May 7, 2020

Episode 97: Greg Zuckerman: Did Jim Simons (Renaissance Technologies) Solve the Market?

May 7, 2020

Today on the Rational Reminder Podcast we interview a seasoned journalist from The Wall Street Journal, Greg Zuckerman. With 23 years of experience with the media outlet, Greg has written extensively about the most prominent figures in the world of investing, including Jim Simons, John Paulson and Carl Icahn, generally focusing his attention on significant trades, traders and fund managers. In this episode, Greg shares how covering the stories of renowned investors and fund managers have influenced his investment philosophy. Specifically, we get into his book about John Paulson, The Greatest Trade Ever, and why Greg reckons Paulson never managed to achieve the same level of success following this famous trade. His work on the founder of Renaissance Technologies, Jim Simons, also produces fascinating points of discussion, including why their Medallion Fund became so successful and how capping the size of the fund contributed to its outstanding performance. Greg also talks about the idiosyncratic character of Simons, the role of luck, why taking an algorithmic approach to investing is likely to produce good outcomes in the long run, and why people should not always pay attention to the advice of “smart money” sources like hedge funds.

Key Points From This Episode:

How covering the stories of prominent fund managers has affected Greg’s investment philosophy. [0:03:27.1]
Thoughts on the likelihood of fund managers outperforming the market. [0:05:54.1]
Hear about John Paulson’s big trade and why he has failed to outperform since. [0:07:24.1]
Find out what made Renaissance Technologies’ Medallion Fund so successful. [0:11:25.1]
The role that capping the size of their fund has played in their ongoing success. [0:13:30.1]
More about Jim Simons: the mathematician with outstanding people skills. [0:14:46.1]
The influence that Simons personally had on the outcome of the Medallion Fund. [0:17:02.1]
The unpredictability of luck and intuition Simon’s relied upon in his early days of trading. [0:22:22.5]
George’s biggest surprise in writing the story and his general thoughts on market efficiency. [0:24:27.1]
Advice about investors making decisions based on the opinions of people like Buffett and Dalio. [0:28:06:7]
Algorithmic thinking and other lessons from working with Renaissance Technologies. [0:31:26.1]
Why the so-called “smart money” sources like hedge funds are not so smart. [0:34:28.6]
Learn how Greg became interested in Wall Street characters and how he gets access to their stories. [0:36:36.6]

Read the Transcript:

We're so happy to have you join us and get a chance to introduce you to our listeners. You've written about big-name fund managers like Jim Simons, John Paulson, Steve Cohen, George Soros and Carl Icahn, to name a few. Has the experience of covering these stories affected your own personal investment philosophy?

It has. I am restricted here at the Wall Street Journal in terms of what I can buy and sell, so we generally just stick to kind of mutual funds, that kind of thing, and index funds. But in terms of my philosophy, my understanding of markets and how they operate, I believe that markets have been more efficient. They're not entirely efficient, the reason why I get paid a salary is to find those who can locate inefficiencies, and there are some of those that exist.

But over time of covering markets and individuals and firms for 23 years at the Wall Street Journal, I do have an appreciation for how efficient the market has become, how much more challenging it is to outperform and to create this alpha. So on the one hand, I do find the markets have become more efficient; I also find that the ideas that emanate from Wall Street, from the best minds on Wall Street, are just not what they used to be.

I used to go to these meetings with billionaire-type hedge fund managers, and walk away just impressed in their understanding of markets, their unique ideas, things I hadn't heard before, different approaches to trading and such. It does happen still, but with less regularity. I sometimes will come away saying, I can't believe these people charge two and 20, and not just the returns, but even just the ideas they come up with.

So it's part of the reason why I wrote this last book, The Man Who Solved the Market, because here was at least somebody or a group of people that were able to justify the fees. But part of it is just getting older and more cynical and jaded, but yeah, I find it's hard to justify the fees, increasingly hard when it comes to Wall Street and financial industries' best and brightest.

It's interesting. So you covering these super-investors has resulted in you believing that the market is, at least for the purposes of the average investor, efficient enough that you should probably just invest in diversified, low-cost stuff, as opposed to trying to identify great managers. Is that an accurate statement?

Yeah, I mean, it's possible, and it's also possible to find niches out there. I wouldn't necessarily tell the individual investor not to invest in the market or the professional in a fundamental way. You've got to have some competitive advantage, and it's just hard to find. But hypothetically, you could be some doctor with a specialty and you focus on that kind of investing, you know the companies better than others, or you could be some kind of narrow type fund manager with that expertise.

I do think there are still possibilities to outperform, it's just harder than it used to be, and it just always was kind of hard. And from writing about these individuals, I do find that, as bright and smart and as competent as they are, they get it right barely more than 50% of the time. Even, you had mentioned this individual John Paulson, who I wrote a book about, it's called The Greatest Trade Ever, and I give him a lot of credit for making $20 billion over two years and anticipating the financial meltdown; he and his colleagues pulled off what was the greatest trade ever. But he's underperformed ever since, and I don't think it's because the greatest trade ever was some fluke of luck in any way.

I do think that there are temptations and distractions and tendencies that even the best investors succumb to; in this case, John Paulson got too big, and he started trading and investing in a way he hadn't before this trade, so you get away from what brought you there, kind of thing. That, to me, was at the heart of the mistake and his under-performance, not that, oh well, it was a one-hit wonder and he got lucky and geez, you should never give him that much credit for the original home run. No, it's that he no longer invests in that kind of way. I can elaborate and give you more details, but that's kind of my sense of things.

Yeah, if you could elaborate, that would be great. Maybe if you can talk a little bit about Paulson's trade and how he was able to pull it off, and then elaborate a little bit more on why he has not continued to outperform since.

Sure. So John Paulson and his colleagues are among the few who got it right, got 2008 right, anticipated the mortgage meltdown, but not only that, they got it right, they figured out a way to express the trade. That, to me, is much more impressive. There were a lot of people who were bearish about housing, and I wrote about them, I talked to them, but 99% of them couldn't figure out a way to make a lot of money from the meltdown. They either were too early or invested in the wrong things, let's say they shorted housing-related stocks, Fannie Mae, Freddie Mac, that kind of thing.

So what Paulson and Pellegrini and these others at his firm did was figure out the perfect trade, and that was buying these CDS contracts, which is just like insurance, they bought insurance on toxic mortgage product, and there was limited downside as a result. Frankly, that was his approach to investing historically, so he's a merger-arb, that sort of underlines the irony or the paradox of this whole thing. A merger-arb got the mortgage meltdown, the housing crisis right, it wasn't a mortgage expert, it wasn't a housing expert.

But it was somebody who, historically, had always had a strategy: his tactic was to buy investments with a limited downside and huge potential upsides. When he was a merger-arb, basically betting on merger stocks, he would get into situations where he would buy shares of companies that were already subject to a takeover offer. So in other words, these takeover offers usually go through, so his downside was limited. Worst comes to worst, most likely the company would be acquired, and his upside was huge because he would buy those that had a possibility of some third-party coming in and making a counter offer, a new offer, a big offer.

That was an interesting, nice way of investing, and it resulted in profits for him and his firm. And that's exactly what he did with the greatest trade ever. I called it the greatest trade ever partly because of how much money they made, but also partly because, again, it was a beautiful trade in that it had limited downside. They were buying CDS contracts, and the downside was the cost of the contracts, and it was like, 7-8% a year. Frankly, that was too much for a lot of investors I talked to on Wall Street. "Well, yeah, Greg, I think there's a huge, tremendous upside, but I can't be paying out money, I can't have a downside where I'm losing 7-8% a year."

That's sort of how Wall Street views these things; they don't want a negative carry, as they call it, where you're paying out. Not only paying out, John Paulson was like, wait, downside is 7-8%, but upside's three, 400 or more percent? Why wouldn't I do that trade? And he backed up a truck and did that, and that's why it's a beautiful trade. So in other words, once again, limited downside and huge potential upside, and that's a nice way to invest.

But after he made all this money, $20 billion, was lauded by me, by others as well, and become the preeminent hedge fund manager managing $35 billion, A, he got too big, and B, he got away from what brought him there. He became an investor like anybody else, sort of a more macro kind of investor. He's bidding on gold, bidding on silver, bidding on pharmaceutical stocks, bank stocks.

With all that stuff, there's upside ans downside. It's not that same strategy of limiting your downside and having unlimited upside. And I guess the larger point is that I see often, frankly, successful investors who get away from what made them so successful. Sometimes they get too big, sometimes they, like with Paulson, they adopt a different strategy. So once again, I don't believe Paulson was lucky with the greatest trade ever in any way. He made a brilliant trade, we can all learn from it, but the lesson also is to continue to do what got you there, as opposed to getting a little bit ... maybe it's hubris, maybe it's overconfidence. People are throwing money at you, you accept the money, you get too big, you have to embrace your second and third and fourth best ideas, instead of just your best idea.

So fascinating. So let's go from the greatest trade ever to arguably the greatest investor ever, which is Jim Simons of the Renaissance Technologies Medallion Fund, started your most recent and fabulous book.

Thank you.

So Ben and I both loved the book; can you describe what made that fund so successful?

Yeah. They are the greatest money-making firm in the history of modern finance. I use that word intentionally, because I don't know if you call them investors, they're short-term traders, they're not high frequency, but they're pretty short-term, and they're not traders, either. You think of that as more like a Wall Street function, some trader at a Wall Street firm, I just call them money-maker. But yes, 66% a year since 1988, he's worth $23 billion, this guy Jim Simons, and the question is, what's the secret sauce?

It's hard to summarize succinctly. I'll give you a bunch of things they do differently or better than everybody else: part of what they do is they don't anticipate where markets are going or where individual investments are going, they look for relationships, this is specifically on the equity side. So it's relationships among stocks, a group of stocks versus another group of stocks, group of stocks versus a factor model, an index, that kind of thing. That's just a different kind of way of investing.

They cap their funds at $10 billion, this is called the Medallion Fund, it's their key funds. That's helped them, so again, as opposed to John Paulson, who let his fund get up to $35-36 billion, the Medallion Renaissance has kept the Medallion Fund lower to $10 billion. And they hire differently than everybody else, they hire mathematicians and scientists, they look for repeating patterns. You can look at them as technical analysts to some extent, much, much more sophisticated version of that. They manage people much differently, I consider my book as much a management book as a trading or investment book.

They have a series of advantages over everybody else, and then that just kind of creates a steady stream of profits, it's not a crazy amount of gains, but yeah, steady stream of profits which they in turn leverage up. And because it's so steady and because they've got good relationships with Wall Street and because they trade so much, they can get really good pricing on their leverage. So that's a key part of it, too, they leverage up.

To summarize, that's kind of what they do better than everybody else. I wrote a long book which talks about a lot of these advantages, but those are some of them.

How important do you figure capping the size of the fund has been to their continued success?

I think it's huge. It wasn't an easy decision; they had to kick out loyal investors, and basically they only kept their own money and the money, a little bit of family and some friends. Most of the friends eventually got cut out, though. Some people will make the argument about my book, well, Greg, you write about a fund that's $10 billion in size, and you compare their performance to Buffet and Dalio and all these others who manage hundreds of billions of dollars, and I would counter by saying, no one forced Warren Buffet to let Berkshire Hathaway get so big or Ray Dalio or AQR. These firms and individuals could have capped their fund like Jim Simons did at $10 billion.

Now, Simons does leverage it up, as I said, so it gets to sometimes 10 times leverage, and that gets you $100 billion. But still, that's smaller than some of these other big firms we're talking about. So yeah, I do think, by limiting your size, you can focus on markets where you find performance, and others who embrace the bigger AUM, bigger asset under management, that strategy, they have to settle when it comes to certain markets and certain trades and not the best ideas, et cetera. So yeah, I think it's hugely important.

Talk to us about who Jim Simons is. He was a preeminent mathematician long before the fund was founded.

Yeah, it's kind of my contention that even if he had never traded or invested at all, he'd still be worthy of a book. As you said, he's a groundbreaking mathematician, he grew up in suburban Massachusetts, actually Newton, not too far out from the city itself, and was very adept at math and skilled, and it was his passion. He did MIT in three years, got a PhD at Berkeley, taught at MIT and at Harvard, and then he left to break code for the government during the Cold War. It's just a fascinating period of time.

He learned about algorithms, he learned how to create a secretive environment where people, they don't speak about what they do, what they're working on, to anybody on the outside, and also it's a very collegial environment as well. The mathematicians were all working together in an interesting way, and yeah, they go down in history as doing some really interesting work for the government. I talk about that a little bit in the book, but I found it sort of fascinating, I learned about that world.

Then he went on to run SUNY Stony Brook's math department and really turned that thing around, made it into a world-class department, and there he learned, during that tenure, he learned how to recruit and how to hire, how to lure people, how to woo them, how to convince people that weren't so interested in joining Stony Brook, wasn't a well-respected department at the time, somehow he got them to leave Ivy League schools to do so. And those were other skills he developed. He also did some math, some work that goes down in history, he's really among the most important geometers of the past 50-100 years. Some of his work is still relevant in math, but also in areas of physics.

So yeah, he's a really interesting guy. He's also interesting just because he does the math and he's a quant, but he also is somebody who is interested in people, he's outgoing, he drinks, he smokes like a chimney, and he's unique in that regard, because most people can do one or the other, they're either, I'm a people person kind of thing or a mathematician. The joke about mathematicians is an outgoing mathematician is one who stares at your shoes as opposed to his or her own shoes. But Jim Simons is not like that, so I found him quite fascinating as a character.

I think it's easy to jump to the conclusion that Simons' brilliance in mathematics is what has allowed the Medallion Fund to be so successful, but in reading the book I don't know if that's necessarily true. What role do you think Simons played in the outcome that that fund has gotten?

Yeah, so some people who've read the book criticized my portrayal in that ... as a neurotic writer, we're much more focused on the criticisms than on the compliments. So one of the criticisms is, well, Greg, the book's called The Man Who Solved the Market, but it wasn't Simons who really came up with the signals, as we call them, these breakthroughs to develop trades and the algorithms that really led to all the profits. The breakthrough was in 1996, where a couple of computer programmers and scientists from IBM came over and developed an equity trading approach that works.

There's just so much you can give Simons credit for, is the argument, and I would counter that by saying that Steve Jobs wasn't in the factory, coming up with the prototypes, he developed the architecture, the system that enabled the breakthroughs, and that's exactly the case with Jim Simons. He understands the math and works with those and asks really good questions, they give him a lot of credit, but his genius is managing genius, is the way it was described to me by somebody who's spent a lot of time there, and I understood that.

Frankly, as a writer, I was a tad disappointed; I was hoping Jim Simons ... I'd developed some scenes where he was responsible for the breakthroughs, and the scenes in the book, as those who have read it and those who will, it's a bunch of mathematicians and scientist characters, quirky, odd, unusual, colorful individuals, but Simons is usually not the one responsible. And yet people internally and people who have left don't in any way resent the fact that he makes about a billion dollars a year for hardly going into the office nowadays, because he made some really key important decisions along the way, when to pull back the system, when to not rely on models. Everything's about computer models, if they still do, 99% of the time, they let things ... they press the button and they let the trades go where they will, let the model go where it will.

But there's that 1% of the time when Simons says, no, I don't trust the model here, we're going to override it, and people internally give him a lot of credit for keeping the firm alive and going at those rare instances. So Simons, I do think should get an enormous amount of credit, but his colleagues too, that's why I focused on them as well.

One of the things that I found striking in the book was that 1% of the decisions that Simons made based on intuition, and that's mind-blowing to me, because it's all about the algorithmic trading and that's what's made them so successful in the long term. But how much of a role do you think luck on Simons' intuition played in their ultimate outcome?

It's a good question. In some ways, I regret how many scenes I have where Simons is pulling the plug or telling them to override the system, et cetera, just in that 99% of the time, that's not what happens over there, and especially after ... he's 81 now, and he's not running things day-to-day. Today, they rarely ever override a system, but as you say, some important times, they did. And I want to call it luck, but you need good luck, you need good fortune.

Listen, a lot of what I do for a living, in my books and at the Wall Street Journal as well, I write about the winners, and it's a self-selecting group. For everyone who wins or everybody like Jim Simons and his colleagues who make history, there's maybe 10 other people maybe had the same kind of approach and didn't have the same luck. So you need good fortune, I'd call it, as much as skill. And in life, you know, it's one thing I've learned as I get up there: at least 50% of success in life is good fortune and counting your lucky stars or thanking some being, whoever you are, however you deal with that kind of stuff. I mean, health, that's part of the good fortune. There's just so much you can do to increase your chances, but you need a lot of the good fortune, too.

So yeah, in 1996 they turned the corner, they figured out equity training, but they spent years struggling when it came to equities. Had they not figured out how to make money in stocks, they would go down as a successful hedge fund, they made good money in bond teachers and commodities and currencies, but they wouldn't be the greatest of all time in any way. So he gave his colleagues, he gave the people running the equity side of things six months, and he gave them a long leash, he was really patient.

Remember when we talked about earlier how he kicked out his outside investors; that helped, he has a structural advantage in that regard, because most others probably wouldn't have given them years to get this thing right. But even Jim Simons was coming to the end of the road, giving no more road left to his colleagues, and had he pulled the plug, again, history would've treated them differently. But he gave them another six months, and they figured it out.

Even how they figured it out, from the book, those who have read it, you guys read it, there was some luck there as well, because this guy David Magerman, who was close to being fired and really unpopular within the firm, a series of screw-ups, monumental screw-ups, letting a virus free within the firm, it's crazy. He's the one who said the mistake here, guys, in the programming, where a number wasn't being updated. It was static. He brought it to his bosses, and instead of just saying get lost, they could've done that. "David, we're about to fire you, I don't know we're going to take any advice from you," they said, "Hey, let's look into this," and he was right.

He figured out the glitch, so there's good luck there too. Had Magerman not stayed up late trying to turn his reputation around, maybe they wouldn't have found it. Or maybe they would've found it, but it would've been too late, kind of thing. Probably eventually would've realized they had this number that didn't screw up. So yeah, there's some important lessons there about life, too.

Unbelievable. I mean, those anecdotes are great, but even pre-Medallion, when Simons was just starting to trade and before they had any of the models, or at least not the robust models that they have now, Simons was just making bets, and he was winning, or he won enough to keep himself going. I just thought that was unbelievable, to look at what we can observe now as the ultimate outcome and to recognize that Simons had, early on, just some pure, pure luck.

Well, I wouldn't call it pure luck. He was a good trader using intuition, but your point is a good one that he is the preeminent quant. He is the role model for everyone, and just so your listeners are aware, quant trading is about 31% of all trading today, so everyone's going in that direction. And right, here he was the role model, and for years, for 12 years, from 1978 to 1990, he kind of went back and forth on how he should be trading, should he be using a mathematical model, should he be winging it, using intuition and judgment?

I mean, they had this red phone they set up at one point that rang whenever there was big market news, and they were going to try to trade before everybody else. It was kind of preposterous: the phone would ring, they couldn't find him sometimes, Simons was in the bathroom, the secretary would come in. "Hey, Jim, you got to come out, [inaudible 00:23:34]'s down 10%!" So not the most sophisticated approach to investing, and not quantitative in any shape or form. He did make a lot of money that way, but he gave back some of it and it just was hard on him emotionally, the ups and downs, as I'm sure people can relate to. It's hard, not everyone can handle that.

I mean, personally I always loved investing and trading and was going to go into it, and I don't have that temperament where I can handle the ups and downs. Not everyone does, and Jim couldn't. That's why, in part, why he developed mathematical models to trade autonomously, and so that he removed the intuition and judgment from the situation. I have to say, he's kind of proud at how well he did using his instincts. He made money with gold and silver, but it was hard on him, and it wasn't clear he could reproduce those and keep it going. So probably wouldn't have been able to.

What was your biggest surprise in pulling together this story?

There were a lot of them. Partly, it was the fact that it took so much tenacity and perseverance, because you look at those returns, 66% since 1988, and you figure, okay, this guy kind of figured it out, and these characters, these individuals, and the rest of history. But there were so many twists and turns and, as we said, serendipity, good fortune that was important. Smart decisions along the way, it could've gone in a different direction.

Also, the personalities: I was a little naïve coming into this, in that I'm not a math person, I don't know mathematicians, really. And naively, maybe, I kind of viewed them as focused on being rational individuals, focused on numbers, and you see they're as emotional and competitive and full of jealousies, the real, full behavior of characters that I hadn't expected and I appreciated. So I was relieved about that.

You mentioned survivorship earlier in our conversation, and you write about the winners. There's the famous quote from Fisher Black that the market appears a lot more efficient on the banks of the Charles than it does on the banks of the Hudson, referring to academia versus in practice. So being where you are, and you mentioned this earlier, you mentioned market efficiency earlier, but being where you are and seeing these winners, but also clearly being aware of the data in aggregate, how do you think about market efficiency in general?

So yeah, listen, I give a lecture at my alma mater, Brandeis University, not too far from the Charles near Boston, and I remember, it really struck me that when I went to school, it wasn't even questioned, the efficient market hypothesis wasn't even a hypothesis. I put it in a paper, I remember, here I came from growing up, I was trading, investing, and believed there were some inefficiencies, and you couldn't even suggest as much in a paper back in those days.

I'm not sure today about the world of academia, but yeah, that is the view of many in academia, that the markets are efficient. And frankly, I'm not saying I've come back to that view; as I said earlier, I think the market has become more efficient, it's not fully efficient, but yeah, even talking to the Renaissance people, I just heard a speech by the CEO last week, he thinks that markets are much more efficient than they used to be. It's just hard to digest information that's coming fast and furious, faster than it used to be.

On the one hand, markets are more efficient; on the other hand, we're looking at markets that are literally up and down thousands of points a day in different directions, and based on news, but not-so-convincing news, that it would justify as much.

So how does the track record of the Medallion Fund fit into some sort of framework of an efficient market?

They are among the view who are able to find those remaining inefficiencies, and the question is can they continue to do so as the inefficiencies shrink? Listen, there are inefficiencies, people like Jim Simons and his colleagues will continue to find them. The question is, are there enough out there for everybody or for all the investment firms out there? And you could argue that maybe they help make the market more efficient, potentially, in their fast trading and allocating capital where it should. They would probably pat themselves on the back and suggest as much, I'm not sure.

If we think about the average investor who sees these super-investors that you write about, they're kind of like celebrities in some circles, anyway. Medallion Fund and Jim Simons and Renaissance, probably less so because they're so private, but you think about people like Buffet and Dalio who are pretty public with their opinions and views. How much weight do you think the average investor should give to the things that Dalio and Buffet say? If Buffet's holding cash, should investors hold cash? If Dalio says get into gold, should investors get into gold?

Ah, it's a good question. So I think you can learn lessons from smart individuals in every walk of life. I try to, as part of this project, one of the privileges is I get to go out to Princeton University and talk to an 80-year-old mathematician who knows Jim Simons back in the day, and we talk about life. You can learn lessons, especially their area of expertise, so Buffet is worth listening to, for sure. And so is Munger, and they've got both investing lessons and life lessons and they're brilliant, and you can all learn from that.

But that said, Warren Buffet has underperformed the market for about 15 years. So you want to take everything with a grain of salt. I mean, Ray Dalio has this book out, Principles. I have it, I haven't read it yet, but I've heard many of those principles are contradictory. So they are convincing and intelligent, and then you read another one and you say, wait, hold on a second, don't they oppose each other? Aren't they in contradiction with each other? The second one is equally kind of brilliant and such.

So I guess my point, again, is that I think you don't want to do what they do, necessarily. But you can learn from them, there are important lessons. You just want to take everything with a grain of salt, and I guess what I took away from my experience, from the Renaissance experience, is the importance of having a system, having a set of rules, and that's true if you're an investor, but that's true in life, I think.

So again, they are a systematic investor, they have a group of rules and systems and they defer to them and they don't use gut intuition, judgments. One thing we've learned is that we humans are susceptible to all the behavioral mistakes: greed, fear, panic, just dumb stuff that we do time and time again. You want to fight that as much as possible, so I'm not saying that everybody has to be a quant. Not everybody can, and not everybody should.

But we should have a set of rules, and it's true in any walk of life. You can look at surgeons, you look at pilots, they have these checklists of the last few years that, even though a veteran pilot's like, I've done this a million times, I don't need no checklist, yeah, they've learned ... and surgeons too, that just forcing them to do these checks, yes, I've done this, yes, I've done that, before you take off, that kind of thing has been really helpful.

And yet you look in the White House, you look at areas of politics, and people are still sort of winging it, ignoring data, proud of their gut intuition, and it scares me as a citizen, frankly. So again, I'm not saying everybody needs to be a quant, but try to establish a set of rules and a system that can be calming for you and reassuring, you can rely on it, especially markets like we're going through today.

That's interesting. Do you think that applies in general? It's kind of like what you said with, my question about Buffet and Dalio, not necessarily do what they do, but take lessons from how they behave.

Yeah, I think so, I think so.

Yeah, it's interesting to think about.

We're not going to be as smart as they are, but we can take some lessons from what they do.

When you think about your experience with Renaissance and Jim Simons, algorithmic thinking is a big one, and I think I read an article that you wrote about some lessons to take away, that was one of them. Were there any other big learnings for you?

Oh, you don't want to go up against these guys, they're just too successful, too good.

Huh.

I mean, people don't really appreciate the type of talent they have there. They've got scientists and mathematicians who are groundbreaking in various fields, in physics and different areas of science and different areas of math, astronomy, et cetera. So these people are not just PhDs, they just led departments and they have groundbreaking stuff.

So you don't want to be trader or investor that's going up against them, and how do you avoid that? You become a longer-term investor, and you corner off a certain segment of your portfolio, which you'll trade and you'll play and you'll assume, like, you go to a casino, maybe I'll make some money, maybe I won't. I think I can beat the market. Fine, try it with a slice of your portfolio, that's fine, but not the heart of it, not everything.

Yeah, you're establishing some parameters, and you don't go up against these short-term traders. And that's one great thing, that the individual still has the ability to invest longer-term, and the pros still aren't doing that. They talk a big game, but they're the ones panicking and selling and buying on all the news, coronavirus and all that kind of stuff. So that's healthy.

I also think that individuals have learned the lesson. One thing I've learned from Wall Street is that everyone talks a big game, they say smart money. That's what I write about, I write about the so-called smart money. Well, the smart money has been investing in hedge funds for the last decade or so, and has underperformed. And when we're talking about pension funds, we're talking about insurance companies, talking about endowments, well-paid people, and part of it, I think, is just the ecosystem.

If you're an endowment or you're a pension fund, you are among others who invest the same kind of things, you all pay money to consultants to give you advice. Do you think the consultant's going to come back and say, yeah, I think you should allocate the beginning of the year, don't touch it for the whole year, or go into index funds? They're not going to do that. So the smart money has been burned time and time again by being fast traders or investing in expensive product, hedge funds and such, whereas the individual investor sort of gets it.

It used to be, I'm older than you guys, I'm sure, but I remember the late '90s. You go to a barbecue or a bar mitzvah or something, everybody's got their favorite stock, Cisco or Yahoo!, et cetera. Today, it doesn't really happen. Maybe Tesla or Bitcoin, but it's not as much, because the average guy or woman realizes that you can't do this market, it's really an efficient market, especially if you're not a pro and don't even try to beat them. We've allocated a 60-40, I've got 60-40 Vanguard funds, and it's after being burnt with active managers in my mutual funds.

We can't really trade here and we've got all these different restrictions, but I think the dumb money isn't so dumb anymore, and the smart money isn't nearly as smart as we suggest it is.

The data are pretty telling, in that the so-called smart money that you describe, the hedge funds, well, at least based on current history, is kind of dumb in that they're paying these crazy fees and they're not performing well. Why are they doing it? Why are the pension funds doing this? You kind of mentioned, but more specifically it'd be interesting to hear from you.

I mean, to be fair, you could also argue that we've been in a unique environment where the Fed and monetary policy generally has been so free with money for years now that you could argue, they would argue it's an unusual environment. And eventually, it will return to the norm, in which case the professional stock trader is going to do well. I would say there's something to be said for that, but it's more likely the fact that it's become just more efficient and it's just hard for the traditional, intuitive, smart, well-pedigreed trader type, hedge fund type, to beat the market.

The market's just gotten harder to keep up with, so why do they keep doing it? It's still sexy to invest in a hedge fund, these people are the best and the brightest, they go to the best schools, they present really well. They present really well, a hedge fund guy's never wrong. He's always ... invested just a little too early, maybe. There's always some explanation, and you come away, trust me, I deal with these guys 24/7, you come away kind of believing what they have to say.

They're well-meaning, I don't mean to suggest in any way these are bad people. Good people trying to make money for their clients, they just charge too much. If you're a professional on an endowment board, let's say, you're being paid really well, a pension you get pretty well, you're a professional investor, you get paid to allocate, you're not going to come back to your board and say, okay, my conclusion after weeks of research is to put our money in a Vanguard 60-40 fund. There's no way. They're going to be like, why are we paying you this salary? You're coming back to us with a 60-40 fund. There's no way you're going to justify your salary, and you can't justify your salary by saying, hey, I'm going to be in a 60-40 fund, sorry, guys.

That's always been Buffet's comment, that if you pay consultants to tell you to invest in fancy stuff, they're going to tell you to invest in fancy stuff.

Yeah, I forgot about that. That's a good point, yeah. That's very true. I believe that.

Can you share with us how you came to have such an interest in characters of Wall Street, and how do you get access to these people to tell such great stories?

So I've always been fascinated by business in general, I remember being a kid and looking at the back of a Skippy container, Skippy peanut butter and I was like, wait, there's no Skippy corporation, it's owned by some conglomerate, Procter & Gamble or whatever? And I was interested in how businesses come together and brands and products, and then I was fascinated by markets, the ups and downs and betting on companies.

Listen, I'm a sports person, I'm big into home runs and strikeouts, and that's sort of what I do for a living. So I write about home runs and strikeouts on Wall Street. I do other things, too, I write analytical pieces, I break news and such, but a lot of what I do is sort of home runs and strikeouts. Some people have called it financial porn; you can be dismissive about it, but I think there are lessons to be learned from the successes and failures of individuals and companies.

There's a lot of drama there too, and I don't know, life is short, so if I'm going to write about important topics, topics I think are important, business topics and such, I want it also to be fun. I'm a big believer in the whole Mary Poppins, spoonful of sugar helps the medicine go down, so I'm going to try to give you a fun read. I'm going to try to get at important topics where the world is moving.

I wrote a book about fracking and the environmental impact and the geopolitical impact, and I wrote about CDS contracts and the global financial meltdown in 2008, and I wrote a book, this current one is about how it's not just about investing and trading, it's also about how to manage employees, how to deal with this environment where we're politically split as a nation. That's what happened with this firm Renaissance, where some people got really upset that one of their co-CEOs was the most important reason why Donald Trump's in office.

So anyway, I try to get at important topics that are relevant to all of us through the people, through the characters, because I personally find characters, quirky individuals, fascinating. Not everyone does, and that's one of my advantages or differences with my colleagues; they do what they do really, really well. I happen to find characters, I like characters. Put me down at a bar mitzvah or something next to some dentist, I don't know, I'm sure the dentist has a really fascinating story, challenges they overcame, which I personally ... I'm selfish, in a lot of way I'm selfish, because I want to learn life lessons.

We've all had setbacks, we've all tried to overcome things or dealing with stuff right now, be it health, be it family, be it career, and changing industries, how do you adjust? What do you do, how do you deal with setbacks? There's a guy in my town who lost everything and had to rebound, and has done so successfully. I think I haven't lost everything, but we've all had setbacks. I want to learn, or maybe someday I can teach my kids.

So in a lot of ways, I'm just being really, really selfish and finding these characters because I want to hear their stories. But I'm a proxy for others, and I think maybe readers do as well. Some people like my style, some people don't, but that's my approach, trying to get at important topics and learn lessons through interesting, quirky, colorful individuals.

So I got to ask: I think you mentioned that you can't trade much, so you invest in a 60-40 Vanguard portfolio. Given the opportunity, knowing what you know about the Medallion Fund and Jim Simons and all the other characters in that story, given the opportunity, now the fund is closed and maybe you couldn't invest anyway because of your position with the Wall Street Journal, but given the opportunity, would you invest in Medallion Fund today? With a meaningful portion of your net worth.

So I'm a jaded, cynical journalist who's been at the Wall Street Journal 23 years, and I've written about the rise and fall of individuals, companies, big names. So my DNA is to say, oh, these guys are going to collapse. But I don't think they will. I think they've got something special, and there's a combination of lots of all kinds of little things that I write about in my book. So yeah, if I had the chance, I'd invest in Medallion for sure.

Could I be wrong? Definitely. Could they blow up tomorrow? For sure, easily. I don't think they'd blow up, the returns could get worse. But not only would I invest in Medallion, they do have now outside funds, they're available for institutions. They don't do as well, they don't do nearly as well. RIEF is one of them, and I'm not in any way advocating in any way that people should go out and put money in RIEF. Some people have been disappointed with RIEF for the other funds, but yeah, all things being equal, I think they've done a really good job.

Again, I come at this as a cynical, skeptical ... more skeptical, maybe, than cynical, journalist, but I come away pretty impressed. And I do have to say, making a contrast earlier to John Paulson, I say at the end of my book The Greatest Trade Ever, about John Paulson, that he's shifting into gold at that point after that trade, it's a very different trade. I don't come out and say he's going to blow up or he's going to underperform, but I may be wrong. I have to look at it again. I think I leave the reader questioning whether he can keep it going, whereas I'm more optimistic when it comes to Renaissance. But I could be proved wrong.

Interesting. And I guess it's a fascinating takeaway for the end investor, for the people listening, because with RIEF you can invest, but with Medallion, the one that's really killed it, even if we said, yeah, I want in, you can't.

Yeah, even his friends and family can't, so it's crazy, yeah.

Last question for you, Greg, is how do you define success in your life?

It's a good question. Being happy, doing something that brings you fulfillment. Me personally, I like to have an impact to some extent, highlight things that are going wrong that maybe can save people. I've written some stories that hopefully have helped people, I would say something about a company called Care.com, over the past year, a bunch of stories about this online site that wasn't properly vetting their caregivers, and they've changed their operation as a result of our stories, colleagues and I wrote these stories together. I'm proud of that.

Written some stories, I think, that maybe shed light on some individuals that have gone through some tough times and overcome some things. I wrote a couple books with my two sons called Rising Above, which are about sports stars who overcame challenges in their youth and how they did it. We're hoping to inspire young people and teach them some lessons, everybody's going through their own stuff. You'll hear that commenting, I guess, in things I've said today.

But trying to leave this world a little bit better than where we got it. It can be interpersonal, everyone does it in their own way, so successful teachers, successful doctors, you guys entertaining and informing, that's success. And treating people well, I guess that's the way ... I've never really thought about it, but that's the way I guess I would explain or define it.

It's a really good answer, and Greg, thanks for being willing to join us, and thanks for your book. We have recommended The Man Who Solved the Market in a prior podcast, so I know we've had many listeners read the book. We really do appreciate you joining us, thank you.

Sure, it was a lot of fun. These were interesting questions that I hadn't thought about before. Have a great day.