Greg Zuckerman is an award-winning Special Writer at the Wall Street Journal and the author of several books on financial firms, hedge funds, trading, and other investing and business-related topics. This podcast focuses on trading and the fierce competition individuals face when attempting to trade against sophisticated hedge funds that employ the best and brightest mathematical minds in the business. We discuss Greg’s book, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.
• • •
This podcast is hosted by Rick Ferri, CFA, a long-time Boglehead and investment adviser. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads’ have held national conferences in major cities nationwide. There are also many Local Chapters in the US and even a few Foreign Chapters that meet regularly. New Chapters are being added regularly. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
Listen On
Transcript
00:00:10 Rick Ferri: Welcome everyone to the 81st edition of Bogleheads® on Investing. Today, our special guest is Greg Zuckerman. Greg is a special writer for the Wall Street Journal where he focuses on financial firms, personalities and traders, as well as hedge funds and other business topics. He’s a three time winner of the Gerald Loeb Award, the highest honor in business journalism. He’s also the author of several books and the one that we’re going to be talking about today, “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.”
Hi everyone, my name is Rick Ferri, and I am the host of Bogleheads® on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable and empowered investors. Visit the Bogle Center at boglecenter.netwhere you will find a treasure drove of information including transcripts of these podcasts.
I have one announcement today. I’m excited to announce that the tickets for the 2025 Bogleheads® Conference will go on sale in May on boglecenter.net. The conference will be in San Antonio this year October 17th through the 19th at the Hyatt Riverwalk, a beautiful location right across from the Alamo. And we have some fantastic guests. The agenda will be up on boglecenter.net soon. I’m looking forward to seeing everyone there.
In today’s podcast we’re going to look at trading. Stock trading particularly, but also commodities trading, currency trading, and even Bitcoin trading. At this point you may be asking yourself, why is the Bogleheads® on Investing podcast talking about trading? I mean, Bogleheads® are going to be mostly buy, hold, rebalance using a few good index funds. That’s the concept, that’s the philosophy.
But many of us have tried to earn an extra buck with trading. And these investments that we make are short term to intermediate term. They’re not in our minds to be held forever. It’s not like buying a total stock market index fund where you’re going to hold it forever. These are investments that you think there’s an opportunity to get in at a particular price point. Then at some time down the road, might be a month, might be six months, might be a year, might be three years. You’re going to sell them at a profit and it all sounds good.
There’s lots of books written about this. The big book that came out when I came into the business more than 35 years ago was “One Up on Wall Street” by Peter Lynch, the iconic Fidelity Magellan manager at the time, talking about how individual investors can get in and buy stocks and make money by trading stocks. That spawned a whole industry of investment clubs and people getting together to do it the Peter Lynch way. That didn’t work out well for a lot of folks, particularly a group called the Beardstown Ladies, which was an investment club out of Illinois, who wrote many books about how they beat the market, when in fact, if you research it, they did not beat the market. It turned out that the club members were making a mistake in how they were calculating their investment returns. And it was quite an embarrassment to those people. But the idea of going out and buying stock or buying gold or buying Bitcoin or whatever you’re going to buy and having it go up in value and then selling it is something that many people believe they can develop the skills to do with success, when in fact it’s extremely difficult.
Why do people believe that? Why did I believe it before I became an passive index fund believer? Well, the financial press is focused on this. Turn on Bloomberg or CNBC, and it’s all about the trade. You know, what traders are doing today, what trade you can make based upon current economic conditions and an infinite amount of other suggestions that are put forward by the financial press, investment advisors, brokers. This is trading for the short to intermediate term.
What we’re going to focus on today is the other side of the trade, which is when you buy something or sell something, who is on the other side of that trade and why it is increasingly difficult to make money consistently doing these trades. Now, we know when you buy something, there’s a 50% chance in the short term it’s going to go up and 50% chance it’s going to go down, but it’s actually less than 50% because just like going to Las Vegas and putting your money down on the roulette wheel or putting your money in the slot machines, the house has the advantage. But how big is that advantage? And that’s what we’re going to talk about today. Who are these firms that are out there waiting to trade against you, and how sophisticated are they and what tools are they using to squeeze money from us and push the odds against us?
And to help tell this story, our guest today is Gregory Zuckerman. Greg is the author of several books. But the book we’re going to be focusing on today is “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.” Greg is a special writer at the Wall Street Journal. He writes about financial firms, personalities and trades as well as hedge funds and other investing and business topics. He’s a three time winner of the Gerald Loeb Award, the highest honor in business journalism. With no further ado, let me introduce Greg Zuckerman. Welcome to Bogleheads® on Investing, Greg.
00:07:01 Greg Zuckerman: Great to be here.
00:07:03 Rick Ferri: The Bogleheads®, as you may know, are mostly passive, do it yourself investors who use index funds and just a simple portfolio in a long term buy and hold rebalance, sort of John Bogle philosophy of investing. But we’re always interested in what’s going on the other side. And you’re a man who has studied the other side. And I’m speaking about hedge funds who use black box quantitative investing models and lots of sophisticated mathematics to try to outmaneuver everyone else out there. And some of these funds make billions of dollars. And you wrote a book called The Man who Solved the Market: How Jim Simons Launched the Quant Revolution. And Jim Simons was the founder of Renaissance Technologies. We’ll get into that book in a little bit, but before we do, could you tell us a little bit about your background and the several books that you’ve written and how you came around to writing this book?
00:08:04 Greg Zuckerman: Sure. I’ve been at the Wall Street Journal since 1996, very long time, covered a bunch of different beats, credit market, writer on the street, private equity. But I spent many years writing about hedge funds and I’ve written several books. My first book is called The Greatest Trade Ever, about the subprime trade, people who anticipated the financial meltdown 2007 and 2008, and John Paulson and some others. Then I got really excited about the energy revolution in this country. I wrote a book called The Frackers about that revolution and who the people were and individuals, unlikely individuals. And I also wrote a book about the COVID vaccines, how we developed them, the race for the vaccines, the long race, actually surprising race. And that’s called A Shot to Save the World.
And then I’ve written some, some books with my sons. But the, the book in particular you mentioned is called The Man Who Solved the Market. And yeah, a lot of what I do at the Wall Street Journal, I write about home runs and strikeouts. I’m a sports guy. I like to write about those who do really embarrassing mistakes, make embarrassing mistakes and those who do smart decisions and it pays off. And those are the home runs. So there’s a lot of drama and a lot of lessons from the home runs and strikeouts. And yeah, that’s kind of a passion of mine, writing about smart decisions and poor decisions over time.
00:09:33 Rick Ferri: A lot of investors out there believe that when they get home from work, they can get on their laptop computer, they can check a few stocks that they like, look at the technicals, maybe some of the fundamentals, read some of the articles that are out there and decide that they’re going to buy this stock. And if the stock does well, we tend to congratulate ourselves on being smart, sophisticated.
But in fact, it was probably just luck. And I say that because after reading numerous books about hedge funds, your book. I even read Jim Cramer’s book, the Confessions of a Street Addict. And I used to use that in one of my classes that I taught at college. And read Michael Lewis’s book Flash Boys about high frequency trading. Every time I read one of these books, I come away thinking, how on earth does an individual investor who’s plinking around on their home computer compete against these people? And I always wanted to get your thoughts about that.
00:10:50 Greg Zuckerman: So, taking a step back, I started writing about world of finance, early 90s, and I got to the Journal 1996. And a lot of what I ended up doing are writing about the winners, the success stories, those who anticipate world events, those who discover underappreciated investment securities, be it in the credit markets or in equities. And in some ways, I’ve done a disservice to mankind, to humankind, in that, yeah, one can read Greg Zuckerman’s work and say, wow, I can beat the market. But I hope people don’t come away with that conclusion.
And over time, I’ve arrived at my own conclusion that it is, if not impossible, really hard to be the market. And it’s gotten much harder, partly because you’re going up against the quants. So there was a time when, when there was a possibility of gaining an information advantage. Even an individual could. It’s rare today. So markets are much more efficient. Information flows much quicker than ever. It’s a fair market in a lot of different ways. I can tell you so many stories of hedge funds and others just having a meeting with the CEO.
I remember the Steinhardt people telling me about how Lou Gerstner at IBM came in the office one day and kind of outlined what he was going to do. And they were like looking at each other like, wow, we have got to back up the truck here. And they did. They made a fortune. You can’t do that today. That’s breaking Reg FD. So I hope people don’t come away from my book saying I’m going to do this at home.
00:12:35 Rick Ferri: No, not at all. I mean that’s exactly the opposite of how I come away from these books. Because after I finish reading the book I say to myself, these people have access to information and databases that I couldn’t even dream of even getting access to, let alone being able to data mine this information using the now quantum computers that some of these companies are using. And the people that these companies hire, they’re mathematicians, PhDs, physicists, I mean dozens and dozens. In your book talk about how Jim Simon and his co-CEOs would go out and just literally hire dozens of the smartest people out there to come in and try to build these algorithms.
00:13:17 Greg Zuckerman: Yeah, it’s harder than ever if you’re going to do relatively short term investing, especially then you’re going up against Jim Simons, well, not him any longer, but his colleagues at Renaissance. And it’s folly. It’s just fool’s errand to try to think you’re going to beat them in terms of short or medium term investing. I do have to say that if you’re going to be a longer term investor, that’s not where the big guns on Wall Street are focused on. So there is an opportunity there and you could even take advantage of their short term nature.
Sometimes stocks on a short term basis move in a volatile way and you can take advantage as a calm, patient longer term investor. There’s still opportunity there I believe. But generally speaking you’ve got to realize that you’re going up against, it used to be you’d go up against let’s say Peter Lynch or, or Jeff Vinick and Fidelity and that was hard enough, but now about 80% of trading on Wall Street is based on some algorithm of some kind.
It’s not to say that they’ve figured out the secret sauce. They don’t outperform necessarily any more than people did in the past, even though it’s more automated. So I wouldn’t worry about that so much. There’s still the same inefficiencies out there and potential opportunities, but it’s just harder to get an advantage, any kind of information or otherwise.
00:14:48 Rick Ferri: Goldman Sachs just announced their earnings and they were record breaking earnings from equity trading. There was a 27% increase year over year. They made $4.19 billion in equity trading. Now this comes out of the market, I mean where there’s profits that they received. Now part of that was through proprietary trading which is Goldman Sachs engaging In their own trading, for their own book where they’re making markets. And in addition to these hedge funds, you’ve got JP Morgan, Goldman Sachs and all these big Wall Street firms that are, that are also involved in this day to day. And they’re all generally making a lot of money.
I just want to go through some of the big prop trading companies out there. DRW, Citadel, Jane Street, Optiver, Hudson River Trading, Tower Research, then you have Two Sigma, you have the hedge funds, Renaissance Technologies and so forth. I mean there’s just dozens of big companies out there that are trying to make money doing algorithmic trading. And, and they are. I mean they’re making big money and this all comes out of the markets. So like you said, 80% of the trading that’s going on is, is all of this. And, and to me, as an index investor, should I be concerned about this?
00:16:25 Greg Zuckerman: No, I don’t think so. There always have been big investors on Wall Street and elsewhere doing prop kind of trading. If anything, the prop trading that big firms, investment banks, Goldman Sachs and such do today pales in comparison with what they used to do. Like Solomon Brothers back in the day was just a prop trading behemoth. And today, because of different regulatory changes, banks just don’t take those kind of chances anymore. Goldman Sachs and others. So they do some prop trades. Very little.
But yeah, it shifted elsewhere and people are making a fortune. I think the real money comes out of the pockets of the big endowments, the big institutional funds, the ones that are clients frankly of these firms. I mean, they pay such high prices in terms of management fees, incentive fees to the hedge funds and trading firms that they give money to that they are clients of. And it’s just a great business for those who do the trading, but not for the clients. And then you say to yourself, well, why are they doing it? Why are all these institutions handing their money over to these investment firms that don’t necessarily outperform the market? Or I don’t even like to say the market because that’s not really the alternative. Alternative is just sort of a 60/40, boring allocation, which I’m a fan of. So you’re speaking to the converted.
Why do they do it? I think it’s a function of keeping your job. So if you’re an allocator at a big endowment sovereign wealth fund, what have you, you have a salary, you have a high salary of your own, you can’t justify it by saying, well guys, we’re going to put all the money into Vanguard and we’re going to be allocated conservatively and we’re going to have some equities and exposure and some fixed income, etc., may a little emerging.
You can’t do that. They could be like great idea, we’re slashing your salary in half. We don’t need you to be doing that. Instead you need to charge someone a lot of money to get you into like you said, Citadel or Tower Trading or one of these places. So there’s incentive there for the allocators to allocate to the really expensive trading firms. And it hurts, it hurts pensioners, pension funds, it hurts the sovereign wealth beneficiaries, etc. So but in terms of you and I, it shouldn’t really affect us. It makes a market much more volatile. So if you could take advantage of that, then there’s benefit.
00:19:02 Rick Ferri: Yeah, I guess the way that we would take advantage of a volatile market, say right now, as I’ve been telling folks, is if the market’s down 20% and you have an allocation to 60/40, then your 60 is probably not at 60 anymore, it’s probably at 50 or at least 55. So you should probably, with that 5% difference, you should probably be buying stocks. And if the market gets driven up by this and you’re at 65% equity, you should probably be selling stocks. And that small amount of rebalancing just to stay to a strategic allocation does seem to equate to some free lunch out there, if there is one, from just doing that. And I think that’s the way we, the public can maybe take advantage of some of these big dips in the market that seem to occur every three years or so.
00:19:55 Greg Zuckerman: Yeah, there’s an argument there. The tricky thing, the challenge nowadays is that the fixed income market, the Treasury market, is having its own problems just as the equity market comes under pressure. So it’s not as easy to shift due to equity troubles to fixed income because you’re getting losses. But if you’re a long term investor, then you shouldn’t want about these blips. And yeah, I’ve got two young sons and I tell them dollar cost averaging and don’t worry about the ups and downs. But of course they ignore me.
00:20:29 Rick Ferri: How young are they?
00:20:31 Greg Zuckerman: They’re in their 20s.
00:20:33 Rick Ferri: I often tell people that when it comes to stock trading, people who begin in their 20s or 30s, they think they’re going to maybe pick some stocks that are going to outperform in the short term, they’re trading. And if they happen to pick a few stocks that went up, they think they actually have skill rather than luck. It’s almost like picking up a used set of golf clubs and going out on the golf course and hitting around and making a couple of long putts and thinking, oh, now I’m ready for The Masters. You might think that, but you’re not going to make the cut.
00:21:15 Greg Zuckerman: Yeah. And listen, there are some people who are great at trading individuals and such and have a touch for it and good for them. But generally speaking, they focus on their winners and not their losers and they’re exceptions to the rule. So for every one of those, there are more that cannot beat the market.
00:21:27 Rick Ferri: So I want to get into your book because it follows the life of one of these hedge fund managers. Really, you could call them the father of the quantitative trading movement.
00:21:44 Greg Zuckerman: Definitely.
00:21:44 Rick Ferri: His name is Jim Simons and he founded Renaissance Technology, which one of the very big quantitative trading firms and very, very successful. Why him? I mean, there were other people. There was George Soros, there was Steve Cohen, David Shaw, Ken Griffin from Citadel. Why Jim Simons?
00:22:06 Greg Zuckerman: So I wrote a book about Jim Simons and his colleagues at Renaissance because they have the greatest track record investing history. I don’t know if you call them traders or investors. I just call them money makers. On average, their Medallion Fund, which is their key hedge fund, is up about 66% a year for decades and decades since inception. So there’s no one really close. That’s before fees. They have enormous fees, but they also have kicked out almost every one of their outside investors. So they charge themselves these fees. So I set out to figure out how they develop such a money making machine.
And to me, there’s a fascinating history. Jim Simons is unique. The people there are unique. They’re not investors, they’re not people from the world of finance. They’re not people of MBAs. You would think. I mean, there’s a paradox behind all my books, all the books I’ve written. After I’ve kind of dug into them and spent time on them, I realized there’s something propelling me. There’s some reason why, why I’m so fascinated by the story. And it’s a paradox. Shouldn’t have been these people, shouldn’t have been Jim Simons and his colleagues who mastered the market, who solved the market, as it were. There are people who don’t necessarily care about companies and earnings and the future and business even. Some aren’t even capitalists within the verb.
00:23:28 Rick Ferri: I noticed that in the book, by the way. Some are not even capitalists.
00:23:29 Greg Zuckerman: Yeah, it’s fascinating. They’re scientists, and they’re mathematicians. And Jim recruited from that world. He literally didn’t want people from the world of finance, people who knew something about business and trading and investing. He wanted them to come fresh to this challenge. And that’s how they looked at it. It was a challenge to figure out markets like any other kind of scientific experiment. And they set out to do it out long on Long island, far from Wall Street, at a time where there wasn’t any quantitative trading going on. They were the pioneers. They became the pioneers and they changed everything. So I set out to write a book to explain how it all happened.
00:24:09 Rick Ferri: So let’s first start at who Jim Simons is. Where did he go to school, what was his education, and what did he do prior to deciding to get into the investment world?
00:24:18 Greg Zuckerman: Sure. So Jim Simons grew up outside of Boston in Newton, Massachusetts, went to MIT and always loved mathematics. And his family pediatrician kind of warned him, don’t go into mathematics, you can’t make any money in mathematics. You should be a doctor like I am. And he ended up being worth, at his death last year, he was worth about $27 billion. So the pediatrician didn’t give great career advice. And luckily, Jim Simons ignored what his pediatrician said. And at first he went into academia, and he got a PhD and was a geometer focused on that. He taught both at MIT and Harvard, but he always had this kind of wandering eye, always had one foot in the world of academia and one foot in the real world.
He took some time off to work for a government arm during the Cold War and did code breaking against the Russians and learned there how to build predictive algorithms early on, and also how to work with just super smart, borderline genius mathematicians and how they could all work together for common cause. And that was a real lesson for him. He went back into academia, led the mathematics department at Stony Brook on Long Island, and there too, learned how to recruit talent and get them to work together and create incentives. And frankly, about my book, so, yeah, it’s called The Man who Solved the Market. It’s about investing and trading, I guess, but a lot of it is just management.
And after I finished the book, I realized it’s as much a management book as it is an investing book, because it’s about how to recruit talent, top talent, and get them to work together. And it’s very unique. And that Jim had that skill. He was a fascinating individual because he was a quant, he was a mathematician. He goes down as one of the greatest geometers of the last few hundred years. His work is still referenced over and over again. And he led academic departments and such. But he also is really personable, or he was personable. He passed away last year. Very personable, funny. And more, more than anything, he understands. He understood people and how to get them to work together and creating incentives to do so.
00:26:33 Rick Ferri: Fascinating background. Having been a military person, I really like the code breaking part of the story. The government recruited the smartest people they could find for that job. But then at some point he leaves code breaking and academia and decides to open up a little mom and pop investment shop, it appears.
00:26:56 Greg Zuckerman: Yeah, that’s exactly right. Jim always traded on the side. He did have a love of markets and a love of money. And he wasn’t ashamed in any way embarrassed by that passion to become really, really wealthy and rich. He was a unique academic in that regard. His colleagues didn’t shared that passion for money. So he left to start a trading firm. And frankly, his instinct was that markets have patterns that people aren’t sufficiently appreciative of. There are hidden patterns that he can identify. That’s what his goal was, to identify hidden patterns, be it short term or long term.
But frankly, from 1978 when he started till about 1992, he went back and forth. They couldn’t quite figure it out. He started as a quant and then he ended up just trading like you and I, with our instincts and intuition, judgment. He bought gold and sold gold and bought silver and sold silver and did pretty well. But he couldn’t handle it physically. Frankly, his stomach hurt him and the ups and downs were just too much. And then finally he just turned it all over to the machines and hired enough talent to be able to do so. And they figured out first with fixed income and currencies and commodities, but then finally turned the corner and it was people he recruited that did it, that figure out how to make a lot of money with equities.
00:28:18 Rick Ferri: The idea of looking for patterns, of course, would go back to his code breaker days. Yes, you said he had brought in some very, very skilled people. One of the people he brought in who was a skilled mathematician was Lenny Baum. He also brought in Jesse Axe from Stoney. Who were these people? These were also brilliant people, top of their fields.
00:28:51 Greg Zuckerman: Jim Axe came from Cornell and Simons was able to recruit him and give him reason to come to Stony Brook, which was not a well respected math department at the time. Lenny Baum was the top of his field. Yeah, these were some of the greatest mathematicians of the time. And Jim had a way. He kind of said, oh, yeah, you don’t care about hedge funds and trading or investing. It’s beneath you. Well, come over, spend a day with us. Let me give you some exposure to what we’re doing over here.
And they saw what we all see, what a challenge it is to beat the market. And there’s nothing a great mathematician or scientist likes more than a real challenge. And also they got to see the talent. So once he got some of the top, most talented mathematicians to come over, and scientists, others wanted to come and be able to work with each other in that kind of environment was really appealing. And then once they were there, once he got them to join, spend some time, they started making money. And you know as well as I do, once you start making a lot of money, it’s hard to go back to not making money.
00:29:51 Rick Ferri: What I find interesting about the book was he started out looking for patterns, but couldn’t really find any. And then he just kind of reverted back to kind of what we all do, you know, intuition, gut and so forth. They made some good calls, but some bad calls as well. And then the interesting thing about this story is that Jim Simons decided, that’s not what we’re going to do anymore. We’re going to go to quantitative investing.
00:30:24 Greg Zuckerman: Yeah. He never really wanted to develop a firm that was based on instinct and intuition and such. He did want to be a quant. It just was very hard. People don’t understand how hard it is to turn decisions over to machines, even for the most successful mathematicians. When I spoke to him, we spent time together. He told me a story about how years later, when he had taken a real step back from the firm and just was mostly trading for himself and investing for himself, and he had a wealth manager and such, there was a downturn in the market, and Jim was on vacation. He’s in the hotel, it was the Beverly Hills Hotel, watching CNBC on the screen as the market collapsed.
And he called his wealth manager up and said, hey, do we have shorts on? Should we put some shorts on here? And I said to Jim, Jim, you’re the pioneering quant. You. You panicked and called you broker like anybody else, like I’m Joe Schmo, you know, like a pediatrician, dentist, you know, calling his broker. And he. He didn’t see the humor in it as I did, or he wasn’t as surprised. But it shows to me, it shows how hard it is, even for Jim Simons, even the pioneering quantum who had the breakthrough that changed everything. He couldn’t help himself from calling his broker, getting a little worried about the market and putting on some shorts, using his intuition and just judgment and reacting.
The fear and greed, man. It’s behavioral economics knows what it’s talking about. So even Jim Simons succumbs. Luckily for his sake and for the firm, they for the most part have turned almost every decision over to the machines. And especially today, they really don’t interfere too much. I write in the book a few times where they step in and stop the trading and interfere or adjust the trading, but it’s rare.
00:32:09 Rick Ferri: I thought the exact same thing when I was reading up. So here’s a guy who is the father of quantitative analysis who believes so heavily in just letting the computer do all the work because humans can make so many mistakes. I just laughed when I read it. I gave the exact same conclusion that you came to. Your emotions get the best of you and it’s so hard to stay disciplined.
00:32:26 Greg Zuckerman: Even the pioneering quant. Yeah.
00:32:29 Rick Ferri: So tell me a little bit about the types of strategies you found that they ended up finding more successful, like pairs trading, arbitrage and so forth. What did they find was working for them?
00:32:42 Greg Zuckerman: It’s a lot of stuff that’s either obsolete today or isn’t as important today. Yeah, pairs trading is, well, that was developed by Morgan Stanley, actually early on. Two similar kinds of companies, I don’t know, Coke and Pepsi, BP and Shell, that kind of thing. And when their patterns, when those stocks don’t align, when they move in different ways or unusual ways, they would use a lot of historic information.
A lot of what Jim did was. And it really, frankly was a colleague of his, Sander Strauss, who came up with the idea is to have better data than everybody else. And today it’s much easier for the average investor, be it a quant or otherwise, to get their hands on almost any kind of data you want. Back then it wasn’t. And it wasn’t just that Jim had better data than more data than everybody else. It was better, it was cleaner. They had this idea of cleaning the data, which was unheard of back then, meaning they would go back in history and they would see, let’s say, silver price moved really in a weird way a hundred years ago. They would look into why it happened.
Maybe frankly, someone took it down incorrectly. There was sometimes there would be some storm such that there was a gap in a day or so in prices and they were missing something. And they took the time to go through history and go through the prices and frankly it was painstaking work and thankless work and wasn’t clear was going to lead to anything. So people always ask me, well, why is he so good? Why is Renaissance so good? And why are they better than everybody else?
And I argue that it’s a series of advantages they have and it’s not always so persuasive to people they want to know like these secret sauce or some secret formula. And there isn’t any secret formula. They have certain approaches that work, but they don’t work always. But what they do is they have better talent, they have better data, they clean it, they incentivize people to work together. That’s a huge part of it. They don’t have silos. On Wall Street you have different groups that compete with each other even within their own firm. And Renaissance has none of that. Everybody’s on the same page and they, they all get paid based on the performance of the one fund, the Medallion Fund. So everyone steps in together and it’s very flat organization. So people chip in and maybe there’s a new data source that someone finds and great, good for you. That’s what you bring to the table. Great. Maybe there’s some other approach.
You’ve got the way to contribute even incrementally and they just get the best talent. They are able to hire everybody on Wall Street. When I take a tour of a trading floor, they say, Greg over there are PhDs. That’s our corner. With our Renaissance the whole firm almost is PhDs. I mean exaggerate. Two thirds of the firm are PhDs. And they’re not just PhDs. They’re people that led math departments of Stanford.
00:35:48 Rick Ferri: But aren’t all the hedge funds and large Wall Street firms competing for the same people?
00:35:51 Greg Zuckerman: They don’t even think they’re competing with Goldman Sachs and D.E. Shaw. Renaissance sees themselves competing with more Google and such, the tech companies, Meta, etc. So there are a lot of little advantages they have that add up to a big competitive advantage.
00:36:04 Rick Ferri: And how much is the firm currently managing?
00:36:06 Greg Zuckerman: It’s a good question. The Medallion Fund, which is that key fund, they cap it. So that’s another advantage. They could be much, much bigger. And one of the biggest mistakes that I’ve seen over and over in my career is how a firm has success and grows and grows too big. I mean, I read about John Paulson and he had the subprime trade made $20 billion over two years in 2007 and 2008. And then the hedge fund started growing it got to maybe $30, $40 billion. And you could see why that happens. You only have yes men or yes women around you. You have people saying how brilliant you are. You figure it out, something big. So you figure out. You figure you could do other kind of investing and you hire talent and you’ve got the money.
People are throwing money at you. It’s hard not to accept those checks in the mail. But Jim Simons didn’t. He said, no, we’re going to cap this thing. And the Medallion Fund did grow over time. $10 billion, $15 billion. I think it’s about $15 million today. I got to check. They have other funds that are open to the public or institutions. And our bigger. They’re a good $20, $30 billion each. They don’t do as well, though. And it’s not quite the emphasis of the firm. Medallion is still the engine that runs that firm.
00:37:21 Rick Ferri: I had a question about the book and the history of all this because Jim Simons talked about making a lot of money in the currency markets and the commodity markets, but he was having a really difficult time in the equity market. And the big breakthrough for them was when they figured out how to make money in equity. So you could talk about that era of Renaissance.
00:37:50 Greg Zuckerman: Yeah, sure. So in the early 90s, Jim Simons was a wealthy man. The firm was doing quite well. They were, as you suggest, making a lot of money with fixed income, currencies, commodities. They could not figure out equities. A lot of it was they would come up with the signals, as they call them, the algorithms that should on paper have made money for them. And yet when they tried to do it in real life, it didn’t work. Theoretically, it was working. Some of it was they were impacting prices themselves. So they would get all excited, their systems would get excited about buying something, selling something, or buying a group of stocks and selling another group. And then by the time they would put the trade on, they would push the prices around such that they didn’t make much money.
And they couldn’t figure it out. And frankly, it wasn’t even Jim. And you know, people have criticized my book and they’re like, well, Greg, Jim is only half the book. And you said the man who saw the market, it should be the men who saw the market. And you know, point well taken. There were others that he hired that were responsible for the breakthroughs, and in particular a few people from IBM in their speech recognition unit. Bob Mercer, Peter Brown, who currently runs the firm, a guy named David Magerman, and a few others. And they were brilliant in their own right.
And Jim said, hey, go try to help us figure out equities because we can’t do it. And to their credit they did. And there’s some good fortune there as well. And if you recall from the book or people will read the book, there was one day where this guy, younger software programmer David Magerman came, computer programmer, came to his boss Bob Mercer and said, hey boss, this number, I think it’s not updating, it’s a static number, it should be updating. It was like an S&P500 number that for some reason was stuck and didn’t get updated. And Mercer, to his credit, said, oh, you’re right, I made a mistake there. And that changed history, frankly. They started figuring out equities. So there was some good fortune. Maybe they would have figured it out anyway eventually or maybe not. So you need some good fortune, too.
00:39:56 Rick Ferri: And you need a lot of people looking at your work and you need people to, you know, you’d be able to take constructive criticism, you know, work as a team. I want to go into a little bit different aspect of trading and I know you, you talked about it, you mentioned it in the book, but you didn’t get into it. But I want to look at the difference here between this quantitative investing that Renaissance Technologies does and high frequency trading, the type that Michael Lewis wrote about in Flash Boys. Can you talk a little bit about high frequency trading and how it differs from algorithmic trading?
00:40:32 Greg Zuckerman: With high frequency trading the emphasis is on speed and being the first. They have better technology than most everybody else. They try to be quicker and faster and try to just get in front of an investors or rival traders even by milliseconds. With medium frequency trading, which is what Jim Simons and Renaissance, what they do, they don’t emphasize speed. They’re self-deprecating when it comes to their own technology. It’s impressive stuff over there, but it doesn’t really match up with some of the technology of others.
They also don’t have the same holding periods as the other. So high frequency trading, you’re in and you’re out in milliseconds. Whereas Renaissance, it’s moments to months is what they say, or seconds to seasons. Generally the holding period is a day or two kind of thing. You know, it’s still quite fast. You can call that high frequency I suppose, but that’s not really what we on Wall Street describe as high frequency. It’s considered medium frequency. A holding period that can be a day or so is, is not considered very fast or high.
So it’s a different kind of investing. And frankly that’s one of their advantages too. There are a lot of people doing high frequency. There aren’t as many doing medium frequency. There’s Two Sigma, there are a few others. But Renaissance is a little bit unique in that regard. So again, the emphasis is on buying stuff that’s going to go up and selling stuff that’s going to go down, as opposed to just being in getting, stepping in front of right rivals by millisecond.
00:42:04 Rick Ferri: One of the points of the book, what I found fascinating is that their win percentage was expected to be about 50.75%. So not even 51% of the time they expected to, to win, to have a profit. But they would put in hundreds of thousands of trades. So they would take that very, very small percentage advantage that they felt that they had and they would just magnify it with sheer number of trades.
00:42:40 Greg Zuckerman: Yeah, you could think of Renaissance. You can liken them to a casino, a Las Vegas casino, which doesn’t win on every or trade as every roll, every bet, but wins on majority of them. Just a bare majority sometimes times. That’s how Renaissance looked at it. Some people come away from the book thinking, ah, the market must be inefficient because Renaissance makes so much money. And I would argue that if anything, it kind of proves how efficient the market is because even they, even Renaissance Technologies, for all the brain power and technology behind them, they don’t get it right even 51% of the time. And they just trade a lot.
And they also know, know when to use leverage. That’s another one of their secrets. They use a lot of borrowed money at the right time. Their systems tell them when to, their systems tell them, yeah, we know what environments work well for us. What don’t they can pull back at the right time. So it’s not an argument for an inefficient market. If anything, it’s an argument, I would say, for an efficient market.
00:43:43 Rick Ferri: So Greg, you met a lot of the smartest, most famous people on Wall Street in your day. I mean, what have you learned yourself personally from all of this?
00:43:53 Greg Zuckerman: Well, when it comes to investing, it’s really hard to beat the market. So I applaud you guys for your focus on long term and low fees and just not trying to outsmart the market because you really, it’s gotten harder than ever and the playing field is flatter and it’s great for the average investor in that regard. You’re not having people share inside information like I used to see all the time on the street and was commonplace and was legal back in the day. So in a lot of ways, things have improved for the average investor. But I don’t think the market is nearly as inefficient as it used to be. So in that regard, it’s much harder for the average investor.
00:44:41 Rick Ferri: Well, Greg, thank you so much for being on Bogleheads® on Investing. I really enjoyed this.
00:44:44 Greg Zuckerman: Great to be here. Thank you very much for your time.
00:44:45 Rick Ferri: This concludes this episode of Bogleheads® on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit boglecenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit, join one of your local Bogleheads® chapters and get others to join. Thanks for listening.
