The quant's must-read book for Jim Simons "The Man Who Solved the Market"

Why recommend this book?

I admire Jim Simons

I personally rarely believe in investment geniuses or gurus hyped by internet celebrities, financial experts, media or ordinary people. After all, few investment results and achievements can withstand long-term testing. My three major filtering criteria are detailed in my two books “The Rules of Super Growth Stocks Investing” and “The Rules of 10 Baggers“, as well as in my post “An investor success can be sustained or not? how to verify?” are included.

Buffett and Munger, who I talk about a lot in my books and blogs, are the two of them. The Simons I want to talk about today is another person who is full of mystery, but his investment achievements cannot help but make me awe.

If you want to know a brief introduction to Simons’ life, please see the article in a previous post I wrote “Jim Simons, the lord of quantitative investing“

Introduction to this book

“The Man Who Solved the Market“: This book is called to be a quasi-autobiography because it is not Jim Simons himself wrote it, but the famous financial writer, former Wall Street Journal senior reporter and biographer Gregory Zuckerman interviewed Jim Simons and those around him want to know the most detailed biography of Jim Simons.

Reasons to recommend

Before Simons’s death, apart from this book, it was unlikely that the average person would have any way to learn any details about Simons’ investment career in the public market. This book was the only one.
Simons’s investment achievements are the best I know. As good as he is, Buffett’s career investment return is less than half of his. As for detailed numerical instructions, you can refer to the instructions in my post of “Jim Simons, the lord of quantitative investing“
The author does not report just good and skip bad things. In addition to investment, he also interviewed relevant people in detail to introduce readers to Simons’ other achievements, the joys and sorrows of life, his relationship with the U.S. government, his amazing achievements in the field of mathematics, which are no worse than investment, and Conflicts between friends and colleagues, philanthropy, and achievements in the educational field, it can be regarded as a heavyweight biography that faithfully presents Jim Simons’ life.
The book is thick but easy to read. Once you start reading it, you can’t wait to finish it. It took me two days to finish the book in one go. The author’s descriptions of important people, places and things are profound, and the details of the story are clearly explained. I believe readers can get inspiration from these related people, places and things.

Value of this book

Simons’ investment achievements

Simons’ investment achievements come from his profound achievements in the field of mathematics, but the problem is that there are many wizards with top mathematical achievements in the world, but no one can create incredible achievements in this completely unrelated field of investment like him. achievements.
He is respected as the first person in the quantitative investment community. His investment strategy is not as simple as a mathematical formula; instead, it incorporates complex knowledge from many daily fields. After constant exploration and revision, he has created such amazing achievements. Again, it’s not just math.

Sufficient information

Nash, who invented game theory, Shannon, the master of information theory, Thorpe, the first quantitative trading mathematician, Kelly, who invented the Kelly formula, and many other famous figures related to mathematics and investment. Famous theories such as the efficient market hypothesis, portfolio theory, and regression analysis will all appear in this book; this may prove that Simons is living in the golden age of quantitative investment, or that he is the core of quantitative investment.
In addition to Simons, the pioneers in the quantitative trading world include Thorpe, the first quantitative trading mathematician, and Simons’s number one rival, David Shaw of Desshaw Fund, who relies on computer model trading and relies on statistical arbitrage to bet that the first 20% of risers will then fall. APT, which predicts that the last 20% of losers will rise next, Bamberger’s pair trading, statistical arbitrage by Kepler, Long-Term Capital Management, etc., will all appear in this book.

Investment Strategy

His strengths and advantages

Jim Simons likes to think long-term about difficult problems and likes challenges to find solutions. Because he has no financial background, he has a unique perspective and is accustomed to examining large and long-term data and finding the order from what others think is random. This is also the basis for his ability to work for the US government, crack Russian codes, and become a cryptography expert. reason.

The training of mathematicians is to dig out the unexpected simplicity, structure, and even mystery in the chaos and confusion of nature, and to find out the patterns accordingly.

Jim Simons reasoned: The market’s reaction to news or events is not always reasonable or explainable, so relying solely on traditional research, knowledge, and insight is not feasible. However, he also believes that no matter how chaotic the market is, there are still some patterns in financial prices; just like weather forecasts, the future direction can still be discerned based on many factors.

Therefore, he was convinced that there must be a method, and he was confident that it could be modeled.

Always looking for ways to invest and make money

Since he had to support his family, he decided early on that he would not be able to make money by teaching in school alone, even if he had great academic achievements, and would not be able to gain financial freedom early. Based on this belief, he started to get involved in stock market investment whenever he had the opportunity when he was in college. He was thinking about how to make money in stock market investment and make money continuously.

Basic principles of trading

The point is not to understand the market, but to find a mathematical system that matches well and makes money consistently. This kind of thinking basically runs through the investment methods of his investment career. His models can proactively identify opportunities in financial markets, including factor investing and other forms of quantitative investing.

Contemporaneous competitors

At the same time as Simons, there were Edward Thop and Harry Markowitz. Markowitz was the inventor of modern portfolio theory and won the Nobel Prize for it. Thorp’s background is similar to Simons, and he is also a mathematician. Academics in the field, and quantitative investors, have made a lot of money in the stock market.

Thorpe has published his own biography, “A Man for All Markets“, which is also worth reading for stock market investors who are interested in understanding quantitative investment. I myself was a reader many years ago and I recommend it to everyone here.

Investment career

Start with Forex Trading

As the world began to abandon the gold standard and exchange rates were fully liberalized, the foreign exchange trading market became a new area of gold mining in the financial world. He also made a lot of money from outside investment in foreign exchange trading. Simons realized that this was a great opportunity. opportunity to make money.

So he decided to resign as chairman of the mathematics department and tenured faculty of New York University and open his own foreign exchange trading company, Limory, which was the predecessor of the famous Renaissance Technologies. At this point, I left the academic field, entered the part-time career that I had been doing before, and began to devote myself fully to the financial world.

Team member

Most of the members of the company are his colleagues or friends in the field of mathematics, including experts in Markov chains, Bayesian mathematics, data analysis experts, cryptography experts, statistics experts, computer programming experts, speech recognition experts, data cleaning and integration experts, machine learning experts, etc. Learning experts, economists, chemists, biologists, physicist consultants and more.

During the period, major team members were separated and merged, another group of major core team members requested to move to California, and the Medallion Fund, which was open to outsiders to join, was established and faced great challenges.

From intuition to computerized trading

Baum, the earliest partner who joined the company, relies on traditional intuitive trading without computers. He prefers long-term positions, studies information, and relies on his own brain analysis to figure out future price trends. He is an investor who believes in the long-term value trend of the subject matter. Jim Simons made a lot of money from his early collaborations, and many of the money-making ideas came from Baum.

But at this point, Baum is incompatible with Simons’s idea of establishing pattern trading, the idea of automating everything, and his preference for making money. Unless there is a strong reason, he will always close short-term positions when the gains are good. This is also the reason why the two later generations The main reason why people go their separate ways.

The first step is to apply the regression testing method to establish trend trading and let the computer automatically execute it; this can be said to be an unprecedented first step in the quantitative investment world.

After years of functional enhancement, the company began to make a lot of money, proving that this computerized trading method was effective and sustainable.

Jim Simons became more and more confident in the computer automation system developed by the company. Later, a newer and more complex Bayesian theorem was adopted─that is, if the original view is added with updated objective data, a more prepared inference can be drawn──In fact, this is the artificial intelligence calculation that has become popular in recent years. the most fundamental basis of law.

Financial products involved

Including the very early intuitive investment in stocks, the corporatized foreign exchange, commodities, precious metals, crude oil, futures, indexes, stock options, bonds, etc., and the later automation of stock investment, are all mentioned in detail in the book.

High frequency and automation

In short, after many years of partners and key members coming and going, the company was repeatedly obstructed by traders who opposed and resisted automated traders for various reasons; only Simons remained unchanged from beginning to end.

In addition to supplementing the data, the academic theory during the period, coupled with the actual changes on Wall Street, the continuous improvement of computer hardware computing power, and the company’s computer system and software have been continuously modified and strengthened after years of actual use, and iterations have continued. In progress, Jim Simons’ investment in full computerization is getting closer and closer to the goal he set out to achieve in the first place.

Personal opinion

All are smart people

There are no exceptions for the members of the quantitative investment team. From the perspective of ordinary people, they are all extremely smart weirdos who are dedicated and motivated to work. They regard solving impossible problems as their goal.

Model is the key

All quantitative investment teams have only one goal–to build a model that can sustainably make profits and be automatically operated by computers. What it relies on are mathematical models, algorithms, and market tests.

Three major theorems

I found that most quantitative investment teams rely heavily on mathematical models. Among them, the three sets of Bayes theorem, statistical arbitrage, and regression testing are the most important. They almost constitute the core and necessary basic laws of the quantitative investment team.

Financial background does not matter

It doesn’t matter whether you have a financial background or not, but whether you have a smart mind determines whether you are suitable for quantitative investment. Because you have financial knowledge, as long as you study hard and find someone to help you, you can definitely change your life. However, whether one is smart or not is not impossible to make up for through acquired learning.

Disclaimer

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