Reminds of the two bubble theory again…

Shout to Ritholtz.com.

An excerpt from: The Secret World of Jim Simons by Hal Lux:

Like all quantitative money managers, Renaissance aims to find small market anomalies and inefficiencies that can support profitable trading on billions of dollars of capital. Though all quant shops are alike in their dedication to models Let the best algorithm win! Renaissance’s approach differs from the “convergence trading” popularized by John Meriwether’s Long-Term Capital Management and similar arbitrage shops. Convergence traders price financial instruments based on complex mathematical models, find two different instruments that are cheap and expensive on a relative basis and then buy one and sell the other, betting that the prices will, at some point, have to return to their proper level. The Renaissance approach requires that trades pay off in a limited, specified time frame. And Renaissance traders never override the models. Back in action, Medallion made its mark through rapid, short-term trading across futures markets. “I have one guy who has a Ph.D. in finance. We don’t hire people from business schools. We don’t hire people from Wall Street,” says Simons. “We hire people who have done good science.” “We have three criteria,” says Simons. “If it’s publicly traded, liquid and amenable to modeling, we trade it.” Unusual for a hedge fund, the heart of Renaissance is not its trading room an uncluttered room where a score of traders buy and sell around the clock but rather an auditorium with exposed beams that seats 100 and features biweekly science lectures. Last month a molecular biologist presented research on colon cancer. “When you hear someone talk about an interesting use of statistics it helps trigger your thinking,” says one Renaissance employee.

I remember a few years ago, sitting in the private office of one of the best trend following traders around (performance and assets), talking about this very issue with him: how does Simons really trade?

He was not buying the ‘short term’ public facade.

More on Billy Walters.

Casino math (PDF) may be the most important wisdom you can know to be a successful trend follower. In fact, I feature much of this thinking in my documentary film.

I received an email today with the subject heading of:

The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History by George Zuckerman (it is a book)

The email said:

This guy made like $24B in two years. More than all the combined profits of all the trend followers in history. 100% based on the fundamentals. You’d gain even more credibility if you acknowledged that other strategies besides trend following make money.

This is quite possibly one of the most ignorant emails I have ever received. This emailer finds one guy who bet the ranch and won — a strategy that no one else has ever replicated — and that is proof positive of what? The great thing about trend following: There is NOT just one practitioner who made $24B. Don’t get me wrong I salute John Paulson and his brilliance to figure out this great trade as it is the stuff of legends, but trend followers are not about one trade. In looking into Paulson I found this note about his success at Portfolio.com:

Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?

Paulson deserves admiration. Period. If you hate Paulson’s success, you are a punk.

This comment made me respond this morning.

I know very few people who work for the “man” who become the “man”. Assuming that by working for the big guy that you will one day become the big guy is just that — an assumption. Keep that in mind as you think about any life endeavor and as you think about any reason why someone takes a “job” – PhD or not is irrelevant. Not all PhDs (and you only have to take a look at the academic world) are motivated entrepreneurial competitors capable of killing it in the real world. That’s not a knock against PhD degree winners, but it is also a proper reminder that a PhD doesn’t mean or guarantee squat.

On a personal note, back in the day, in my MBA program (not a great use of my time), there was the one guy who everyone (except me) worshiped. He got the best grades. He was awesome. To this day I still can’t figure out how all of my other classmates figured this guy’s grades would translate into success. It was crystal clear he had the social skills of mud. Fire in his belly? None. And where did he end up? On a campus (with his PhD now) teaching. Surprise, surprise, surprise…

I love it when people tell me the trend following ‘winners’ are the lucky survivors. In my humble opinion people who think like that are either ignorant in the short-term willing to learn/be corrected or, and I say this bluntly, losers in life unable to accept reality. If trend following winners are the lucky monkeys hitting the keyboards, than the king of the monkeys must be Warren Buffett. Buffett himself makes the case for why this is bullshit (there is no other word) in an excerpt from Snowball:

Part 1
Part 2
Part 3
Part 4
Part 5
Part 6

Book excerpt idea courtesy of BreakoutStocks.

Michael Lewis’ book Moneyball was great, but the big market clubs have closed the edge down.

All that brain power going to all the wrong ways to trade the markets. Reacting to market moves must not stimulate ‘em enough!

They play because of stories like this. An excerpt:

If this were a movie, nobody would believe it: A rancher struggling to eke out a living in one of the poorest corners of America claimed one of the biggest undivided jackpots in U.S. lottery history Friday – $232 million – after buying the ticket in a town by the name of Winner. Neal Wanless, 23, said he intends to buy himself more room to roam and repay the kindness other townspeople have shown his family. “I want to thank the Lord for giving me this opportunity and blessing me with this great fortune. I will not squander it,” he promised, wearing a big black cowboy hat and a huge grin. Wanless, who is single, lives with his mother and father on the family’s 320-acre ranch near Mission, where they raise cattle, sheep and horses. They don’t own a phone, a mobile home of theirs was repossessed last year, and records show they have fallen $3,552 behind in their property taxes.

And people will keep buying because of that story. When the next bubble starts…people will jump on board blindly under the same behavioral biases that drive the lottery player. Different name, same game.

It’s a good thing monkeys can’t gamble. New research shows these primates are capable of “woulda-coulda-shoulda” thoughts, like those that keep gamblers at the tables. Hmmm. Some people have questioned why I would cover the love affair with the lottery in a film about money and markets. Isn’t it obvious?