Jim Simons' System for Work and Life

Even in his day-to-day life, Jim Simons had a system...

Simons was known as a pioneer of quantitative investing... meaning he built computer models to tell him where to put his money.

Before entering the markets, Simons worked as a government codebreaker in the 1960s. He used what he'd learned from cracking codes to look for patterns in the markets and human behavior.

The thing is... before he started his first fund, Monemetrics, he had never taken a finance course. He'd never even really traded at a high level.

Simons launched Monemetrics in 1978 with mixed results. His first model wasn't sophisticated, and he had to override a lot of its decisions. His turnaround came in 1988, when he launched the Medallion Fund.

Medallion went on to outpace all other funds in the past three decades, with 66% average annual returns.

Simons' approach mostly relied on complex models. Those models helped make him one of the greatest investors of all time. And yet, he still had a healthy respect for the more "fundamental" stock-picking approach.

Many of the greats used it to make their billions, after all.

Simons died on May 10 at age 86. There's little doubt in most folks' minds that the financial world lost a master investor.

So today, I want to discuss another system Simons relied on throughout his life – what he called his five "guiding principles"...

You don't need to be a math whiz to put Simons' five principles into practice...

That's the beauty of them... they're so versatile, they can be applied to almost any scenario.

As it happens, that's also one of the principles...

Be guided by beauty.

To Simons, this guideline meant making his investing algorithm beautiful. The Medallion Fund lost money in 1989. Simons wasn't satisfied with that. As he liked to say, "there's a sense of beauty when something is working well."

He shut down trading for six months to rebuild the model in a more "beautiful" way, meaning it worked better... and he never had another down year.

Of course, I'm not suggesting everyone should attempt to build a complex investing model. Simons was a one-of-a-kind talent.

Everyday investors can still put this principle into action, though.

A lot of the best businesses could be considered "beautiful." For instance, Nvidia (NVDA) built a beautiful business model by making the gold-standard programming platform CUDA... then requiring that people buy its chips to run it.

Regular readers know we think the market has caught on to much of the Nvidia story already. That said, there are other businesses with beautiful qualities within today's top trends.

These are the stocks that should be filling your portfolio.

Talk of trends brings us to Simons' next principle...

Do something new... Don't run with the pack.

You can't beat the market by doing what everyone else does. If you could, the market would be filled with "greatest investors of all time."

The actual greatest investors of all time took the calculated risk to do something different... They found opportunities that everyone else was missing.

If the pack is moving in a straight line, it's not necessarily the wrong path. That said, the best investors are okay with diverging. They're not afraid to be original.

When everyone was focused on stock-picking, Simons used his own values and background to create a quantitative strategy. By combining the two, he outpaced the market... year after year after year.

He diverged from that line. And he used his creativity to make his own way to the top.

Simons also knew better than to totally ignore those around him. That's why he said you must surround yourself with the smartest people you can find.

That could look like getting advice from folks with a lot of market experience... or even top-tier investors like Simons himself.

It also applies directly to your investments. Knowing who you're investing in is just as important as knowing what you're investing in.

Apple (AAPL) is a great example of this principle in practice. The Big Tech giant had the best creative team for decades. Apple invested in its people... and the market rewarded it.

That's what led shares more than 1,000% higher in the past decade-plus. (It's also why we're keeping a close eye on Apple today. This innovator has been bleeding top talent for the past several years.)

And the last two principles go hand in hand...

Don't give up easily and hope for good luck.

You might find a beautiful business with excellent management and a top-notch value proposition. And yet, maybe the market just isn't pricing this opportunity to grow.

That doesn't mean your research is irrelevant. You're there before the pack has even caught on. So stay patient while the market is irrational. Stocks won't move right away... and the market may just need time.

Investors are bound to notice a strong business eventually.

Luck plays a part in that, too. When everything else is in place, you have to hope you got lucky enough for the timing to line up.  

On the flip side... at the end of the day – be it in work, life, or investing – you can do everything right and still have bad luck.

It's important to recognize that luck won't always go your way. All other things being equal, you're often just as likely to buy a stock at a good time as you are at a bad time.

Even if you got everything else right, you need to be willing to respect your luck. Have an exit plan in place. If you bought at a bad time, stick to that strategy and be ready to walk away.

There was nobody like Jim Simons – and there likely never will be again.

However, by putting his five guiding principles into practice, we can honor his investing legacy... and lift our portfolios in the process.

Wishing you love, joy, and peace,

Joel
June 7, 2024