#108 Jim Simons (Money Printer)

What I learned from reading The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution by Gregory Zuckerman ---- The story of the greatest moneymaker of all time [0:01] Simons prefers to move in silence [1:40] Unknown Unknowns > Known Knowns / Wise people always know exactly why something won’t work. That is why I never employ an expert in full bloom. —Henry Ford [2:42] A one word summary of the book: PERSISTENCE [4:15] Simons’ early life / Only the arrogant are self-confident enough to push their creative ideas on others. —Nolan Bushnell [4:44] Advice from his father: Do what you like in life, not what you feel you should do. [6:16] Personality: Jim had a persistent and burning desire to be wealthy [7:20] A seed has been planted + Jim’s existential crisis [9:55] Lessons from codebreaking that Jim applies to his business later [14:08] Jim Simons at 29 years of age: Fired, father of 3 young children, no idea what his future holds [20:00] Jim Simons at 33 years of age: Genius and madness are next-door neighbors [21:44] Jim Simons at 40 years of age: Jim finally makes the jump. Only misfits understand misfits [22:55] Jim’s first trading style [28:00] We all go through times like this: DON’T QUIT! [29:15] Jim Simons at 44 years of age / Jim’s partner doesn’t see the point in developing automated trading system / Giant success followed by giants failures [34:30] Back to being filled with self-doubt [37:15] Our mind loves playing tricks on us [38:00] Jim Simons studied the past to gain an information advantage [41:00] Finally, the new strategy starts working! / Even with wild success people will tell you that you are wrong [46:55] Business is like nature, it doesn’t care if you arrive at the right answer from the wrong reasoning. [52:50] Emperors want empires [57:02] Life advice from an 82 year old Jim Simons [1:02:40] ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01David Senra?

  Simons chose a different approach. A world-class mathematician and former codebreaker, Simons had a hunch that 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, Simons hired mathematicians, physicists, and computer scientists to amass reams of historic records and develop algorithms to process it all. His team hunted for patterns in deep in the numbers that might reveal long-sought rules governing markets.

• 0:43David Senra?

  After decades of struggle, his data-driven approach paid off. Other investors began to emulate Simons' quantitative methods, inspiring a revolution that swept Wall Street, Silicon Valley, and everywhere else predictions are made. Since 1988, his company's Signature Fund has generated average annual returns of 66%. The firm has recorded trading gains of more than $100 billion. Simons himself is worth $23 billion. Okay, so that's from the book that I read this week and the one I'm going to talk to you about today, which is "The Man Who Solved the Market:

• 1:25David Senra?

  How Jim Simons Launched the Quant Revolution", and it was written by Gregory Zuckerman. Okay, so I want to start with what I think is an important aspect of his personality. It's important for you to know that Jim did not want this book to be written. A huge aspect of his personality is he definitely prefers to move in silence. And so let me just read this excerpt to you. It says, "Simons and his team are among the most secretive traders Wall Street has ever encountered, loath to drop even a hint of how they conquered financial markets lest a competitor seize any clue."

• 1:59David Senra?

  Employees and Jim avoid media appearances and steer clear of industry conferences and most public gatherings. And then Simons is gonna, he provides a great illustration of his opinion quoting a character from the classic book Animal Farm. He says, Simons once quoted Benjamin, the donkey in 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." And then Jim says, "That's kind of the way I feel about publicity." So there's something that the author says in the very beginning of the book that I think holds true to for a lot of the entrepreneurs that we're studying in this podcast. And he says, "I was most fascinated by a striking paradox.

• 2:44David Senra?

  Simons and his team shouldn't have been the ones to master the market. Simons never took a single finance class, didn't care very much for business, and until he turned 40, only dabbled in trading. A decade later, he still hadn't made much headway." And so whenever I read things like that, my mind always goes back to this quote from the autobiography of Henry Ford, where Henry says, "Wise people always know exactly why something won't work. That is why I never employ an expert in full bloom." So what Henry's saying there, and what the author's also saying is like, experts have a lot of good ideas, but they also have a lot of ideas why things won't work. And the unknown unknowns in life will always outnumber the known knowns.

• 3:25David Senra?

  And the only way to discover true, like unique new knowledge is through trial and error. That's how humans learn. And so I wouldn't, even if you have a belief that something, that you can do something or that something's possible, and other people aren't telling, are telling you automatically, "Oh, it's impossible," the only way to see if those other people are right is to actually try. I mean, that's exactly what Jim does. That's a testament to this entire book.

• 3:50David Senra?

  Okay, so I want to start talking about his early life. I'm going to really focus on his personality because what the author was just saying there, like, that's a bizarre occurrence, a bizarre situation to happen, where he dabbled, he barely dabbled in trading, didn't dedicate his full attention to it till he was over 40, then struggled for more than a decade before actually being proven that his thesis was correct. Like, what kind of person is able to persist that length of time? And I think that's, if you had to summarize, if you have to summarize this book, that's a good word to summarize it. It's persistence. The entire book is a story of just Jim constantly running into a problem, doubting himself,

• 4:32David Senra?

  but carrying on anyways, figuring out a solution, then he has some success, then he runs into another problem, and this just happens over and over and over again. So that's really how I think of the life of Jim Simons, is really a life of persistence. So let's go to his early life, and it says, "The 14-year-old was trying to earn some spending money, working at a garden supply store near his home. It wasn't going well. The young man found himself so lost in thought that he had misplaced the sheep manure, planting seeds, and most everything else. Weeks later, the couple who owned the store asked Jimmy about his long-term plans. 'I want to study mathematics at MIT.' They burst out laughing." Now, this is the interesting part. "The skepticism didn't bother Jimmy.

• 5:16David Senra?

  The teenager was filled with unnatural confidence and an unusual determination to accomplish something special." There's a great quote by Nolan Bushnell. He's the founder of Atari and the founder of Chuck E. Cheese, and he was also the mentor of Steve Jobs. Steve Jobs worked for Nolan when he was 19 years old, when Steve was 19, that is. And he said in his book, I think it's called Finding the Next Steve Jobs, the one he wrote, I did a podcast on it, but he says, "Only the arrogant are self-confident enough to push their creative ideas on others." Remember, as we go through all this book today, Jim's idea was unique and new, and he definitely was, I don't know if it was, I mean, 14, we see signs of it at 14 years

• 6:01David Senra?

  old, but he definitely had... High levels of self-confidence, high levels of arrogance. And I think Nolan's, in regards to Jim and a lot of other people, I think Nolan's quote is actually true. Now, we're gonna see some advice Jim got from his father early in life, and I just think this is fantastic advice for everybody. Because his father's name is Matty. Matty lived a life he didn't really want to live. And he's realizing that, and he's teaching his son not to do as I did. So he says, "Later in life, Matty told his son he wished he hadn't foregone a promising and exciting career to do what was expected of him." Interesting to note, if you ever look at, like, when older people are, you know, closer

• 6:42David Senra?

  to death than we are, hopefully, they're looking back on their lives, usually, one of the biggest regrets is that, right there. That I didn't live my life, I lived a life what other people expected of me. That's something you just definitely don't want to do. He says, and this is Jim talking about the lesson he got from his father. "The lesson was, 'Do what you like in life, not what you feel you should do,' Simons says. 'It's something I never forgot.'" What Jimmy liked to do more than anything else was think, often about mathematics. Another aspect of his personality that will, that kind of sheds some light on, like, why,

• 7:24David Senra?

  how is it possible that he was able to persist through all the struggles that he encounters throughout his life? And he says, "It's nice to be very rich." I observed that even before he was rich, Simons says. "I had no interest in business, which is not to say I had no interest in money." So what Jim is saying there, he had a persistent and burning desire to be wealthy. So I'm gonna tell you a little bit more about his confidence. Before I get there, I think this is a good idea, and it's how, it just says he really liked to think, especially about mathematics, but also how he used his mind to solve problems. So he says, "Simons realized he had a unique approach. He would mull problems until he arrived at original solutions.

• 8:06David Senra?

  Friends sometimes noticed him lying down, eyes closed, for hours at a time."

• 8:13David Senra?

  He was a ponderer with imagination and the instinct to attack the kinds of problems that might lead to true breakthroughs. Okay, so I don't know if I do it for hours, but I do this as well. Like if I have a, if I can't figure something out, if I'm frustrated by something, sometimes I, you know, you just throw more time and effort at it, and then you're not making any progress. So I will do this. I'll close my eyes, I'll make sure there's no noise, there's no light, and I won't try to control anything. I will just literally let my mind go wherever it wants to go. And I, it actually works. You have like, you're giving yourself time, it's almost like a, like your mind is like a computer in that sense, where you have to give it time to like cycle through all the information and to actually make the computations to solve the problem.

• 8:54David Senra?

  And so Jim continues, he says, "I realize I might not be spectacular or the best, but I could do something good. I just had that confidence." So at this point in the book, Jim's about 18 or 19, he meets his first wife, and really what this is an indication of, before I read it to you, this is an indication, when you hear what his, what his future mother-in-law says about him, that Jim had a very strong personality. And what the book goes into great detail is, you know, he's got a lot of brilliant people that work with him over, you know, several decades in his life, and he, he's the one responsible for managing all these brilliant people. So I don't think you could do that without a strong personality.

• 9:37David Senra?

  So it says, his wife is, his first wife's name was Barbara, it says, "Barbara was too young to wed, her mother insisted. She also worried about a potential power imbalance between Barbara and her self-assured fiance. Years later, he's gonna wipe the floor with you, she warned Barbara." Okay, so so far we have this super smart, super driven, super confident person with a strong personality, hell-bent on doing something great with his life. Okay, so that's a really important part to understand Jim Simons as a person and understand how he's able to do what he was able to do. So at this point in the story, he's already in college, and this is when he first gets introduced to the idea of trading, because at the time he was just focused on pure mathematics.

• 10:22David Senra?

  He thought his life, he was just gonna be an academic. That's what he thought his life was gonna be. So it says, "He began getting up early to drive to San Francisco so he could be at Merrill Lynch's office at 7:30 in the morning, in time for the opening of trading in Chicago. For hours, he would stand and watch prices flash on a big board, making trades while trying to keep up with the action. It was kind of a rush," Simons recalls. "When Barbara became pregnant, there were too many balls for Simons to juggle. Reluctantly, he put a stop to his trading, but a seed had been planted." Okay, so right around this time in his life, he's doing some really good work in mathematics, and he wins a prestigious three-year teaching position at MIT.

• 11:04David Senra?

  So he starts doing that, but almost immediately, he experiences an existential crisis. And this is gonna happen a lot in his life, which makes it even more remarkable that he was able to persist through all this. So he says, "Simons began to question his future. The next few decades seemed laid out for him all too neatly: research, teaching, more research, and still more teaching. Simons loved mathematics, but he also needed a new adventure. He seemed to thrive on overcoming odds and defying skepticism, and he didn't see obstacles on the horizon. At just 23 years old, Simons was experiencing an existential crisis. Is this it? Am I going to do this my whole life?

• 11:47David Senra?

  There has to be more. His jovial exterior masked mounting pressures." So the reason I wanted to pull that out is because Jim's experiencing that in his life, I've experienced that in my life, you've probably experienced it in your life. Everybody experiences that. It's important to understand that the experiences that we're having are not unique, that humans in the past had them, that humans currently have them, and that humans in the future will have them. What matters is the ability to understand that and realize, hey, a lot, most people, when they feel like this, they quit, they give up. That's what most humans do. They don't write books about those people. The fact is, the few people that are able to push themselves to just keep focusing, not on how they feel now, but what they need to do in the future, and what they need to

• 12:31David Senra?

  do today, I think that's the best piece of advice you get from the life of Jim Simons. It's inevitable. There is no life where you're gonna feel comfortable all the time, you're happy all the time. You're gonna run into problems, especially if you're trying to do something unique and great. The point is, just focus on today, and then focus on the next thing, just keep going forward. Do not let your mind beat you. Alright, so it says, um, this is the very next page and gives you a description of like what he's trying to do. Like, he's, he's teaching, he's doing all this stuff, but he's also has multiple jobs because he's, he still has this desire to be rich. It says Simons was hustling for money, but it wasn't simply to pay off his debts. He hungered for true wealth. Simons saw how wealth can grant independence and influence. Jim understood at an early age that money is power, his first wife says.

• 13:16David Senra?

  He didn't want people to have power over him. So this is what I always talk about, like, what is the, like,

• 13:23David Senra?

  like, what is the point, like, what drives most entrepreneurs? And, and I use the word entrepreneurs, anybody that wants to master their craft. And my opinion on this is like, yeah, we all would make a lot of money, but I think it's more like seeing money as a, as a means to buy our independence. And so in that sense, like, I think control motivates most entrepreneurial, like, type personalities than money does. Uh, he says his earlier career doubts resurfaced. Simons wondered if another kind of job might bring more fulfillment and excitement and perhaps some wealth. The mounting pressures finally got to Simons. He decided to make a break. So he's 23 years old here. It is going to be 17 years from this point till he actually does what he wants to do, which is, you know, build wealth through trading.

• 14:08David Senra?

  Now, he jumps out of academia and he starts working for a, like, a very secretive, um, intelligence group that works, they're essentially subcontractors for the National Security, uh, agency. And the reason I'm bringing up this part of his life is because he learned so many valuable lessons here that he uses, he'll use about a decade, decade and a half, maybe even close to 20 years from the time we're in the story. Okay, so it says, Simons quit, uh, quit Harvard University to join an intelligence group helping to fight the ongoing Cold War with the Soviet Union. It was an elite research or, organization that hired mathematicians from top universities to assist the National Security Agency.

• 14:51David Senra?

  So, the reason I think this is important because the, what I'm about to read you right now, he copies this idea for his fund. But again, this is gonna, you know, this doesn't take place for another 15 to 20 years in the future of his life. So it says, "Simons was struck by the unique way talented researchers were recruited and managed in his unit. Staff members, most of whom had doctorates, were hired for their brainpower, creativity, and ambition, rather than any specific expertise or background." He does this exact same thing when he hires people for his fund. He doesn't hire people on Wall Street. He hires people for their brainpower, creativity, and ambition. "The assumption was that researchers would find problems to work on and they would be clever enough to solve them."

• 15:35David Senra?

  And it was while working at this company, or I guess this organization, he comes up with the idea that he would eventually use, um, he just has to wait for the technology to catch up, and it wasn't there at the time. So this is what I mean. This is also Jim Simons at 28. "Even as Simons and his colleagues were uncovering Soviet secrets, Simons was nurturing one of his own. Computing power was becoming more advanced, but security firms were slow to embrace a new technology, continuing to rely on card-sorting methods for counting and other areas. Simons decided to start a company to electronically trade and research stocks, a concept with the potential to revolutionize the industry." Now, the problem was, he never got the company off the ground because he couldn't raise any money, and he didn't have any money of his own.

• 16:17David Senra?

  So he just kept working at, it's called IDA is the organization he's working for. Now, um, they, eventually Simons and some of his colleagues, they, they published this paper, and I'm gonna read to you what the paper's about. And the note I left myself on this page was, this sounds a lot like what he does at Renaissance Technologies. Um, so it says, uh, the group, I'm gonna skip over their names, there's a lot of characters in this book. This, if, if you ever read any books by Michael Lewis, this, this book is kind of remind you of, of that. Um, so much so that at the beginning of the book, there's like, they publish a cast of characters. I knew I was in trouble right away because I'm terrible at remembering names, so I'm gonna skip over the names because that confuses myself. Uh, and it'll probably confuse you. So it's not, it's not really important who he's working with, just know there's

• 17:01David Senra?

  The group that Simmons has, I mean, he's exhibiting behavior he does all the time. He is able to corral really bright people and for some reason, they like, they not submit, that's what they submit to his management. He like kind of runs things. He has that kind of personality. So he says, "The group published an internal classified paper for the IDA called probabilistic models for the prediction of stock market behavior." That's exactly what he dedicates his later career to. "That proposed a method of trading that researchers claim could generate annual gains of at least 50%." Now, how crazy is that? Because he actually achieves gains of 66%. Simmons and his colleagues, and this is exactly what they do later on. "Simmons and his colleagues ignored the basic information most investors focus on, such

• 17:44David Senra?

  as earnings, dividends, and corporate news, what the code breakers termed the fundamental economic statistics of the market. Instead, they proposed searching for a small number of macroscopic variables capable of predicting the market's short-term behavior. Here's what was really unique. The paper didn't try to identify or predict these states using economic theory or any other conventional methods, nor did the researchers seek to address why the market entered certain states. This is extremely hard for humans to do because humans learn by stories, right? Jim is avoiding that. And humans, not only is this desire to learn by stories so, I think, ingrained into our

• 18:27David Senra?

  nature, that even when we don't know why something's happening, will create a reason, a narrative, even if that narrative is not accurate." He 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." Simmons and the Code Breakers proposed a similar approach to predicting stock markets. So something I always repeat to people is like you just, in life, it's just a good idea to stay as close as possible to the money. And in this case, we see gamblers doing that.

• 19:12David Senra?

  People where they are judged on their P and L immediately usually derive insights that theorists or people that are not practitioners do not. And so that's why I think it's just good life advice to stay close to the money. You'll derive, you'll obtain information through trial and error and through experience that others just won't. Back to his personality. And I think part of the reason why so many smart people were willing to follow him, he was a really great listener. And so it talks about one of his colleagues that he's working with at IDA, he says, "He was a terrific listener. It was one thing to have a good ideas. It's another to recognize when others do.

• 19:52David Senra?

  If there was a pony in your pile of horse manure, he would find it." Remember earlier it said, when Jim was quoting Animal Farm about his lack of desire for publicity? He wasn't always like that. He actually gets fired from the IDA because there's a lot of protests at the time. And once they found out that this organization exists and that they work for the National Security Agency, just like you could see something like this happening present day, but this is, you know, 60 years ago. They start protesting, there's picketing and all this other stuff that's happening. And so Simons is like, "Hey, I'm against the war. We're not building missiles here. We're just trying to crack like this is a mathematical problem." Right? So he writes this letter, like this op ed in a newspaper.

• 20:36David Senra?

  And once it's published, he's fired immediately. So I think this experience caught, like he learned, oh wait, you know, like not all publicity is good publicity. Like it could have negative effects. And it's a very terrifying part of his life. He's 29 years old, so listen to this. Simons had three young children. He had little idea what he was going to do next, but getting fired so abruptly convinced him that he needed to gain some control over his future. He just wasn't quite sure how.

• 21:06David Senra?

  This is Jim Simons on talent. Simons developed a unique perspective on talent. He valued killers. Those with a, and this is how he describes what a killer is. Those with a single-minded focus who wouldn't quit. That sounds a lot like him. It really does. And he talks about like, there's a lot of smart people, but some of them don't have any, like, they don't have any original ideas in their head. He says, "Some academics were super smart, yet they weren't original thinkers." So he eventually winds up at Stony Brook. He's gonna build their math department. He goes back to academia, essentially, but he's not happy. So this is Jim Simons at 33 years old. And this is a reminder that genius and madness are next-door neighbors.

• 21:51David Senra?

  Simons decided to take a sabbatical year so he could undergo primal therapy. The approach involved screaming or otherwise articulating repressed pain primally, as a newborn emerging from the womb. Simons, who sometimes woke up screaming at night, was intrigued by the approach. So again, I have to say, like, the reason, the benefit of reading this book is because it's a book about struggle and persistence. And I think the ability to persist through struggle is applicable to every single thing in your life. And I think seeing somebody else do that over a multi-decade period and eventually succeed is extremely inspiring. I will tell you later, if you do decide to read the book, where to stop at. It's divided in two parts.

• 22:36David Senra?

  And I would say 95% of my notes, and if you could see the book I have in my hand, you can see this by the post-it note sticking out, but like, 95%, maybe 98% of the notes I took were in part one. Part two is just weird. I don't even know why it's included in the book. Alright, so this is, I'm gonna skip ahead seven years. This is Jim at 40, and he finally makes the jump. And he says, "Simons reduced his obligation to Stony Brook to spend half his time trading currencies. By 1977, Simons was convinced the currency markets were ripe for profit. It seemed to Simons that a new, volatile era had begun. In 1978, Simons left academia to start his own investment, uh, his own investment firm focused on currency trading."

• 23:19David Senra?

  So this is the company that eventually turns into Renaissance Technologies. And then, here's the problem. And then, other note, so, the note that puts off is at 40, he finally makes a jump. And then, keep this other idea in your mind as I read the rest of the section to you. Only misfits understand misfits. That's why it's so important, if you happen to be a curious and driven person, to be exposing yourself to these, I feel biographies is the best vehicle for this. Because like, you realize that, everybody that doesn't really fit in, and if you are driven and curious, you don't fit into the rest of humanity. They might, I think all of humanity is curious, they're not all driven, right? And so it's very important to expose yourself to, to other people like you, so

• 24:02David Senra?

  you realize, hey, everybody, like, there's, other people have gone through this, I can do this as well. Um, and if you look to, you know, your, your, in many cases, your immediate surroundings, you're not gonna find people that have, that have the same personality traits, or the same ideas, or want the same things in life, and we're gonna see this here. You know, Jim was obsessed, he had this idea to, to do something great, a burning desire to achieve wealth, and yet it took him till he was 40 to do this. And then when he finally does it, he gets an unbelievable amount of criticism, and I'm gonna talk a lot about that today. He says, "Simons' father told him he was making a big mistake giving up a tenured position."

• 24:37David Senra?

  Now think about that, his dad's like, "Bad move, you have a steady job." Jim doesn't want a steady job, he wants wealth. And think about if he, what would have happened if Jim listened to his dad here? He would have, he made 23 billion dollars following his own intuition. Misfits only understand misfits. You can't, like, his dad wasn't, his dad's like, didn't understand it. Most people want that. Or maybe if they, I don't even know if they want that. Most people will accept that. "Hey, I got a steady paycheck, I'm fine."

• 25:04David Senra?

  If you really want to do something different, like you're gonna have to overcome

• 25:09David Senra?

  people telling you that you're wrong. Alright, math, and then he gets it from his peers too. Mathematicians were even more shocked. The idea that he might leave to play the market full-time was confounding. Academics were convinced he was squandering rare talent. And then this is one of his colleagues. "We looked down on him, like he had been corrupted and he had sold his soul to the devil." And here's the problem though, Simons had never completely fit into the world of academia. And he says, "I always felt like something of an outsider, no matter what I was doing."

• 25:46David Senra?

  And so his friend says, "He," meaning Jim, "really wanted to do unusual things. Things others didn't think possible. Simons would find it harder than he expected."

• 25:59David Senra?

  So I'm gonna give you a description of his first office, and it's a reminder to all of us that big things start small. Simons sat in a storefront office in the back of a dreary strip mall. He was next to a women's clothing boutique, two doors down from a pizza joint, and across from the tiny one-story Stony Brook train station. His space was built for a retail establishment. It had beige wallpaper, a single computer terminal, and spotty phone service. From his window, Simons could barely see the aptly-named Sheep pasture road, an indication of how quickly he had gone from broadly admired to entirely obscure. This is not gonna deter him though. And this is another example of the Nolan Bushnell quote that I just said. "Only the arrogant are self-confident enough to press their creative ideas on others."

• 26:44David Senra?

  And what I mean by arrogance is I don't like, this belief, when you have, if you have a profound belief in yourself, a lot of times like it's beneficial to get along with other humans if you hide it. But don't let them extinguish it. And by arrogance, like my definition of arrogance is different than other people's. I don't believe in like people that are super self-confident. I don't call them arrogance. What I consider arrogant is like people think they know everything that they, they, they get to a point where they think they can stop learning from other people. I think that is arrogance. I don't think high levels of self-confidence is arrogance. You know, but you can never get to a level of arrogance where it's like, oh, I've mastered this. I figured it, I figured it out. I don't, I can stop learning now. But no, that never happens. Uh, so he says, until then Simons had dabbled in investing, but he hadn't demonstrated any special talent.

• 27:29David Senra?

  Somehow Simons was bursting with self-confidence. This is like, he's using his fuel, it's pushing him. This is a positive thing. It's not, it's only negative to, to most of society, most other humans. But for entrepreneurs, anybody wants to do something different, it's, it's like rocket fuel. He says, and this is the inner monologue he's having. It looks like there's some structure here, Simons thought. He just had to find it. Simons decided to treat financial markets like any other chaotic system. There must be some way to model this, he thought.

• 28:01David Senra?

  So he comes up, you gotta start somewhere, right? So this is his first idea for a trading style. And what's so remarkable about the story is like, he comes up with a lot of good ideas. They work for a good amount of time. He'll make a good amount of money and then they break. And that's where he's like, oh crap, I have this problem. Most people quit, they pack it up, they go home. Simons persisted.

• 28:22David Senra?

  He says, uh, and now he's working with this other person, doesn't matter. Simons hoped he and blank could make big money relying on a trading style that combined mathematical models, complicated charts, and a heavy dose of human intuition. Um, so they wind up raising about, they start with a little less than $4 million, but they experience, uh, high levels of early success. And they're doing, they're doing this in currency. Says, he and Simons kept buying British pounds and the currency kept soaring. They followed that move with accurate predictions for the Japanese yen, the West German douche mark, and Swiss franc, gains that, that grew the fund by tens of millions of dollars. Simons was having a blast exploring his lifelong, lifelong passion for financial speculation, while trying to solve markets.

• 29:07David Senra?

  Perhaps the greatest challenge he had encountered. The fun would not last.

• 29:15David Senra?

  So they start, they're trading bonds as well, they're doing all this other stuff. The important part is that it's gonna blow up in their face. It says Simons shift to bond trading had gone awry. Clients kept calling, but now they were asking why they were losing so much money rather than extending congratulations. Simons seemed to take the downturn hard, growing more anxious as the losses increased. I'm gonna explain more about his state of mind here. The important part to remember about this section is, we all go through this. Don't quit. Simons seemed to take the downturn hard, growing more anxious as the losses increased. Sometimes I look at this and I feel like I'm just some guy who doesn't really know what he's doing, Simons said. His colleague was startled.

• 29:59David Senra?

  Until that moment, Simons' self-confidence seemed boundless. Simons told his colleague about Lord Jim, which centers on failure and redemption. Simons had been fascinated with Jim, a character who had a high opinion of himself and yearned for glory, sounds like it's him, right? But failed miserably in a test of courage, condemning himself to a life filled with shame. Simons is doing the exact same thing we're doing. Understanding and learning from these stories so we can seek inspiration that we can use in our own lives. It's very, very important. It gets him through these tough times. And the important part to remember here too is like, he has to go through these tough

• 30:41David Senra?

  times to arrive at the innovation that actually gives him these crazy outside results. He could not have had, the important part here, he cannot have the success he had without first going through the failure. That applies to everybody. Alright, so he's gonna emerge from the funk and he comes up with a new goal. In the following days, Simons emerged from his funk more determined than ever to build a high-tech trading system guided by algorithms rather than human judgment. He shared a new goal, building a sophisticated trading system fully dependent on preset algorithms that might even be automated. I didn't want to have to worry about the market every minute. I want models that will make money while I sleep, he said. The technology for a fully automated system wasn't there yet.

• 31:25David Senra?

  He suspected he'd need reams of historic data so his computers could search for persistent and repeating price patterns across a large swath of time. So he brought 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. So I need to, I don't think I've mentioned this, but he doesn't start trading stocks. So he's much, this is like years in the future. He's, he's building systems to trade bonds, commodities, and currencies. That's what he's doing. So I just need to tell you that now in case I forget to tell you in the future. This was ancient stuff that almost no one cared about. I feel the same way when I find a book that's like 50 years old or 75 years old,

• 32:10David Senra?

  and you have this, this person that I didn't even know exists and this built this wonderfully fabulous business. I feel like, I told you this idea where I really don't think about this as a podcast. I think about this as a service. And it's, I, it's like the same way archaeologists dig for like, you know, bones or signs of past animal and human life. I feel like I'm doing the same thing, but I'm doing it for ideas. Idea archaeology. So he says, "This was ancient stuff that almost no one cared about, but Simons had a hunch it might prove valuable. Simons had a staffer travel to Lower Manhattan to visit the Federal Reserve Office to painstakingly record interest rate histories and other information not yet available electronically." So there's other examples I'm not going to read to you in the book, but he does this for his entire career.

• 32:54David Senra?

  He's constantly searching through historical records to develop an information advantage. And he feeds these historical records into the automated system he has, and that's how he builds the, the machine that essentially prints money that he's, that he's gonna eventually build. All right. So he does this, it works out for a little bit. I'm gonna skip over a lot of that. And then the inevitables happen. He takes just one step forward and two steps back. Two steps forward, one step back. And he has this process over and over again. And it says, "Soon, he and his colleagues had lost confidence in their system." And then this is, this is what happens. This is the thought that Jim is having. This is in 1980. We are 10, 12 years before he finally gets the system, the automated system he wants,

• 33:38David Senra?

  and about 20 years, so he becomes fabulously, fabulously wealthy. Maybe, this is the thought he's having, "Maybe a computerized trading model wasn't the way to go after all." And the note I left myself is, listen, there's no formula. Life is complex and success is not a straight line. Imagine if he gave up here.

• 33:59David Senra?

  I think a lot of people externally, they would understand. Doesn't mean he would stop trading. Maybe decides he can handle ups and downs by trading on intuition or whatever the case is. But if he quit here, this book wouldn't exist. We wouldn't even be talking about him. His life would be drastically different. The point is, there's no formula. Everybody's gonna go through this over and over again. Persistence, that's what this book is about. And Jim's 44 years old. Forty-four. And he's not giving up. Alright. So, he doesn't know if the technology's there. They try to do a mixture of essentially more traditional methods,

• 34:41David Senra?

  mixed with a little bit of data mining and technology. And it starts to work. So it's like, okay, maybe this is the better system. The traditional trading approach was going well. At the same time, Simons was developing a new passion. And as we're gonna see, he's losing his focus here. He starts backing promising technology companies. In 1982, Simons changed the name of his firm to Renaissance Technologies, reflecting his developing interest in these upstart technology companies. This is a crazy sentence, because he's known as a trader, right? Simons came to see himself as a venture capitalist as much as a trader.

• 35:18David Senra?

  And what makes this story so fascinating to me is that he can have wild, wild success doing these things. But they're wild, wild success for short periods of time. So unless you have the extreme discipline that most humans don't have, it's like, okay, I made $40 million in two years. I'm gonna bank it and that's it? I'm gonna go find something to do? Most people don't. Like, oh, I made $40 million? Okay, I'm gonna make $80 million. And then in their quest to go from $40 to $80 million, they lose it all. This is what we're gonna see here. So this is his partner, Baum. "Why do I need to develop those models?" he asked. "It's so much easier making millions in the market than finding mathematical proof." This is his partner. He says, "If I don't have a reason for doing something, I leave things as they are and do nothing." He was explaining his trading tactics. This is Jim's partner's daughter, describing how his dad trades.

• 36:01David Senra?

  "Dad's theory was to buy low and hold on forever. The strategy enabled them to ride out the market turbulence and rack up more than $43 million in profits between 1979 and March 1982."

• 36:14David Senra?

  Alright, that's fantastic. Uh oh, what happens on the very next page? "In the spring of 1984, the losses kept growing." "This cannot continue," they yelled. "When the value of Baum's investment position had plummeted 40%, it triggered an automatic clause in his agreement with Simons, forcing Simons to sell all of Baum's holdings and unwind their trading affiliation." So this happens a lot. The one constant in the book is Simons pushing everything forward. But the people he does this with, including partners, he goes through, I don't know, half a dozen? Um, half a dozen partners? And he has to do that. Because he keeps learning from these situations and then tweaking his idea. Little by little, he takes the failure and uses that as another informational advantage.

• 36:59David Senra?

  And he's like, "Okay, well, I'm gonna find somebody else." And then he starts working with them. And they may have a key insight that he wants to keep, but maybe some bad insights he wants to avoid. So eventually they have a falling out that's inevitable. And then he just keeps that. "I'm gonna take the good ideas and avoid the bad and keep pushing forward." I think that's good advice for life.

• 37:15David Senra?

  But before he's able to do that, we gotta go back to wrestling with self-doubt. Our old friend is here. Good old self-doubt. "The losses in 1984 trading tobacco left deep scars on Simons. The fund was losing millions of dollars daily. Simons contemplated giving up trading to focus, uh, giving up trading to focus on his expanding technology businesses. Simons himself was racked with self-doubt. He had to find a different approach."

• 37:44David Senra?

  Okay, so eventually, he starts working with other colleagues where

• 37:50David Senra?

  they build, together, they build something that, uh, that's very close to what Simons envisioned when he was 28 years old. Right? This automated, uh, system that doesn't rely on human intuition. Now, the weird thing is how he reacts when they finally do this. And this is not like, this is something that can make a lot of money, but it's not like, uh, it's, he's gotta go through about two or three more, um, iterations till he finally gets, like, his, the crazy numbers. This is still crazy numbers to any normal person, but Jim is an empire builder and a psycho. And so, that's what I mean, like, goes from, like, he's not satisfied making hundreds of millions. He wants to make billions. So I want to read this section to you and then I'll tell you the note I left myself. He says, "His method wasn't based on a model Simons and his colleagues could reduce to a

• 38:35David Senra?

  set of standard equations, and that bothered him. These results came from running a program for hours, letting computers dig through patterns and generate trades." This sounds exactly what he wanted to do anyways. "To Simons, though, it just didn't feel right. I can't get comfortable with what the system is telling me. I don't understand why. It's a black box," he said with frustration. Karma, his colleague, agreed with Simons' assessment, but he persisted. "Just follow the data, Jim. It's not me, it's the data. It works, Jim, and it makes rational sense. Humans can't forecast prices. Let the computers do it," they urged. It was exactly what Simons originally had hoped to do, yet Simons still wasn't convinced

• 39:20David Senra?

  of this radical approach. When I read that section, it's just like, the insight there is, this is what he wanted to do, but he was still unsure. Like, we love, love playing tricks on ourselves. Our mind is undefeated. And just understand that, like, even like, think about how strange this is. He might have been working, let's say, what, 20 years? Where we are, like, he had this idea for 20 years. He starts finally getting to the point where he sees just on the horizon, it's right there. And what happens? Back to his old friend, self-doubt. Mind playing tricks on him, like, I don't, it doesn't feel, it doesn't feel right. There's just something that, that, that happens, that we have to understand. This is something that happens, rather.

• 40:03David Senra?

  And we just have to understand that it's, it's, it's gonna happen to us, it's gonna happen to other people. And like, we just have to, when that happens, I love this idea, because it's almost like, to me, what, what is happening in Simons here is almost like a fear of the unknown. You know, because we, we love to tell ourselves stories, we want to know the why, but like, there is no explanation for this. It's more, it's more complex than we're able to reason with. And so that fear, what Jimmy Iovine always says, the founder of Interscope Records, and he's had a crazy life, but, he always says, like, a lot of people, he's like, "I use fear as, instead of letting it, like, push you from the front, or, uh, push you from the front, use it as like fuel to push you from moving forward." So he's like, "I've trained," Jimmy says, "I've trained myself, as soon as I feel fear, to keep moving forward.

• 40:46David Senra?

  Because I know my natural instinct, my natural result, what most humans will do is they'll stop."

• 40:53David Senra?

  Going back to the system that they're developing, part of what gives them a huge advantage and why the system starts working so well is because they study the past to gain an information advantage and they just have access to information that other people don't and it's access to good information. So it says, "They had access to more extensive pricing information than their rivals, thanks to their growing collection of clean historic data. Since price movements often resembled those of the past, that data enabled the firm to more accurately determine when trends were likely to continue and when they were ebbing." So this is something they talk about over and over again in the book, that they feel their huge advantage is the fact that human nature doesn't change. And so they have these clean data models of how humans have reacted in the past and their hypothesis

• 41:37David Senra?

  moving forward is that humans are going to react the same way in the future. Okay. So this is the state of... Now, this system works for a little bit, but again, I told you, they have to go through these iterations. They have to keep going forward and tweaking this thing. So they're going to have success over and over again, and they're going to go backwards, and then they're going to fix it. Eventually, they're going to get to the point where they have the system they want. So this is the state of his business right after he starts the Medallion Fund. Now, the Medallion Fund is the one I told you about at the very beginning of the podcast, the one that's going to make over $100 billion in profit. Okay, so it says, "Simons had spent more than..." And this gives you an insight of how much he's struggled and persisted. "Simons had spent more than a decade backing various trades and attempting a new approach to investing. He hadn't made much headway."

• 42:21David Senra?

  He talks about this guy flamed out, this was his old partner, this other guy wasn't around anymore either, and now his new fund with two other people was down $20 million amid mounting losses. Simons was spending more time on his various side businesses than he was on trading. His heart didn't seem to want to be in the investment business. Strauss, another person he's working with, and his colleagues became convinced that Simons might shutter the firm.

• 42:50David Senra?

  And the reason I brought that section into the podcast is because you see entrepreneurs do this all the time when they run into a roadblock with their business, they're stuck, they don't know what to do. Really, what you're searching for is momentum, to get back on track, right? That's your number one goal. But what we do is we focus on everything else but that. And so what Simons is doing, he's confused. So you start immediately going back to like maybe your second or third best option, because you don't know how to progress. I think it's a better idea, just like, oh, okay, when I notice I'm distracting myself, that means I need to lean in more. I need to go and focus on one thing, just getting back on track and regaining that momentum. All right, so eventually he has a falling out with all his partners. And again, he's the one that runs the Medallion Fund.

• 43:32David Senra?

  He's the one constant person throughout all of this. And he links up with somebody, this guy's name is going to be Berkelkamp. And Berkelkamp was working like part-time, and he would analyze what Jim's former partner that is now out of the Medallion Fund was doing. He's like, well, he's got one good idea, but he was distracted by all these other less good ideas. He's like, so why don't we just focus, his one insight that he had, or not one, one of his insights he had, was why don't we focus on what's working? Which is interesting that he needed somebody with outside eyes to tell him that, right? Because that seems so obvious to us, because we're on the outside. But when you're lost in the thick of things, it's very hard to think clearly.

• 44:11David Senra?

  And so that's, this huge revelation that Berkelkamp has, leads to the Medallion Fund starting to like really get on track and really generate the money that Simons is interested in. And it's interesting, the strategy was almost opposite of the person running it before. So he says, he advocated for more short-term trades. This is what the Medallion Fund is known for. At the beginning, they'll trade two, three times a day. Eventually, they get to trading 150,000 to 300,000 times per day. And Berkelkamp's idea is like, we're going to set up a fund like a casino set up. This is a really interesting part of the book.

• 44:55David Senra?

  So he says, 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 try to build on that success. Yes, absolutely, let's go. So he said, "Burkirk Camp also argued that buying and selling infrequently, and he's got really weird ideas, but these ideas are literally what their future success is built on." And I say weird because I don't think I would have came up with them, maybe you would have, but they're weird to me. Burkell Camp also argued that buying and selling infrequently magnifies the consequences of each move. Mess up a couple of times and your portfolio could be doomed. But if you make a lot of trades, each individual move is less important.

• 45:36David Senra?

  Burkell Camp hoped Medallion could resemble a gambling casino. So this metaphor really helped me understand what the hell they were doing. Because they can give you ideas of what they're doing, they're not going to tell you like, they say this is, you know, they're not going to tell you exactly what they're doing. But this is, gives you, like, when I read this section, it really kind of crystallized what was happening, okay? So he says, "He wants it to resemble a gambling casino. Just as casinos handle so many daily bets that they only need to profit from a bit more than half of those wagers, Burkell Camp wanted the fund to trade so frequently that could score big profits by making money on a bare majority of its trades.

• 46:19David Senra?

  With a slight statistical edge, which they derive from their models and their historical data, the law of large numbers would be on their side, just as it is for casinos." So this is what Burkell Camp says. "If you trade a lot, you only need to be right 51% of the time." That fundamental insight is exactly what they do from the time we were in the book till now. They say, "Listen, we are only right 51% of the time, but we're 100% right 51% of the time. And if you do that, and they also add leverage and all this other stuff, you can make billions of dollars trading." Alright, so the new strategy is working and it says, "The firm implemented a new approach in late 1989 with the $27 million Simons still managed." Remember, they lost a bunch of money earlier.

• 47:04David Senra?

  They had these, you know, huge run-ups and they lose a bunch of money. So they start in 1989 with $27 million and essentially that $27 million is gonna generate $100 billion of profit, like it's gonna keep going into the future. So it says, "The results were almost immediate, startling nearly everyone in the office. They did more trading than ever, cutting Medallion's average holding time to just a day and a half." It's down from a week and a half. "Scoring profits almost every day." So that's in 1989, they start to make a ton of money. So it says, "For much of..." This is an important part, right? Because this is, again, like not only is your own mind gonna play tricks on you as we've seen, but other people are gonna... Even when you're succeeding, other people are gonna tell you you're wrong.

• 47:48David Senra?

  We are a bizarre species and we get in our way a lot of times. So it says, "For much of 1990, Simons' team could do little wrong. It was as if they discovered some magical formula after a decade of fumbling around in the lab. One day, they made more than $1 million, a first for the firm. Simons rewarded the team with champagne. The one-day gains became so frequent that the drinking got a bit out of hand. So every time you make $1 million, you have champagne. Now they're drunk every day. For all the gains, few outside the office shared the same regard for the group's approach." Who cares? These people don't know what they're talking about. Ignore them. "We were viewed as flakes with ridiculous ideas. Medallion scored a gain of 55.9% in 1990.

• 48:32David Senra?

  Dramatic improvement over its 4% loss the previous year." That's Berkelkamp was the one that led that key insight. And so, listen, the story of this page is even with wild success, people will still tell you that you're wrong. Who cares? They just don't matter. These people just don't matter. They fundamentally do not matter. You cannot let them play with your mind. Your mind's gonna mess with you on its own. You can't add... Like, you can't let other people do it. I'm kind of running over my point on the next page. So they just had a 55... This is what I mean, okay? So I guess I'll tell you the note first. Note of myself. We have to remember that we humans have the tendency to get in our own way. Okay? I think I've said that a lot today. They just had...

• 49:15David Senra?

  Jim is gonna do some weird stuff here and he's a brilliant person.

• 49:20David Senra?

  They just had a 55%, 56% return. And Jim is worried about like overall macroeconomic environment. So he's like, hey, maybe we should buy some gold. Essentially, he's like, I have an intuition that we should do something. But Jim, you just said that you didn't want to rely on intuition. That when you relied on intuition in the past and you succeeded and then inevitably we failed, you got sick, you wanted to throw up, all this other stuff. So what are you doing? So he's calling up his trading partner, Berkelkamp. He's like, buy gold. And Berkelkamp's like, no, we're gonna, no, Jim. We're not doing that. We're gonna let the system run. They hang up. A bit later, he calls again. Did you see gold? It went up. And Berkelkamp's like, what are you doing? He says, Berkelkamp was baffled.

• 50:06David Senra?

  It was Simons who had pushed to develop a computerized trading system free of human involvement. And it was Simons who wanted to rely on the scientific method, testing overlooked anomalies rather than using crew charts or gut instinct.

• 50:18David Senra?

  Yet, the rest of the team had worked diligently to remove humans from the trading loop as much as possible. And now Simons was saying he had a good feeling about gold prices and wanted to tweak the system?

• 50:30David Senra?

  We get in our own way.

• 50:34David Senra?

  This section was interesting because I love this idea that books are the original links. And so, you know, the people that he's gonna mention here, they're a bunch of past episodes of Founders. So it says, Ed Thorp became the first modern mathematician to use quantitative strategies to invest sizable sums of money. Thorpe was an academic who had worked with Claude Shannon, the father of information theory, and embraced the proportional betting system of John Kelly, the Texas scientist who had influenced Berkelkamp. So it's interesting how all this stuff ties together. I would have, you know, if I would have, it's just a matter of what books, like which sequence you read the books in. If I had read this book first instead of the other books, like I would have, you know, this book would have led me to them. I just happened to discover them beforehand. But I really think it's very interesting how...

• 51:18David Senra?

  Simons is going to have a lot of success and and Burke Camp was a huge influence on that success and yet he was influenced by people in the past. He read John Kelly's paper, The Kelly Criterion. They knew Ed Thorp had thought about investing with Simons. And Burke Camp was also a huge, he ran into in the hall, I forgot where they're at, I think they were at MIT. And he starts, he just bumps into Shannon and tries to start a conversation with him even though everybody knew Shannon was a huge introvert because he respected him so much. And it's interesting, he bumps into Shannon and one of the first things out of Shannon's mouth was like, hey, this is not a good time to invest in the market. And Burke Camp didn't even understand because at that time he wasn't interested in investing. He's like, why is Shannon talking about investing? So I don't know, I love

• 52:01David Senra?

  how all this stuff ties together. And I think it's just more of an indication that we're just on the right track and that we're studying the right people. Okay. Now, here's the point. Remember when I said Jim was, was like, his heart and his mind were messing with him because like, I just, this is what I want, but I don't understand why, I don't understand why. Eventually Jim gets over that. And then he has this great metaphor for how Jim thought about the system that he, that they were developing. He says, "I don't know why planets orbit the sun," Simons said, suggesting one need to spend too much time figuring out why the market patterns existed. That doesn't mean I can't predict them.

• 52:36David Senra?

  So again, I think that just helps. The book can get, it's a great story, but it can be sometimes confusing what the hell is going on. So these metaphors really helped me understand and that's why I'm sharing it with you. Let's see. Okay, so continuing that kind of line of thought, he says, "Simons' viewpoint can be seen as profound, even radical. At the time, most academics were convinced markets were inherently efficient." Okay, so we talked about this a lot. The people, we studied a lot of people that don't agree. You know, at this time, I don't know what it's like in academic circles now, but definitely back in, let's say, five decades ago, whenever it was. The conventional wisdom was it's useless to try. Markets are perfectly efficient. Don't do this.

• 53:18David Senra?

  And so we study people that, you know, said, eh, I don't agree with that. Henry Singleton's, the Claude Shannon's, the Ed Dorps, the Warren Buffett's, the Charlie Munger's, really any entrepreneur. Because I don't think they, I know that their theory is like on financial markets. But if you, you take that idea that, you know, oh, you know, don't, markets are already efficient, all the opportunities are there, like, there'd be no entrepreneurship. You'd just go get a job. So entrepreneurs, I think instinctually, practitioners as opposed to academics, instinctively understand that that's not true. Like, one of the reasons I started companies when I was so young is because I, first of all, I had to. I had to make money. And I didn't think, you know, making $10 an hour, or whatever it was, 15, 20 years ago, whenever that was, I thought I was worth more than that. And I was willing to bet on myself to prove that.

• 54:03David Senra?

  So I think that's, that's not a unique thought, by any means. It's why you start a company. You're like, eh, I can capture way more, I can, first of all, I can provide more value and I can capture more of it than, than just going to get a job. So he says, they were convinced there's no way that markets would be, da-da-da-da, suggesting that there were no predictable ways to beat the market returns, and that financial decision-making of individuals were largely rational. Simons and his colleagues sensed that professors were wrong. They believed investors were prone to cognitive biases, the kinds that lead to panics, bubbles, booms, and busts. So it also talks about in here, it's like, well, they, they came to that realization early, and then after the fact, you had people like Danny Kahneman and Amos Tversky about providing like, like, reasons after the fact of why this is probably true. Right? But Simons didn't know that.

• 54:48David Senra?

  It says Simons had embraced a statistics-based approach because of the work, or he did not, excuse me, he had not embraced a statistics-based approach because of the work of any economist or psychologist, nor he had, had he set out to program algorithms to avoid or take advantage of investors' biases. So, he was doing it because he instinctively thought that was accurate. One of my favorite, favorite quotes that illustrates what's happening in this part in the book is that, "Business is like nature. It doesn't care if you arrive at the right answer for the wrong reason." I think it's extremely important, because it's a very bizarre way for people to think. "Business is like nature. It doesn't care if you arrive at the right answer for the wrong reason. I don't care if I arrive at the right answer for the wrong reason. I just want the right answer." Simons just wanted the right answer.

• 55:34David Senra?

  So he says, "What you're really modeling is human behavior. Humans are most predictable in times of high stress." This is talking an insight in how the system, uh, system they built operates. Humans are most predictable in terms of high stress. They act instinctively and panic. Now, this is so important, because he's gonna talk about their entire premise of what the hell they're doing. Essentially, it's the entire premise of what you and I are doing right now. Our entire premise was that human actors will react the way humans did in the past, and we learned to take advantage. So I want to direct your attention now to, they were trying to recruit somebody, right? And he comes to visit and decides, "I'm not gonna do this." So he says, and this is why, he says, "It looked like four guys in a garage.

• 56:17David Senra?

  They didn't seem that skilled at computer science, and a lot of what they were doing seemed by the seat of their pants. Just a few guys dabbling at computing. It wasn't very appealing." And this is just a reminder, appearances can be deceiving. At this time, the fund had already grown to around $300 million, and they were seeing annual returns above 50%. Four guys in a garage that don't know, that don't look like they know what they're doing. And I, the note I left in terrible handwriting is, it's important to note, "This opinion by outsiders persisted well past the point of Simons outperforming everyone else." Perhaps there's a lesson in human nature there. And what I mean about outperforming?

• 57:02David Senra?

  Check this out. These numbers are mind-blowing, but this also, the reason, that's not the reason I'm reading it to you, the reason is because this tells you a lot about Simons' personality. "Why don't we keep it at $600 million?" they asked Simons. "That way, the medallion could rack up $200 million a year in annual profits, more than enough to make his employees happy." That is insane amount of money. And that's like, that's different from like being worth 200 million. You are actually making, that is real cash coming back to you, $200 million. "No," Simons responded. "We can do better." "Emperors want empires," griped one colleague. "What Jim wants to do is matter. He wanted a life that meant something. If he was going to do a fund, he wanted to be the best."

• 57:49David Senra?

  Now, you can imagine with somebody with that kind of personality, that's not happy with $200 million a year in profits. You can imagine what, like, what kind of environment do you think that that person's creating at their company? Well, here's a description of that environment. Simons pushed for results within weeks, if not days. An urgency that held appeal. The atmosphere was intense. One visitor likened it to a perpetual exam week. Okay, so, at this point, they still needed one more breakthrough. The final breakthrough comes from two guys. I think they're Mercer and, I forgot the other person's name. Mercer and Brown.

• 58:32David Senra?

  Okay, so, and I love seeing, let me tell you how. They wind up raiding IBM's computation linguistics team. So I'm gonna read this section to you. They're light on the details, but just the way they look at things. So, the reason I'm gonna bring this up is because I love seeing people draw parallels from other domains and then bring those insights into their own work. Okay, and that's exactly, so, from 200 million, a couple hundred million, whatever the number is, every year to billions and billions and billions of dollars rapidly. The final innovation was this. And it says, "It became clear to Mercer,"

• 59:15David Senra?

  and this is, they're thinking abstractly, right? "It became clear to Mercer and others that trading stocks bore similarities to speech recognition." Let me back up. There was a fundamental ceiling on the size of the markets that, up until this point, they were operating in, right? And so Jim kept saying over and over again, like, to get to the level he wants to get at, he has to be able to trade various other products. And it starts with stocks. So they had to build a system to adapt to stocks. And they tried it, didn't work, went really slow, etc., etc. The whole thing, the whole theme I've been telling you over and over again. You know, it was not immediate. They had to do trial and error. They had to think about what they're doing, constantly run experiments, and then eventually keep focusing on what's winning.

• 59:59David Senra?

  So, now I can read this part two. "It became clear to Mercer and others that trading stocks bore similarities to speech recognition." This blew my mind. "Which is part of why Renaissance continued to raid IBM's computational linguistics team."

• 1:00:16David Senra?

  In both endeavors, now they're gonna compare both of what they want to do and what they had experienced doing. 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 ignoring traditionalists who employed analysis that wasn't nearly as data-driven.

• 1:00:42David Senra?

  And to further explain that point, Simons does a great job of taking extremely complex things. And then, like, I mean, he's a teacher at heart. That's what he did for, you know, most of, not most of his life, maybe two decades of his life. So he explains that paragraph, now he's gonna translate that for us, right? And so he's gonna summarize that point here. Simons summed up the approach in a 2014 speech. "It's a very big exercise in machine learning, if you want to look at it that way. Studying the past, understanding what happens and how it might impinge non-randomly on the future."

• 1:01:16David Senra?

  Okay, so remember when I said earlier I wish, there was, the book is broken down into two parts, okay? Like, 75% of the book, something like that, 70% of the book is part one, and then you have part two. I have two notes in part two. If I could do this again, I would just read part one and then stop. Part two starts to get into stuff like, they're already fabulously wealthy, so then you have like, a bunch of people coming, new people coming into the firm. Has a lot to do with like, backstabbing, like contentious interpersonal relationships, office politics. They get into current events and, and real, like, national politics.

• 1:01:56David Senra?

  That stuff's just not interesting to me in my own personal life. I don't, I barely pay attention to current events. In my personal opinion, the information age were, were, like, were overwhelmed with so much noise and information. Like, personally, I just use time as a filter. And things that, time is a great way to separate noise from signal, or signal from noise, however you want to say that. So... I'm not, there's nothing for me to say there. It does not, that's fundamentally uninteresting to me. I like to read about ideas that are true today, that were true in the past, and that'll be true in the future. The last few chapters in this book, no one's gonna give a shit about, like, in the future. So, I'm skipping over all that.

• 1:02:36David Senra?

  I'm gonna end the podcast here with life, which, something that I think is true today, was true in the past, and will be true in the future, and it's life advice from an eighty-two-year-old Jim Simons. I think older people, especially older, successful people, are smarter. They have had, they've seen more. They've been able to separate what is actually, you know, true, or what is actually valuable from things that are not valuable. And that's why, you know, I spend so much time trying to learn from people that have already gone where I'm trying to go. So, he says, "Simons 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."

• 1:03:17David Senra?

  So, he did that. He worked with smart people. A lot of those people, especially in a specific domain, he says, they're a lot smarter than me. Be persistent. He definitely did that. Don't give up easily. And then this, I just love, because this is the way I feel about whenever I see, like, a well-run business, or a well-thought-out idea, I just, there is a beautiful element to it for me. It is beautiful. Good writing, great books, there's just all kinds of things in life that are like that. Staring at the ocean, looking at mountains, whatever. He says, and I think it's good life advice, "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."

• 1:03:56David Senra?

  I think that's a lovely way to end this story. If you want the full story, I'd definitely read the book. Like I said, I'd stop at part two, maybe you might be more interested in that stuff, and then read about it if you want to, but, um,

• 1:04:07David Senra?

  I could see, again, I said it before, it's very thrilling. Like, let's go to the back page real quick. You've got Ed Thorp, who, you know, has become somebody that... I definitely don't idolize him, that's not, that's not the right word, but something I look up to. And like when I, when I read the story, Ed Dorp's life, man of all markets, like I look at his life as something that I, I want to aspire to. The fact that he was so successful in so many different domains that are important and he understood when enough was enough.

• 1:04:33David Senra?

  He just, I think, I've been telling friends, I've been buying that book for a lot of people, that in my opinion, he mastered life. My opinion of what a mastered life looks like, everybody probably has a different opinion, right? So he says, talks about this book, he says, "Zuckerman vividly tells the story of how Jim Simons and his team of scientists developed the most successful quantitative trading operation in history. It was immensely enjoyable." One of my favorite writers, Michael Lewis, he says, "The definitive account of a strange and wonderful subplot of the financial crisis." So there's, it's, it's very well reviewed, it's sold a lot, and a lot of people like it, and I understand. If you want to see the next book I'm doing, because there's a lot of people are saying they're using this as like a giant book club. I don't know how the hell, I don't expect anybody to read 52 books a year.

• 1:05:16David Senra?

  And I don't think every, I'm not saying that people have said they have done this, but people are, are buying the books if they find out what I'm doing in advance. So they have it done, or at least partially done by the time the podcast comes out. That's really interesting, like byproduct, I'm kind of surprised by that. If you want to see that, I leave a link in the show notes, it says like a list of all the books that appeared on Founder's Podcast, or something like that, but anyways, you can, you can either click that link. It just leads you to the URL, which is amazon.com/shop/founderspodcast. And so as soon as I know what the next book I'm going to do, I don't know if I know that next week yet. I have, you know, I can't even tell you how many books I have, any queue.

• 1:05:59David Senra?

  But anyways, I put it up there. Usually by the time you're hearing this, you, if you go to amazon.com/shop/founderspodcast, you could already see what the next book is I'm doing, almost every time. By the time the podcast comes out, I already know. And I might start. I don't want, I don't like having like a set schedule too far in advance because I really try to focus on what am I most excited about to read, to read about now. Just more enjoyable to me and I think it's better for, for your experience as well. Uh, but as far, as much as I can know in the future, I'll just start putting them, even if I know maybe two, the next two or three books. Um, I'm going to have some series, like I'm going to do at least, there's four books I have that are all about like early days of Detroit industry.

• 1:06:41David Senra?

  Cause I'm fascinated by like the beginning of the automobile industry and then the fact that like it happened in one city and now that city like through competition like kind of exploded, like a, like a bomb went off and that, that industry got destroyed. It's just, I don't know. So anyways, I was like, well, instead of splitting those up, I'm going to do a bunch. So when I know the series, I'll do that. Um, I have a series on a father and son, two biographies. One was recommended to me from a listener that made me find who their dad was when I started doing research. So that kind of stuff where I know that, hey, in the next like three or four weeks, this is what I'm going to focus on or whatever. I'll, I'll put that on amazon.com/4/Shop, 4/Founders Podcast, or founders, I don't even know what it is. Just click the link, you'll figure it out. You're smart. All right. Um, thank you very much for your attention. Thank you very much for your support and I'll talk to you next week.