You probably do not know who Jim Simons is. He likes it that way. Simons is a quiet figure who is not interested in self-promotion and does not need to be told how great he is. Despite undoubted countless interview requests over the past 35 years, Simons has largely declined the opportunity to tell his story. The flagship investment fund he started in 1988 and managed until his retirement in 2009, Renaissance Medallion, is not a well-known brand. You won’t find promotional materials from Simons or Renaissance boasting to the investment community of how great they are. Even most investment professionals do not know the story of Jim Simons.
Yet the reality is that Jim Simons is probably the greatest investor ever and that is not written as hyperbole. In the 28 years since its inception, Simon’s Renaissance Medallion Fund has produced roughly $55 billion in profits for its investors. This makes it about $10 billion more profitable than any other fund ever. Between 1994-2014, the fund averaged a 71.8% annual return meaning that a $10,000 investment in 1994 would have turned into a modest $502 million 20 years later.
In making the case for Simons as the greatest investor ever, it is also worth noting that these hard-to-believe returns came with almost no downside. The fund he managed has almost never experienced a negative month and the worst calendar year return since 1990 was a 21.2% gain in 1997. That’s right – a 21.2% gain was the worst one-year return. In 2008, when financial markets were cratering, the fund earned 98.2% for its investors.
It is reasonable to conclude that not since Biff Tannen[i] has anyone had a knack like Simons for consistently predicting the future. In fairness, Simons did not necessarily predict economic or market events in the way that Tannen predicted the outcomes of sporting events. Simons and his team of PhDs have just been better than the rest of the world at understanding financial relationships and probabilistically forecasting how those relationships might change in the future – even if the future was measured in nanoseconds.
Simons is the outlier. Many have likely claimed to have the magic touch or predictive abilities but no one has really delivered in the same way. If it were easy to replicate or if everyone could predict the future well, there would not be an advantage and there would be no economic benefit to doing so.
What is the value of a crystal ball?
What if you could predict the future like Simons? How much would you realistically charge others who wanted to purchase this valuable foresight from you? We should be able to agree that if you were a financial advisor who could forecast the future, you would be ill-advised to charge fees of 2% per year. That would be the bargain of bargains. Rather, you would charge egregiously high fees – as in the fees of more than 20% per year[ii] that Jim Simons charged outside investors to manage their investments. This is how much you charge when you can predict the future.
But don’t bother trying to figure out how to invest with Simons, even if the egregious fees are not a dissuading factor. Simons and Renaissance won’t take your money. They won’t take anyone’s money and it has been a long time since they have. In fact, they gave back all external investor funds well over a decade ago. For the better part of 20 years, Simons and his team have been investing only their own money. When you can predict the future, you don’t need other people’s money to get rich. Outside capital just becomes a hindrance.
Similarly, Biff Tannen did not need to sell his knowledge of the future via a ‘tip of the week’ newsletter or an expensive co-investment vehicle. This again would have been an ineffective means to generate wealth. He was far better off using his foresight for his own investments.
What can we learn from Jim Simons and Biff Tannen?
1) As a public service reminder, anyone who can consistently predict the events of tomorrow is not likely to be found selling his or her knowledge for 1% annual management fees or via a $999/year newsletter. If you catch yourself relying on an investment newsletter or an investment advisor to tell you what stock to buy this week or when to sell before a market correction, you would be well-served to reconsider your decision framework. Moreover, answer this question: if the author of this newsletter or the advisor providing a hot investment idea is so confident about the future, why is he or she sharing that knowledge with me? Like Simons and Tannen, wouldn’t he/she be better served to keep that information private and profit from it, individually?
2) The short-term returns of a diversified portfolio are going to be boring and pedestrian compared to the returns of Biff Tannen and Jim Simons. As the late Paul Samuelson said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
3) Investors – not all of them but at least many of them – want extraordinary returns like those of Tannen or Simons and they’re not patient in waiting for them. They subsequently spend lots of money and time trying to find a crystal ball or at least someone else who has access to a crystal ball. As evidenced here, this quest tends to end badly.
It should come as no surprise to our clients or anyone who has followed our writings that we do not claim any ability to predict the future. (Well, that’s not totally true. We do claim some ability to predict the future. More on that in part II of our investment commentary.) Instead, we leave our hubris at the door and humbly resign ourselves to adding value for our clients in ways that do not include fortune-telling, predicting short-term market movements, discovering the next great fund manager, or market timing. We instead ‘resign’ ourselves to adding incremental value from underappreciated and underutilized activities like intentional asset location, tolerance band rebalancing, tax efficient portfolio distribution strategies, regular tax loss harvesting, and the use of smart beta strategies, to name a few. These activities and others that we pursue to add incremental value are not intended to be glamorous. They’re intended to help make financial plans more successful.
Now, we’ll go back to these unexciting activities and others go back to predicting the future.
With warm regards,
Resource Planning Group
[i] Biff Tannen was a fictional character in “Back to the Future”, for anyone who missed the 1980s.
[ii] When it closed to new capital, Renaissance Medallion charged an annual fee of 5% and an incentive fee of 44% which translated to an all-in fee of more than 20% in most years.