainty. So
Ellen Burlicamp.
Urge Axe. He's sh he's coming in, Jim recruits him to come in and try to have a help Axe.
And he's like, Hey, why don't you look for smaller
short term opportunities.
That way you get in and you get out.
And it's Burla Camp that's going to institute this change.
This is when he's gonna lose the the partner, uh, James Axe because
Burley Camp has this idea and he and he's very actually he's in line with what he has a belief uh uh the same belief that Simons has.
That Axe doesn't.
And so he goes, Well, why don't I just why don't you just sell me your steak?
in the firm. Like I'll buy you out and then I'll try to implement this idea that I'm trying to give you.
and axe agrees. And so this is the idea.
that Burlecamp wants to implement.
Buying and selling infrequently, which is what Axe was doing, magnifies the consequence of each move. Make a lot of trades and each individual move is less important. They hope medallion could resemble a casino.
Casinos handle so many daily bets that they only need to profit from a bit more than half of those wagers.
with a slight statistical edge, the law of large numbers would be on their side, just as it is for casinos. If you trade a lot, you only need to be right fifty one percent of the time.
The way he arrived at this idea, we just looked he analyzed
all the trades that they were doing. Like which ones did you make money on?
Remember a few weeks ago, Ken Griffin said something that he sees this the mistake that people make in finance. If they spent all a bunch of time studying like how they lost money or their losers, he's like, Wait.
People in finance should be spend more time studying their winners.
That's exactly what Burley Camp does. He advocated for more short term trades. Too many of the firm's long term moves had been duds, while Medallion's short term trades had proved its biggest winners.
It made sense to just build on that success.
And then I absolutely love this'cause it goes back to you know having self confidence.
Being comfortable trusting each your own judgment, not being worried what those around you are doing. In fact, they talk about a lot of people Renaissance, they they criticize the overall financial industry. It's like it's just herd mentality. That's why their returns suck, is what they would say.
So Burlicamp
He he's still in working in academia as well.
And so he goes and he's discussing
His ideas
With
other people in the uh in the business school.
And they mocked his methods.
Okay, they're about to go on historic run right now.
So they're describing what we're about to do, right?
And their g their methods are getting mocked.
And they called them quacks. So think about this. Simons and his partners were so early.
And their ideas were so different from others in their industry.
That they were dismissed as
Quacks. They're gonna start this strategy.
With twenty
Seven.
million dollars and go on this historic run. The new strategy starts working immediately. The firm implemented its new approach. The results were almost immediate, startling nearly everyone in the office.
They did more trading than ever. Remember that idea. It's like we're just gonna do a ton of sh like look what the casinos do. We just need right fifty one percent of our time. And they would cut medallion's average holding time to just a day and a half, scoring profits almost every day for much of nineteen ninety. Simon's team could do little wrong. It's as if they had discovered a magic formula after a decade.
of fumbling around in the lab.
One day they made more than a million dollars that day, a first a first for the firm.
Simon's rewarded them with champagne. This is one of my favorite t favorite parts of the book.
We made a million dollars in profit in a single day.
We're gonna celebrate with champagne. The one day gains became so frequent.
That the drinking got a bit out of hand.
And then this is absolutely perfect timing'cause right in this book.
There's a there's an excellent lesson on human nature for you and I, even with wild success.
People will still try to tell you that you're wrong. For all the gains, you outside the office share the same regard for the group's approach.
We were viewed as flakes with ridiculous ideas. Simon's
Did not care about the doubters. This is why I kept hounding on it over and over again. It's so important to understand he was an outsider.
He always viewed himself as an outsider. He was comfortable being on the outside. Medallion scored a gained of fifty five point nine percent in nineteen ninety.
A dramatic improvement on its four percent loss.
The previous year. Now here's the crazy thing.
Even w this.
There's always a d uh dispute with Simons and his other partners about the scale and how big it could get.
And they're always trying to get him to like tamper his ambition, which is really fascinating to me.
And I'm gonna like ha hit on this'cause I think it's one of the most important ideas in the book, at least one of the most important ideas I took away.
In the middle of this.
Fifty five percent gain.
We know it's gonna work.
Another partner gives up.
Burley Camp is going to give up because he's having a dispute, okay?
This is what I said earlier, that Simon's had something valuable.
that his partners did not. And it's not intelligence. They were all smart.
It's belief. It's conviction in what they were doing.
Remember, Simon said I want to do something historic.
thirty percent and chill was just not gonna happen. It is not in this guy's DNA.
So they're having this fight where
This disagreement where
Simon's like I'm pretty sure we can make like eighty percent returns every year.
And Brocamp's like, Why no? Like we we'll be lucky, like let's just get thirty percent and it's fine.
And
This guy's so pronounced that this leads to their breakup.
And so it says, Jim, if you think we're gonna be doing eighty percent, and I think we can do thirty percent, you must think that the company's worth a lot more than I do. So why don't you buy me out? Oh my
Could imagine.
You were right there. All you had to do was hold on, Burler Camp. You didn't have to go anywhere.
Which is exactly what Simons did in December nineteen ninety, after putting up fifty five point nine percent. Why would you sell?
Simon's purchase Burrow Camp's ownership interest for cash.
Burler Camp sold and this is he thought he he thought he

He thought he had a win.
He thought Burley Camp thought he had to win. Listen to this.
Burler Camp sold his shares at a price that amounted to six times what he had paid just sixteen month or sixteen months earlier. Remember, he bought Ax out.
Now he's flipping that interest.
to
Simons.
At a 6x return in 16 months. Like, look at what I'm doing. Not realizing you're missing out. He amounted to six times what he paid just sixteen months earlier, a deal he thought was an absolute steal.
And then Simons, when he loses another partner, this is what he told a friend at the time.
To hell with it. I'm just gonna run this myself.
the benefit of being an outsider and having the ability to trust your own judgment. Simon's viewpoint
Can be seen as profound, even radical. At the time, most academics were convinced that markets were inherently efficient.
Suggesting that there were no predictable ways to beat the market's return, and that the financial decision making of individuals was largely rational.
Simons and his colleagues sensed that the professors were wrong.
They believed investors are prone to cognitive biases.
The kinds that lead to panics, bubbles, booms,
and bus and their building system to take advantage of these re reoccurring
Behaviors of human nature. This is how Jim and his team viewed what they were doing. This is what I meant about their ability to be very clear communicators.
What you're really modeling is human behavior. Humans are most predictable and hot in times of high stress. They act instinctively and they panic.
Our entire premise was that human actors will react the same way humans did in the past.
We learned to take advantage.
This is where they
Can be boiled down to that maximum. History doesn't repeat, human nature does.
Another Max in the Union I talk about all the time.
This is something I mean t I kinda hinted on but it's so prof
Profound.
And and it's this idea that bad boys
Move in silence.
Renaissance Jim.
Super, super secretive.
The idea is like you find an edge and then you shut up about it.
I told you a few months ago I had dinner with one of the wealthiest people in the world.
I found out that his family had commissioned a bunch of biographies for him him and other prominent members of the family. That's only for
internal use of the family and I asked was like let me get this those biographies. Let me do an episode about it. Without hesitation she says absolutely not.
I have no desire
to educate my competitors, you're gonna see a very similar line of thinking from Jim here.
By the end of nineteen ninety three, medallion had uh grown to two hundred and eighty million. Remember it was up from tw uh twenty seven million just a few years earlier.
S this is the wild part.
Simon's already there, he knew this was winning. He had that belief. He decided not to let any more clients into the font.
this point they're still managing other people's money. They're gonna kick every single person out of the fund though.
Simon's team turn more secretive.
Our very good results have made us well known, and this may be our most serious challenge, Simon said.
Visibility invites competition, and with all due respect to the principles of free enterprise, the less competition, the better.
Our only defense
is to keep a low profile.
Another description of this is found in the book. Simon and his team are among the most secretive traders in the world.
Lest a competitor sei on any clue.
Simon's has a great way to describing this himself.
He once quoted Benjamin, the donkey from Animal Farm.
To explain his attitude.
God gave me a tail to keep off the flies.
But I'd rather have no tail and no flies.
That's the way I feel about publicity.
Let's go back to another insight of human nature.
It's important to note.
This opinion by outsiders
is going to persist.
Well past the point.
Of Simon's outperforming everyone else. So at this time that they try to recruit this guy.
The company was making over two hundred million.
An annual
Prophets. To me, this is a lesson on human nature.
This recruit they try to recruit this guy. He comes and hangs out with them.
And you know, they're in a kind of a crappy office still. So it looked like four guys in a garage. They didn't seem that skilled at computer science, and a lot of what they were doing was by the seat of their pants. Just a few guys dabbling at computing. It was not
very appealing.
It's gonna be really important'cause if you took the job
The only people that can have money in the medallion fund are Jim and the employees at
Renaissance technologies.
This is very fasting.
And I gotta go back to this idea I've already mentioned, the fact that all these people try to like they they they are succeeding past maybe their expectations.
But Jim's not the kind of person that's just like, Oh, okay, I'm making two hundred million a year or making thirty percent or forty percent, like
Yeah, I do guys I'll just
Just do this forever. He wants the challenge, he wants to do something historic, he wants to be the best
The best person at what he's doing. This is just part of his DNA.
And so
They they come to him like one of his top guys like why don't we just keep this at six hundred million dollars?
That way we can rack up.
Two hundred million in annual profits.
No.
S Simons responded, We can do better.
This is noted off myself and in multiple times in the book. All along the way, people around Jim are trying to get him to moderate his ambition.
Jim gives this great interview as a much older man and he's asked like what motivates him? And he goes, Well, motivates me.
I'm ambitious and I like to do things well.
I love to create something that really works. We have lots and lots and lots of strategies, and each new one gives me a lot of pleasure.
To see something new that works.
And then at the same time, a colleague beautifully summarizes why Jim wants to keep pushing and making more money.

Emperors.
Want
Empires.
Over and over again throughout the book, you see these lines that tell you a lot about Jim's personality. Emperors want empires. What Jim wants to do is matter.
He wanted a life that meant something.
If he was going to do a fun, he wanted to be the best.
His need to accumulate more wealth.
was ceaseless and ever
Now this is
Again, all these people
They're they're early.
It's working incredibly and that they just can't sit still. There's something about humans that just can't do this.
At the time, Jim has a team in Long Island and he has a team in California. He's like, Okay, we need to consolidate this is working. I want every single person to move and we're all gonna be together in the office in Long Island.
Strauss who played.
An incredible role.
He doesn't want to leave.
He refuses to move.
And as a result, he winds up missing out on a fortune. And the note out of myself this is amazing how many characters in Simon's life
don't even realize what they have when they're staring straight at it. What does that mean? In nineteen ninety six, Strauss sold his Renaissance shares.
And quit.
Later.
Simons would force Strauss and other non employees to pull their money out of Medallion.
I thought we were one of many, Strauss said.
If I thought there was some secret sauce, I would have made sure I could have stayed invested in medallion. And the only way to do that would have been to move and to stay an employee of Renaissance.
Never now this is also very fascinating.
Is there's there's a line.
Uh in the book that was
Th it kind of speaks to this idea that you and I speak about a lot, that those on the margin often come to control the center.
And that Simons never took a single finance class. He didn't care much for business.
And until he turned forty, he only dabbled in trading.
Uh his firm hires mathematicians and scientists who don't know anything about vesting are the ways of Wall Street.
They are very
Vocal.
in their critique of this, in fact it was hilarious. They had one one guy had a suggestion that was like hey
When they start trading stocks.
Like
We should just
Delete the names of the companies?
And replace all the names with numbers.
Because if we s if we pay attention to the name, we'll pay attention to the story.
And then we'll make decisions based on human intuition when the the model on the computer is actually
way more sophisticated and understands things that are uh are beyond human comprehension.
And you see this would play out.
Uh just a great example of this where
They're
Doing a lot of commodity trading.
And sometimes, you know, they could do s something as simple as like a human input error.
that causes the system to do something it wasn't supposed to do. And it can move entire markets. So what is this? And then I left myself on this one is never forget this.
A data entry error caused the fund to purchase five times as many of Wheat Futures contracts as it intended.
Pushing prices higher.
The next day's Wall Street Journal reported
The analysts were attributing
The price surge to fears of a poor wheat harvest.
Rather than Renaissance's misqueu, which was was just a data entry error.
And this is uh Peter there's a direct quote from Peter Brown, who's the CEO of Renaissance to this day. Anytime you hear financial experts talking about
how the market went up because of such and such. Remember, it is all nonsense.
And Simons would talk about why he ignores the financial press and largely the financial industry.
We never hired anyone from the financial ward at Renaissance. We never did, because they don't have anything to add. Some of these people write papers about predicting the stock market and stuff like that. We looked at a bunch of these papers. They were all wrong.
Every paper was wrong.
So we stopped bothering
Looking at these papers.
Because they were wrong, mute the world and then build
Your own.
Now
This is very fascinating how Simon structure
The medallion fund?
There's a lot in this book that's going to suggest that Simons was a genius in system design and understanding the power of incentos.
And he insisted on a different approach to again his peers and other funds. Medallion would have a single
monolithic trading system.
Every employee enjoyed full access
To each line of the source code.
underpinning their money making algorithms.
All of it was also readable in clear text on the firm's internal
Network.
And then something that he would repeat over and over again.
On in the book.
And in interviews.
You need to make
Everyone.
Partners.
share all the profits. And he supercharges this.
When he kicks out
Every non employee.
out of the fund.
In two thousand two, Simon's increased medallions investor fees goes all the way up to thirty percent
of each year's profits.
A bit later he increased the fees again to forty four percent of the profits. He gives this interview.
And he says we charge the highest fees in the world at one time.
And the response was, How can I get more?
A year later in two thousand three, he kicked all of his investors out of the fund.
Simons had worried that performance would ebb if Medallion grew too big, and he preferred that he and his employees keep all the gains.
This is what I meant about he was a genius of system design and understanding power incentives.
When you like Charlie Munger would talk about the power of census over and over again, and he talked about this one guy named Lashwab who I did two two piecus on.
You said that Les Schwab had one of the the best understandings of the power of incentives. What Lesh did was make sure that at each individual store that he owned.
He shared all the profits with the people in uh the profits of that store with the people in that store. You see a very similar approach to what Jim does here. He made sure that everyone shared in the profits of the fund's success, from programmers to statisticians.
And he had an unusual incentive structure that bred loyalty and aligned everyone's goals.
Remember when even top people would leave, he would kick'em out of the front.
Think about how weird.
Unusual as businesses.
Yeah, no customers.
You have no outside investors.
You essentially have a money printing machine that hasn't lost you know, had a single down year and I don't know.
Cute.
Do two and a half decades.
And all the money every year just gets sweeped and distributed to the people in the
The company.
And you could do the math, like how much are these people making? Well, if there's three hundred, three hundred and ten employees and they're making seven to six billion dollars a year.
Everybody's making a ton of money.
But I want to pause on that line that's in the book. There's an unusual incentive structure that bred loyalty and aligned everyone's goals.
The end result is as you have this unbelievably low
employee turnover because if you leave the job, you leave the ability to invest in the medallion fund, which is this magic money making machine.
There's a when I read this section, I thought of uh there's this book called Software that
is a biography of Larry Ellison's written, you know, two or three decades ago.
And he said that was very interesting where he did not he one thing that he deviated from some of his peers at the time.

He says you don't want turnover of your core product team.
Because knowledge compounds and if you have turnover, that means you're interrupting the compounding.
So let me read this paragraph from Software.
It says, While many parts of the business actually need staff turnover to stay fresh and vigorous, Ellison believes that keeping the elite kernel group together has been vital.
The process of building a software product teaches a programmer what to do and what to avoid.
The accumulated knowledge and experience within the forty or fifty strong kernel group.
comes from continuous work on improving the core code.
Rather than some extension of the product.
that will make a flashy new release. You don't want turnover on your core product team.
Simon's designed this incentive structure to breed loyalty and to a line everyone's goals.
A few weeks ago I talked about that Ken Griffin, a young Ken Griffin, I think he's like thirty years old.
He studied the collapse of LTCM long term capital management.
Simons and his team did. This this what they took away I thought was fascinating. They observed that LTCM had drifted into markets the firm didn't fully understand. It was a reminder for Simon's team.
Of the need to hone their approach.
Not

Another thing that he does and this is one way that he he makes his existing approach better. And it's something I love seeing. I love seeing when people draw parallels from other domains and then actually bring those insights into their own work.
And so he's going to recruit
From
IBMs
Computational linguistics.
Department.
And two people that he's gonna approve from there wanna being co CEOs.
So they're going to be it's both Peter Brown and Robert Mercer.
They were computer scientists specializing in computational linguistics who joined Renaissance in nineteen eighty three from IBM research.
At IBM, Brown and Mercer were working on computer systems to transcribe spoken language into computer text.
And one of the reasons that Mercer and Brown came over is says it was clear to them that trading stocks bore similarities to speech recognition.
Which is part of why Renaissance has continued to raid.
IBM's comp computational linguistics team.
In both endeavors, the goal was to create a model capable of digesting uncertain jumbles of information and generating reliable guesses.
about what might come next.
While ignoritionalists who employed analysis that wasn't nearly as data driven.
And Simon summed up this approach in a two thousand fourteen speech. He says it is a very big exercise in machine learning.
Studying the past.
Understanding what happens and how it might impinge non randomly.
On the future.
And then I wanna end with some parting life advice from Jim.
Simons.
says Simon shared a few life lessons with the school's audience. Work with the smartest people you can.
Hopefully smarter than you.
Be persistent.
Don't give up easily.
Be guided by beauty.
It can be the way a company runs or the way an experiment comes out.
There's a sense of beauty when something is working well. And then in two thousand twenty.
He
Published.
His five guiding principles, which I think are excellent.
Number one, do something new. Don't run with the pack.
I am not such a fast runner.
If I am one of N people working on the same problem
There is very little chance I will win.
If I can think of a new problem in a new area, that will give me a chance. Number two.
Surround yourself.
With the smartest people you can find.
When you see such a person, do all you can to get them on board.
That extends your reach and terrific people
are usually fun to work with.
Number three, be guided by beauty.
This is obviously true in doing mathematics or writing poetry, but it is also true in fashioning an organization that is running extremely well.
and accomplishing its mission with excellence.
Number four.
Don't give up easily.
Some things take much longer than one initially expects.
If the goal is worth achieving
Just stick with it.
And number five.
Hope.
For good.
Luck.
And the last piece of advice is advice that Jim said he would give his twenty year old self.
It is very important to enjoy your work.
Find something you love.
And then put your heart and soul.
into it.
And that is where I'll leave it for the full story. Highly, highly recommend reading the book.
If you buy the book using the link that's in the show notes are available at founderspodcast.com. You'll be supporting the podcast at the same time. That is three hundred.
And eighty seven books down.
One thousand ago?
And I'll talk to you again soon.