Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm, Renaissance Technologies.
Though he stepped down in 2021, I still think his legacy is fascinating, not just for its impacts on the Hedge Fund industry - but on trading as a whole.
He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors).
His background is impressive. Simons taught at Harvard and MIT and worked with the NSA. Here is a video where he shares some thoughts in a 2015 TED talk interview. It's worth a watch.
Despite advanced math still being a mystery to many, we rely on it more than ever as the foundation of many exponential technologies.
The Heart of AI is Still in Humans
Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).
This hits on something important.
Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.
Better Math is a Competitive Advantage - So is More and Better Data
We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data
– Jim Simons
On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors.
It is hard to have an edge if you use the same process and the same data as your competitors.
As the flywheels of commerce spin faster, edges will emerge and decay faster. Finding a solution is only a step in an ongoing process.
Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage. That implies that idea factories will become as important (if not more so) than factories that produce material products. Likewise, innovation funnels will become more important than sales funnels.
The world changes at the speed of thought ... and as technology continues to improve ... even faster.
Overall, markets improved, which is unsurprising after the year we had in 2022. With Energy seeing such a massive boom last year, it recessed a little, but real estate and technology both saw strong gains.
Here is a more global look at return by asset class.
Japan saw significant growth, partly driven by China’s Real Estate issues.
Oil, commodities, and Chinese equities all lost, but that loss in oil and commodities could be driven by China’s woes.
In 2022, I said it was unlikely that the trends would continue into 2023, which wasn’t much of a prediction ...
On one level, I try not to think about or predict markets, because I know better. On the other hand, it is an election year, and my opinion matters as a proxy for what people like me think or feel in an election year. So, with that in mind, I predict that we see a brief market correction blamed on various geopolitical instabilities and partisan weaknesses, followed by a long and steady push higher as we approach the November elections.
What do you expect for 2024?
Do you think the continued investment into generative AI will impact these trends?
I've been an entrepreneur ever since I can remember. I sold tadpoles and frogs in elementary school, colored sand terrariums in middle school, stereos and sound systems in high school and college, and I started a database development company in business school.
But it wasn't until the early 90s that I made being an entrepreneur my career.
I quickly realized I needed peer groups and advisors to help take my businesses to the next level.
Verne Harnish was one of the first people I found. I joined the Young Entrepreneur's Organization (but so many of us have lost our "Y" that it's now just called the Entrepreneurs' Organization.) Among many entrepreneurial endeavors, Verne founded EO, Gazelles (a global executive education and coaching company), and Birthing of Giants (now called the Entrepreneurial Masters Program at MIT).
I was recently at a party with him in Arizona. While there, I asked him, "What's changed about entrepreneurship over the last 30 years?". Here is a short video with his response.
I was happy to hear that the answer was "Nothing". While the hot industries, technologies, and players have changed, many of the winning principles are timeless.
This is a helpful reminder that, even when innovating, we should focus on what doesn't change - rather than what does.
I shared an article titled “Who’s The Most Innovative?” a few weeks ago. That post alluded to the power of patents. Here, we'll discuss the importance and value of intellectual property in more detail.
Historically, profitable companies often built or sold some tangible product. Consequently, the Titans of industry were automobile manufacturers, oil producers, landowners, etc.
However, over the past 20 years, the Titans have changed dramatically. Now, the leaders are in tech, intellectual property, and other intangible assets.
As business becomes more digital, you will see an increasing shift towards creating and protecting intellectual property.
When most people hear that, they probably think about patents. So, let's start there.
A patent is property ... meaning it is an asset. Technically, it is a legal right granted by the government to an inventor, giving them the exclusive right to make, use, sell, and import an invention for a limited period (typically 20 years from the filing date) in exchange for public disclosure of the invention. To obtain a patent, an inventor must apply and prove that their invention is new, non-obvious, and useful. In addition, the application process involves disclosing the details of the invention so that others can learn from it.
Patents and trademarks are a great way to build a moat between you and your competitors ... but they’re more than that. They help you create partnerships and an ecosystem. Ecosystems & communities have proven to be the difference between legacy businesses and flash-in-the-pans. It’s the difference between having a product and having a platform.
Patents add dimensionality and revenue streams.
Take Tesla. They’re not just in the business of making cars or pushing the proliferation of electronic vehicles. They’re creating a suite of capabilities that are patentable and licensable. In the future, they can license the self-driving capability (because why would someone build it when they can license it?). They can license the ability to update a car’s operating system over the Internet (or by their Starlink Satellite offering). They can also grow into a clean energy business. I’m sure there are other strategic byproducts I’m missing – but you get the idea.
As they develop these tools and create intellectual property, these same inventions can also become a weighing and measuring tool to find out where people are interested, and identify where people are spending time, money, and energy. Here is a 60-second video that explains the concept.
Patents make the intangible, tangible.
They provide a concrete form to innovative concepts, enabling businesses to protect and capitalize on their intellectual property.
This mindset also creates the infrastructure for change and anticipating future needs, and ensures companies remain adaptable and positioned for long-term sustained growth.
Getting Started
When I help people understand how to move forward with AI, the first thing I ask them is “What’s your why?”. I ask that because as soon as you lose sight of why you built your business in the first place, you’re lost.
After you understand yourself and your business, you have to understand the industry-wide ecosystems, and where the low-hanging fruit are.
If you know the low-hanging fruit, your problem statement, your value proposition, and your “why” you’re in a great place to move forward.
You can use that understanding to stack some easy wins and create bandwidth for larger endeavors.
The effort-to-impact ratio is a great way to think of how you get started. As you begin thinking about staking ground, you don’t want to do the flashy and cost-intensive stuff first. You want to keep a low profile and start to create walls that will help you in the future.
You can use trade secrets, instead of patents, when you don't want to disclose what you do and how you do it. A trade secret is any non-public information that provides a business with a competitive edge and is subject to reasonable steps taken by the business to keep it secret. The protection of trade secrets does not require registration or disclosure to the public. The information remains protected as long as it is kept secret and continues to provide a competitive advantage.
You can also use your intellectual property as part of an attraction strategy to find potential partners or collaborators – creating what Dan Sullivan calls the “Freezone Frontier”.
Final Thoughts
In essence, patents are not just legal safeguards—they are strategic instruments that can shape the future trajectory of businesses. By embracing a holistic approach that combines legal protection, market intelligence, and strategic foresight, companies can harness the full potential of patents, unlocking new dimensions of success in an ever-evolving business landscape.
I just shared an updated article on the difference between Skill and Luck.
Serendipitously, this article showed up in my feed from 2012. Instead of updating it, I want to share it as I wrote it, because it's still relevant, and it might lose some of its magic if I update it.
So, here it is:
________________
Title: Some Thoughts On Whether Luck Is Something You Create
Date: November 3rd, 2012
Doing the same things, the same ways, has predictable results. Sometimes, it is important to do things differently.
Here is a photo of me at the National Society of Black Engineers' Professional Development Conference, where I had the opportunity to present and participate in several panel discussions.
I'm neither black, nor an engineer, and they aren't traders; so why would they ask me to present... and why would I say yes?
Value is often added at the edges. Likewise, good things often happen when you travel outside your comfort or habit zone.
I gained a lot from the experience. For example, I had a discussion with a nuclear physicist who talked about how they use computer simulations to model the effects of a nuclear explosion. That gave me great ideas about how to measure the effect of a particular trading system or algorithm on a market.
Luck does favor the prepared. That conversation could just as easily have been me simply saying 'hello,' shaking hands and moving on to the next person. To some extent, the ability to take advantage of opportunities comes from the intent to find them.
Is Luck Something That You Can Maximize, Or Would You Consider It Random?
It's possible that luck is both random and something you can maximize.
Here is an example. Many people consider the stock market to be random. Nonetheless, there are groups of people who consistently beat the market and trade profitably. How is that possible?
To explain, let's examine the decision to purchase Apple Computer stock. Regardless of whether that decision was based on gut instinct, fundamental analysis, or a technical chart pattern ... whether the price moves up or down the moment after that purchase is for the most part random.
However, if you make 10,000 trades over time, then your ability to make and keep money is about how you manage risk and opportunity. At that point, your system is not necessarily random. Consequently, it is something that you can improve.
Transform Results By Getting Un-Stuck.
Improvement means getting better and different results. And, as you already know, it doesn't make sense to continue to do the same thing, yet expect different results. So, a key skill is learning to recognize when things are "stuck" in a rut.
The trouble with many "ruts" is that you don't know you're in one, while you're in one. Consequently, it often takes a different perspective to become aware of new possibilities, opportunities, or best next steps.
Implications.
The interesting thing that this implies is that those opportunities were always there ... they just weren't there for you in your current state of awareness.
Similarly, recognize that many of the processes that we rely on limit our "luck" or opportunities precisely because they limit our choices. When this is done consciously it can be helpful. However, when it's an unconscious act, it can be dangerous.
In general, you can categorize many tools as either being multipliers or diminishers. Neither one is good or bad in and of itself. The trick is to recognize that you have a choice and that not choosing is still a choice.
Innovation means a lot of different things. It changes based on where we are in history, the amount of time we're considering, and the scale.
Language was an innovation, the piece of plastic on the edge of your shoelaces was an innovation (called the Aglet), changing time signatures in music was an innovation in history, and so is artificial intelligence.
Defining and measuring innovation is difficult even in your business ... but the Global Innovation Index attempts to do it globally. It does so by measuring several factors, like:
Knowledge and Technology Outputs - patents & high-tech manufacturing
Human Capital & Research - number of researchers & global corporate R&D investment
Business & Market Sophistication - knowledge-intensive employment & financing/VCs for startups
Creative Output, Institutions, and Infrastructure - trademarks, access to resources, and policy
By this metric, Switzerland and Sweden take the top two spots - followed by the U.S. and the U.K.
Honestly, the list surprised me some. Some names I expected to be on the list - or higher on the list - didn't crack the top ten. Though Switzerland and Sweden have dominated this list for many years.
A topic I'm very passionate about right now is patents - and how valuable they can be to your business. Here's a previous article I wrote on the subject, but I'll revisit it soon with new ideas and distinctions.
In 2016, I wrote a variation of this article focused on trading ... but it's even more relevant today as I spend more time talking with entrepreneurs and AI enthusiasts.
There are many lucky people in the business world. Perhaps they made a good decision at the right time – and are now on top of the world. There's nothing wrong with luck. But, the goal is to make sure your success isn't predicated on it. Why? Because you might get lucky once, but it's unlikely you'll get lucky every time.
Luck favors the prepared ... and those who understand the difference between skill and luck.
First, let's talk about luck. Think about a nationwide coin-flipping contest. Initially, each citizen is paired up with another for a contest. The winner goes on to the next round. Think how many rounds you would need to win to be City Champion, State Champion, Regional Champion, etc.
At the end, someone would have won many coin-flip contests. Assuming they didn't cheat, they were lucky ... but does the winner have an edge? If so, what could it be?
If you followed the contest from beginning to end, I'm sure you could imagine the finalists doing articles or interviews about how their mindfulness practice gives them an edge ... Or, the law of attraction .... Or, how the power of prayer is the difference.
Meanwhile, sometimes, the most straightforward rationale provides the best explanation. Somebody had to win that contest – and luck was the reason.
Finding The Edge
Likewise, just because a product or business makes money doesn't prove it has an edge. For example, at OpenAI's Developers Conference last week, they announced several new models and internally created tools that cannibalize or obsolete many tools or businesses built on their platform. Meanwhile, they also announced several new models and tools that will help create new businesses. But, the app developers who have been made redundant are out of luck.
I saw the same thing with the rush of .com companies in the late '90s. The ones that made it are now the underpinning of a new era, but they climbed out of a sea of failed businesses that might have even been better businesses - they were just unlucky (e.g., Betamax vs. VHS).
Simply relying on whether something is profitable NOW means you have both the chance that you have an edge - and also that you got lucky.
If it isn't just a matter of winning, how do we know if we're skillful? In trading, we would call this alpha. We are searching for clues to help find systems with an edge ... or at least have an edge in certain market conditions.
Unfortunately, I can't give you the one rule to follow to identify skill vs. luck, but it's much easier to find the answer if you're asking yourself the question.
Internally, we've built validation protocols to help filter lucky systems and systems that can't repeat their results on unseen data.
It is exciting as we solve more of the bits and pieces of this puzzle.
What we have learned is that one of the secrets to long-term success is (unsurprisingly) adaptability.
What that looks like for us is a library of systems ready to respond to any market condition - and a focus on improving our ability to dynamically select the systems that are "in-phase". The secret isn't predicting the future, but responding faster - and more reliably - to changing environments.
From a business perspective, this looks like being willing to adapt to and adopt new technologies without losing track of a bigger 'why' like we talked about in last week's article.
A Practical Example
When we first wrote on this, one of Capitalogix's advisors wrote back to see if they understood the coin-flipping analogy.
The odds of flipping a coin and getting heads 25 times in a row is roughly 1-in-33 million. So if we have 33 million flippers and 100 get 25 heads in a row, statistically that is very improbable. We can deduce that group of 100 is a combination of some lucky flippers, but also that some have a "flipping edge." We may not be able to say which is which, but as a group our 100 will still consistently provide an edge in future flip-offs.
Well, that is correct. If we were developing coin-flipping agents, that would be as far as we could go. However, we are in luck because our trading "problem" has an extra dimension, which makes it possible to filter out some of the "lucky" trading systems.
Determining Which are the Best Systems.
There are several ways to determine whether a trading system has a persistent edge. For example, we can look at the market returns during the trading period and compare and contrast that with trading results.
This is significant because many systems have either a long or short bias. That means even if a system does not have an edge, it would be more likely to turn a profit when its bias aligns with the market.
You can try to correct that bias using math and statistical magic to determine whether the system has a predictive edge.
It Is a Lot Simpler Than It Sounds.
Imagine a system that picks trades based on a roulette spin. Instead of numbers or colors, the wheel is filled with "Go Long" and "Go Short" selections. As long as the choices are balanced, the system is random. But what if the roulette wheel had more opportunities for "long" selections than "short" selections?
This random system would appear to be "in-phase" whenever the market is in an uptrend. But does it have an edge?
One Way To Calculate Whether You Have An Edge.
Let's say that you test a particular trading system on hourly bars of the S&P 500 Index from January 2000 until today.
The first thing you need is the total net profit of the system for all its trades.
The second thing you need to calculate is the percentage of time spent long and short during the test period.
Third, you need to generate a reasonably large population of entirely random entries and exits with the same percentage of long/short time as your back-tested results (this step can be done many times to create a range of results).
Fourth, use statistical inference to calculate the average profit of these random entry tests for that same test period.
Finally, subtract that amount from the total back-tested net profit from the first step.
According to the law of large numbers, in the case of the "roulette" system illustrated above, correcting for bias this way, the P&L of random systems would end up close to zero … while systems with real predictive power would be left with significant residual profits after the bias correction.
While the math isn't difficult … the process is still challenging because it takes significant resources to crunch that many numbers for hundreds of thousands of Bots.
The good thing about RAM, CPU cycles, and disk space is that they keep getting cheaper and more powerful.
Conclusion
It is relatively easy to measure the wins and losses (and luck versus skill) of trading systems. It can be complicated, but ultimately, it's just math. The logic of the example also applies to adopting technology, starting a business, or transforming from a product-based to a platform-based business model, etc.
In most situations, the secret is to figure out what data is incumbent to your industry as well as what data you're creating. Figure out how to analyze it. Figure out how to do that consistently, autonomously, and efficiently. Then ... test.
It's not sexy, and it's not complicated.
We live in a ready, fire, aim era. The speed of innovation is staggering, and the capital and energy needed to create an app or start a business is less than ever before ... and a bias for action is powerful.
Luck and a bias for action will take you further than most - but it still won't take you far enough.
So, I'll leave you with the question...
If you're reading this, you've almost certainly been lucky ... but have you been skillful?
In 2018, the local news did a brief story about Capitalogix - centered around finding tech talent ... and how hard it can be.
It has only become harder since then. In part because of the growing demand for tech talent ... and in part because success today requires a higher level of mathematical, statistical, and innovative problem-solving talent than ever before.
And that's only part of the reason that I'm proud of our team!
The robots aren't coming for our jobs. We're creating the robots, the AI, and the automation.
The secret to great AI is that it still has a heartbeat.
It's not enough to invest in the right ideas or technologies. You have to invest in the right people as well.
"Standing still is moving backward ... so you don't only need new technology, you need a new level of data scientists – a new level of professional that can think about what's possible, rather than how to do what we want to do right now."
Even though we've got an incredible edge now. I recognize that edges decay faster than ever. The trick is to stay ahead.
I can predict that the future is bright ... And I know that the best way to predict the future is to create it.
I tend to focus on the themes that are impacting industry and the world ... but when I started this blog back in 2008, I was much more focused on investment themes ... why were markets doing what they were doing, both on the micro and the macro scale?
Based on data from Morgan Stanley, visualcapitalist just put together a chart that looks at the key investment themes from each decade since 1950. It's a great retrospective.
In the 1950s, we saw a post-war boom in European stocks, followed by a shift into "blue chip stocks."
When I grew up, my grandparents advocated for blue chip stocks, and they held their investments until the day they died ...
By the 1990s, when I started paying attention to markets, tech startups were taking over, and stocks weren't primarily held for years and years. Instead, they were getting calculated in weeks and months; people were trying to capitalize on a "quick trend."
Now, a quick trend can last under a day, and the average holding time for a stock (based on trading volume) is calculated in seconds.
Where will investments go in the '20s? We're currently seeing massive investment in tech, specifically the platforms that enable burgeoning tech, like NVIDIA. We also see a disconnect in U.S. equity markets, with 43% of global investment, but 26% of the world's economic output.
I think that, plus the growth in emerging markets, will result in a massive shift. Time will tell.
We're now midway through the Cowboys Season, and despite injuries plaguing the team, we just had a fantastic 43 - 20 victory over the Rams.
At every game, I run into this guy, and every game he wears a different creative, and well-thought-out costume. He sits on the 50-yard line. He wears Ferragamo shoes and a nice watch. For his day job, he is the Head of Psychiatry at a well-known hospital in the area. Yet, something about this game captures his imagination.
Jerry Jones does a lot right in how he builds his "Disney Ride." But this post will focus more on what the coaches and players do.
I'm regularly surprised by the levels of innovation and strategic thinking I see in football.
Football is something I used to love to play. And it is still something that informs my thoughts and actions.
Some lessons relate to being part of a team, while others relate to the coaching or management side of things.
Some of these lessons stem back to youth football ... but I still learn things watching games – and even more, from watching Dallas Cowboys practices at The Star.
Think about it ... even in middle school, the coaches have a game plan. There are team practices and individual drills. They have a depth chart, which lists the first, second, and third choices to fill certain roles. In short, they focus on the fundamentals in a way that most businesses don't.
The picture, below, is of my brother's high school team way back in 1989.
To re-state, most businesses are less prepared for their problems than an 8th-grade football team. Now, that might sound offensive to some of you – but if you think about it ... it's pretty accurate.
Losing to an 8th Grade Team
I shot this video right before the COVID-19 shutdown. I encourage you to watch it. I think it's 3 minutes well spent.
Football teams think about how to improve each player, how to beat this week's opponent, and then how to string together wins to achieve a higher goal.
The team thinks of itself as a team. They expect to practice. And they get coached.
In addition, there is a playbook for both offense and defense. And they watch game films to review what went right ... and what they can learn from for use later.
Contrast that with many businesses. Entrepreneurs often get myopic ... they get focused on today, focused on survival, and they lose sight of the bigger picture and how all the pieces fit together.
The amount of thought and preparation that goes into football - which is ultimately a game - is a valuable lesson for business.
What about when you get to the highest level? If an 8th-grade football team is equivalent to a normal business, what about businesses that are killing it? That would be similar to an NFL team.
Let's look at the Cowboys.
Practice Makes Perfect
How you do one thing is how you do everything. So, they try to do everything right.
Each time I've watched a practice session, I've come away impressed by the amount of preparation, effort, and skill displayed.
During practice, there's a scheduled agenda. The practice is broken into chunks, and each chunk has a designed purpose and a desired intensity. There's a rhythm, even to the breaks.
Every minute is scripted. There's a long-term plan to handle the season ... but, there was also a focus on the short-term details and their current opponent.
They alternate between individual and group drills. Moreover, the drills run fast ... but for shorter time periods than you'd guess. It is bang-bang-bang – never longer than a millennial's attention span. And they move from drill to drill – working not just on plays, but also on skillsets (where are you looking, which foot do you plant, how do you best use your hands, etc.).
They use advanced technology (including advanced player monitoring, biometric tracking, and medical recovery devices ... but also things like robotic tackling dummies and virtual reality headsets).
They don't just film games, they film the practices ... and each individual drill. Coaches and players get a cut of the film on their tablets as soon as they leave. It is a process of constant feedback and constant improvement. Everything has the potential to be a lesson.
Beyond The Snap
The focus is not just internal, on the team. They focus on the competition as well. Before a game, the coaches prepare a game plan and have the team watch tape of their opponent in order to understand the tendencies and mentally prepare for what's going to happen.
During the game, changes in personnel groups and schemes keep competitors on their toes and allow the team to identify coverages and predict plays. If the offense realizes a play has been predicted, they call an audible based on what they see in front of them. Coaches from different hierarchies work in tandem to respond faster to new problems.
After the game, the film is reviewed in detail. Each person gets a grade on each play, and the coaches make notes for each person about what they did well and what they could do better.
Think about it ... everyone knows what game they are playing ... and for the most part, everybody understands the rules and how to keep score (and even where they are in the standings). Even the coaches get feedback based on performance, and they look to others for guidance.
Imagine how easy that would be to do in business. Imagine how much better things could be if you did those things.
Challenge accepted.
And, in celebration of a Cowboys win ... here's me doing a cartwheel. I'm sure my body will feel great tomorrow ...
A Look At Jim Simons & Renaissance Technologies
Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm, Renaissance Technologies.
Though he stepped down in 2021, I still think his legacy is fascinating, not just for its impacts on the Hedge Fund industry - but on trading as a whole.
He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors).
His background is impressive. Simons taught at Harvard and MIT and worked with the NSA. Here is a video where he shares some thoughts in a 2015 TED talk interview. It's worth a watch.
TED via YouTube
Despite advanced math still being a mystery to many, we rely on it more than ever as the foundation of many exponential technologies.
The Heart of AI is Still in Humans
Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).
This hits on something important.
Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.
Better Math is a Competitive Advantage - So is More and Better Data
On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors.
It is hard to have an edge if you use the same process and the same data as your competitors.
As the flywheels of commerce spin faster, edges will emerge and decay faster. Finding a solution is only a step in an ongoing process.
Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage. That implies that idea factories will become as important (if not more so) than factories that produce material products. Likewise, innovation funnels will become more important than sales funnels.
The world changes at the speed of thought ... and as technology continues to improve ... even faster.
Onwards!
Posted at 06:13 PM in Books, Business, Current Affairs, Ideas, Market Commentary, Trading, Trading Tools | Permalink | Comments (0)
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