What can be learnt from the world’s most successful investor and trader? Jim Simons achieved an astounding average annual return of 66 percent from 1988 to 2018, before management fees. Contrast this with: Peter Lynch 29 percent, Warren Buffet 21 percent, George Soros 20 percent, and Charlie Munger 20 percent with the average annual return on the Standard and Poors index of 10 percent.
What can be gleaned from Simons, a math genius who solved this management problem? Given management involves unpredictable human behaviour, and all sorts of other variables, not everything can be solved by an algorithm.
How can a Non-Government Organisation (NGO) be made increasingly operational and financially sustainable? How can a bank introduce an innovative youthful product, that gobbles up profitable market share?
How can a State broadcaster turn around its fortunes by learning from Sun Tzu, by not competing head-on with market leaders? These are management quandaries that can be solved by not taking the more linear thinking, standard operating procedure.
Strictly a quant approach
Growing up, Simons was a math prodigy who was more concerned with Zeno’s Paradox than conventional matters. After receiving a doctorate in mathematics, he went on to teach at the Massachusetts Institute of Technology and work on secret code-breaking endeavours for the US government.
Getting bored, he turned his attention to investing in the financial markets. In the first two years, he used the traditional emotional instinctual approach to investing, while his hedge fund did well, he admits it relied on luck and it was emotionally draining.
The tipping point came when, going back to his academic roots, he took a strictly quantitative analysis approach, hiring physics and math PhDs, and not MBA business types. His firm Renaissance Technologies took a strictly ‘quant’ approach to the behaviours of financial markets, that act more like the weather systems.
Part of the effort involved computers, and machine learning, long before the current Artificial Intelligence craze.
Given the success of his firm and the Medallion Fund, his methods are a closely guarded secret, however, some leak out. In 2019, veteran Wall Street Journal reporter Gregory Zuckerman wrote: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.
Problem definition is everything
First Simons thought differently, not following the crowd, that takes the more traditional ‘study the company’, and markets, often instinctive ‘gut feel’ approach. His way of doing things is to only use math to recognise hidden patterns, in what to others, looks random.
Second – he defined the problem in his own way. “A well-defined problem is 90 percent solved” was Albert Einstein’s remark. Problem definition is everything. How one defines the business problem, how one structures thinking, what frameworks one uses, and sets out the possible solutions.
If you box yourself in to start, the possible solutions will be limited. What is required is inductive and deductive logic, blended with a dose of ‘out of the box’, more lateral creative thinking.
We tend to think in a linear ‘straight-line’ sort of way. Not because we think that will really solve the management problem, but more because it is easy to understand. Just look at a garden, a forest, a tea field.
If straight lines don’t exist in nature, why do we think that straight lines apply in management? Early in his career, Simons spent time applying math to objects with unusual shapes and surfaces.
It is useful to consider principles of quantum mechanics to approach business growth in a holistic and dynamic manner. Helps to see the business and the NGO - donor community as interconnected systems, an ecosystem.
Apply non-linear thinking: few things are straight line process. Embrace the idea that change occurs through non-linear, unpredictable shifts and transformations.
Is all of this easy ? No. Perhaps try to get one percent better each day, or week. If one had invested $ 100 (Sh13,400) in Simons fund 31 years ago, an annual average 66 percent return would generate $ 665,000,810.
