Speaker 1:
From the library of the New York stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the Ice House. Our podcast from intercontinental exchange on markets, leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism, right here, right now at the NYSE and at ICE exchanges and clearing houses around the world. Now welcome inside the Ice House, here's your host, Josh King of Intercontinental Exchange.
Josh King:
Past performance is no guarantee of future success. It's the familiar boiler plate language of any investment prospectus, and it's a good, solid practical piece of advice. I mean, who has a crystal ball? Who can divine the future? But what if the future doesn't really matter? There can be a glowing government jobs report or a gloomy one. There can be fighting on the border between Turkey and Syria or a ceasefire could hold. These can be market moving events in the future, or maybe they don't matter as much as past patterns, how well those patterns are cleaned and scrubbed and mathematically analyzed, and how algorithms are designed to trade, to buy and sell against them. Whether it's cocoa, coffee, sugar, potatoes, interest rates, or cash equities. Yeah. Past performance is no guarantee of future success.
Josh King:
Tell that any investor in the Medallion Fund of Renaissance Technologies, the under the radar outfit run by mathematician Jim Simons and his team since 1988, that since then has generated average annual returns of 66% creating trading gains of more than 100 billion. Evens subtracting Simons' 5% management fee and 44% performance fee, the returns that investors have been able to achieve in markets that go up and markets that go down as treasury secretary Bob Rubin used to say has exceeded the likes of George Soros, Steven Cohen, Peter Lynch, Warren Buffett, and Ray Dalio, making the secret of Simons' the most successful money maker in the history of modern finance.
Josh King:
So much of Jim Simons' success has been based on secrecy in operating beyond the gaze of a financial press that has put people like Lynch, Buffet and Dalio on the covers of magazines and books, Renaissance Technologies? Who's heard of that? I did only by accident when a friend went to work for a subsidiary company about a decade ago. Now, thanks to Gregory Zuckerman of the Wall Street Journal, a lot more people will be hearing about the improbable story of a boy who grew up in my hometown of Newton, Massachusetts, trying to earn spending money, so lost in thought about math, that he misplaced sheep manure at his job at a local garden store. His punishment, just sweep the aisles young man, a perfect job for a genius who just needed more time to think.
Josh King:
That thinking with many fits and starts ultimately resulted in the returns I've described. The unlikely journey of the founder of Renaissance Technologies and his band of not so merry mathematicians, our conversation with Gregory Zuckerman author of The Man Who Solved the Market, how Jim Simon's launch the quant revolution right after this.
Speaker 3:
It's more than an iconic building or a global financial marketplace. It's anywhere technology, commerce and people intersect, the innovation that makes people's lives better. Dreams that were once impossible are now realities at the New York Stock Exchange we help tech companies flourish and change the world. So go ahead, bring those ideas to life, we'll bring it to market. We are living tech.
Josh King:
As a 23 year veteran of the Wall Street Journal and winner of the Gerald Loeb Award, the highest honor in business journalism, not once, not twice, but three times, it certainly warrants the title special writer. Previously, Greg penned the Journal's Widely Read, Heard on the street column and also Cover the Credit Markets. Today, he covers biggest financial firms in the country and the personalities leading them as well as hedge funds, the energy revolution and a range of other business and investing topics. Greg's had a front row seat to some of the biggest financial shakeups and successes over the past two decades. Some of which he's turned into books, including The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, and The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters.
Josh King:
Greg and his two sons have also published two books, Rising Above: How 11 Athletes Overcame Challenges in Their Youth to Become Stars, and Rising Above: Inspiring Women in Sports, which describes these stories of how athletic stars overcame challenging setbacks in their youth. Greg joins us inside the Ice House fresh off the release of his third book, The Man Who Solved the Market, Greg, welcome inside the Ice House.
Greg Zuckerman:
Oh, great to be here.
Josh King:
You've got over 23 years at the journal under your belt. Surely you've spent some time familiarizing yourself with our trading floor here at the NYSE. Any days spent here that particularly stand out in your career?
Greg Zuckerman:
Oh, I remember a number of times coming here and the mystique, the romance of it, the hustle and bustle. It's just like when you grow up, as I did fascinated by markets, just coming here is like a privilege and yeah, brings back all kinds of memories.
Josh King:
I mean, Jim Simons certainly found some solace on the floor, the floor of Breck's Garden Supply of Newton, Massachusetts. What was this young man made of it? It wasn't in the water in Newton that's for sure otherwise it would've rubbed up on me.
Greg Zuckerman:
So Jim Simons is a middle class kid. His mother didn't work, but his father worked in a factory, a shoe factory. It wasn't his first choice though, he had a thriving career in the motion picture industry, we're talking about Jim Simon's father and he felt the family obligation to enter a business he really didn't want to, and it was a lesson for Jim, a young boy, the lesson was pursue your passion. Jim at a young age, had a passion for mathematics, and back then people sort of didn't see where it might go. The family doctor kind of said, "Jim, don't waste your time with mathematics, you should be a doctor." But Jim pursued what he loved, and there's a lesson kind of for all of us, I think, and he kind of hoped it would lead to a career somewhere, and it kind of did.
Josh King:
I mean, he was sort of a trouble making youth really. He declared to his bosses at Breck's Garden Supply that he wanted to go to MIT gets there and spend some of his time filling up water pistols with lighter fluid.
Greg Zuckerman:
Yeah. So Jim Simons is a fascinating guy because on the one hand, yes, he is a mathematician and he becomes one of the greatest mathematicians over the last 50, 100 years. But he's got another side to him as you suggest, he was a guy who you would like to have a beer with. He's funny, he's witty, he's mischievous, and yes, you saw instances and I write about it by, in the book as a youth where he got into trouble, time and time again, nothing crazy, nothing outrageous, but it's a sign to me of how varied his personality is and how multifaceted it is in that he can do the side, the math side, the quant side, but he's got another side to him as well.
Josh King:
He had this adventuresome side. I mean, he gets out of MIT, he wants to do something that will get noticed. He thinks that he actually has perhaps a licensing deal available to him by getting some media company to cover his motor scooter journey from MIT down to Buenos Aires.
Greg Zuckerman:
Right. So you can see signs of what he wanted to do in life, and that is do something or many things that are in his words, what he told his friends, remarkable. I want to do something remarkable, something new newsworthy, and early on it was as you suggest, this attempt to drive, take their scooters from the Boston Area all the way down to Buenos Aires. It was quite the adventure, at times it was dangerous and there was one little town in Mexico where the whole town was upset they were there, they had come during siesta and made too much of a noise, and they backed them into a corner, had their machetes out and to their throats and it was a close call quite frankly, there were a few close calls along the way.
Greg Zuckerman:
So yeah, he's a guy who loves adventure as you suggest, and he also was influencing, did a lot of traveling in his youth and he traveled the country with a young friend of his, and they saw some of the disadvantaged areas of the nation, and it had an impact on him. He became a little more, I'd guess more liberal, more sympathetic, more empathetic, and some of these early adventures while entertaining in the book, they also kind of lay the groundwork for who he became.
Josh King:
The Man Who Solved the Market debuted on the New York Times best seller list in just a couple of days after it was released. You said in an interview Gregory that you found the story of Renaissance Technologies and Jim Simon's fascinating and that no one else had taken on the challenge of telling this story. Why do you think no one else had decided to chase what was going on in Stony Brook?
Greg Zuckerman:
So Jim Simons is the greatest moneymaker in modern financial history. You can call him a trader. You could call him an investor. You can debate how you describe it, but he's a moneymaker. These remarkable returns, he's worth 23 billion. So if you're a financial journalist like I am, and if you focus on sort of the buy side, the investors, the interesting investors out there, there's really no bigger character out there who hasn't been written about. So many of us, including myself for years have wanted to write about him. The problem is he and the firm are the most secretive investors out there. They have no interest in getting publicity. They don't raise money from the outside like others do. They're key fund medallion is closed to outsiders. It's just Jim Simon's and his employees.
Greg Zuckerman:
So they have no interest in publicity, but beyond that, they have no interest in letting any of their secrets out. They have conquered the market and they don't want anybody, it's a very competitive world. There are all kinds of quants, is what they do, quantitative trading. We can get into that a little bit. They're all kind to people that rivals and they didn't want anything sneaking out.
Greg Zuckerman:
So early on, years ago, I approached Jim and said, "Hey, I'd love to write the book with you, write about you." "No, Greg, no, no." His people said no. So it was always at the back of my mind, and I said, "You know what? Let's see if I can figure out a way to get at it." Quite honestly for months. So I get a book contract and I'm a writer. I could use the money, it's in advance and I got a kid at NYU, it's not the cheapest thing in the world. But I wouldn't cash the check for months because I wanted the ability to hand it back to the publisher. Then finally, somebody from Penguin Random House accounting department got in touch and they were like, "There is discrepancy here, I mean, what author doesn't cash their book advance?" Finally I said, I think I could pull this thing off, but I was up nights worrying that I couldn't. So it was the biggest challenge of my life.
Josh King:
400 interviews, including over 30 with current and former Renaissance Employees at over 10 hours, speaking to Jim himself, who's infamously mum when it comes to media. You describe this scene at the preface of the book about actually sitting down with him, but what actually had the light on go in his head saying, "I can do this. Now I can talk to Greg."
Greg Zuckerman:
That's a good question. So I think partly it was the fact that Zuckerman wasn't going anywhere and he got the point that I was determined, if anything sort of these obstacles maybe added to the allure of the chase and made me more eager to try to see if I could figure this thing out. I'm a glutton for punishment maybe, and I want to see if I could write the book, be the one to do it, and I think he finally got, I mean, I talked to everyone around him, people he grew up with. When I finally met him, I showed him a picture on my phone, he didn't quite recognize it was the home he grew up in Newton. So I had gone there and I think he realized, okay, Zuckerman's not going, and also, I cared a lot about getting it right. I think Simons realized that I was taking it seriously and both the math and the science and the investing and the trading. He's got a rich life even before he even tried to conquer the market, and after Renaissance as well.
Greg Zuckerman:
So I do think that Simons, I like to think that he A, I wasn't going away and B, that I was really serious about the project and wanted to get it right. So eventually he did say, "Okay, I'll sit down with you." We had a good rapport, he decided he'll talk about some things, and other things were off limits.
Josh King:
You say that he has this rich life, and he has to be aware too, that Zuckerman is not going to stop when it comes to telling the full story of Jame Zacks, that's not going to stop when Kelvin to telling enough of the story about the tragedy that befell two of his sons. But let's start with this rich life before he began Renaissance Technologies. Tell us about this young man, the codebreaker working for the Institute of Defense, analysis the IDA out of Princeton, New Jersey.
Greg Zuckerman:
Sure. I'll just take you a step back. So he graduates from MIT and he's serious about math. He goes and guesses PhD in Berkeley and starts to teach. He teaches at Harvard and at MIT, and he's enjoying it. He's a popular professor, but he's an interesting guy because he's got one foot in the world of academia and he's serious about that, but he kind of has that at foot in the real world as well. So we always had this interest in money, not so much business and trading here and there, he dabbled over time, but he didn't want to get really wealthy.
Greg Zuckerman:
So we had some businesses that he sort of, some friends started and he borrowed money because he was middle class and his father borrowed some money and they got it going, but they owed money, that point Simons did. So he needed to make a little bit more money than he was making as an academic, and he got this offer as you suggest to work for the government. This is really for an agency that helps the government, an organization, I should say that helps the government, and back then it was in the midst of the Cold War against the Russians, and they were trying to break code. A, the pay was a little bit better than in academia and B, there was the challenge, it was a real challenge and he loves challenges and it was a curiosity about whether he could be the one to break code and to be the one to help the government.
Greg Zuckerman:
At the time we were sort of being beaten by the Russians when it comes to breaking code and concealing code and we needed super smart people like Simons to help us. Over time he did and he became a star codebreaker and I write about it in a book which is important because in his life, because he learned a few things, A, the idea of building algorithms and these kind of step by step procedures that later would change the world. But back then they weren't something that people talked about. Today we talk about predictive algorithms and Netflix and Amazon, et cetera, but back then no one was dealing with these things. So Simons learned how to build algorithms, but he also learned how to recruit and deal with just super smart individuals, and because all the codebreakers that he was working with were superstars in the world of academia that were recruited to try to take on the Russians.
Greg Zuckerman:
So here he was a young man dealing with high level stuff, building algorithms, and also learning how to work with other super smart mathematician, scientists and how they could blend together in an organization, and later when he develops his own, he starts his own. I do think some of the lessons he employed.
Josh King:
I mean, some of the working with other people brings him to great success, but in some ways too, I'm amazed that his work at the IDA allows him so much latitude, so much free time to pursue other interests while he's in Princeton trying to break the Soviet's code.
Greg Zuckerman:
Yeah, it is kind of surprising. The model was a little bit of like a academic model where you get your work done. You teach your courses as it were, and on the side you can pursue your own research, and that's what he did in one of those pieces of research was a paper he did with a couple colleagues, really early paper. We're talking in the '60s about using models and math to try to beat the market, and it's really crude and you couldn't really make a lot of money with it then, or even today. But you can see early on of the development, the early development of the process and the approach that he later would employ, but they are fascinating guys, there was a lot of comradery, but also there was some controversy, they got in fights about certain things, they gambled a lot. Jim got arrested once for not paying his fines, he got parking tickets, they towed away his car. They put him to jail. The gang of mathematicians piled into a car to bail him out.
Greg Zuckerman:
There were all these kind of episodes and to me there was somewhat surprising just because you think of mathematicians and you think of quants and you think of maybe little more sedate and yet they're competitive, they're colorful, they're unusual. They're almost odd sometimes, and time and time again, the people I write about in my book surprised me, and it was reassuring as a writer that I kept finding these unusual, super smart, odd, colorful characters.
Josh King:
Three young sons, his dad worked for the shoe company as you said, living in Princeton, New Jersey says, "Look, I really need a stable job. I need to run a math department." This is really where sort of a person in my profession can hang their hat and begin to have the power to recruit and entice and create a dream team of other mathematicians.
Greg Zuckerman:
Right. So it was an unlikely choice, frankly. He was offered the position to run Stony Brook's mathematics department, and at the time Stony Brook School in New York and on Long Island, it wasn't very well respected. The mathematics department was especially overlooked by most in that world, and many people advised Jim not to take the job he had other offers, but he liked the idea of building something and using some of the skills and the lessons maybe he had learned at the IDA, which is the code breaking organization, and he liked the idea of being his own boss as you say. He was sick of the possibility of getting fired, and he said, "You know what? I'm going to see if I can turn Stony Brook around, their mathematics department." It was a huge challenge at the time.
Josh King:
I mean, and he goes about recruiting some of the best minds in mathematics in New York State, runs a little of foul of Governor Rockefeller, I think. I mentioned at the beginning of the intro, this not so merry band of mathematicians, because there are periods of kind of immense pain that you write about in the book. There's the story of James Ax, brilliant mathematician, who just couldn't control his anger and in some ways needed to get as far away from Simons as possible and still stay on the continental United States. There's Simons at Stony Brook and Ax in Huntington Beach, California.
Greg Zuckerman:
Yes. So yeah, he builds this department and what he finds himself really good at is recruiting, and again, you wouldn't necessarily expect it from one of the greatest geometers of and theoretical mathematicians of the last 50, 100 years, but he is. He understands what people need, what people want. Mostly in that world, it's a curiosity and a challenge, he presents it to each of them and he's got this way to appeal to people. And as you suggest, he recruited this guy, Jim Ax, a young up and coming superstar from Cornell, and he gets him to come to Stony Brook over and over again. He somehow manages to succeed in recruiting talent to Stony Brook, and they become one of the greatest mathematics departments in the country, thanks to Simons.
Greg Zuckerman:
So then eventually we're talking in the late '70s, he gets a little frustrated with mathematics. He gets a little more curious about trading. He gets a little more hungry to become wealthy, and these are all kind of things that his colleagues can't really relate to, to them he's just this giant in the world of mathematics, they don't realize he's got these other interests and he's going through some personal crisis too. He's going through a divorce, and finally Simons says, "I'm going to quit mathematics. I'm going to quit academia, and to try to start a trading firm,"
Greg Zuckerman:
Even his father is like, "Why are you doing that? You're giving up this prestige, you're giving up the tenured position," and he says, "I'm going to try to do it with a different approach, hiring mathematicians and using models and big data." Before it was such a thing, it was called big data. So they start this firm in a little strip mall in Long Island. This is really Simon's and just a few others, and it was sort of embarrassing in some ways to be there. We're talking about next to a pizza store. There's a bar nearby. It's pretty dilapidated. The phone service was spotty. Again, he gives up so much he's on top of the world in the world of mathematics, he's got all this prestige and a claim and he gives it up to try to take on the biggest curiosity and biggest challenge of his life.
Greg Zuckerman:
Again, that's what he wants. He wants challenges, and the challenge is to beat the market. We all know, for decades, hundreds of years, people have tried to beat the market time and time again, they failed, and those are people who actually like investing in trading, grew up reading books about it, and now that's what I did. I loved investing and I read magazines, I read books and Jim Simons because he didn't really care about investing, he just cared about making money and he cared about challenges.
Greg Zuckerman:
So he starts this firm, and as you kind of say, well, where does he get his talent from? Well, he goes back to the world of academia to guys like Jim Ax, these colorful, headstrong, cocky sometimes, difficult individuals, mathematicians because they're the tops of their field, and he says, "Hey, come on over and trade with me." And they're like, "Trade? Who wants to trade stocks?" It's beneath them. They've got no interest. They don't even care so much about making money. Most of the people that he recruited their own wives and others were investing for them, they didn't want to spend the time, they no interest in investing.
Greg Zuckerman:
But again, Simons has this way of appealing to these top superstars, scientists, mathematicians, and say things like, "Well, just come over one day a week, help me out one day a week, or take a on this challenge. I think you might find it really stimulating like I do." And they did, and this is through the late '70s, but the bulk of the '80s, they tried various different approaches and we can talk about it, but for years they were unsuccessful.
Josh King:
I mean, you talk about the instinct that you might have watching David Faber on CNBC talking about one company or another, or going to the Apple store and thinking that they've cornered the market on the watch, and you have a gut instinct that company is where it's going. But you use an example in the book of paired trades, between Pepsi Cola and Coke, to actually talk about how you can look at these companies that you might apply a motion to. But look, just in terms of its trading patterns historically against some of its peers.
Greg Zuckerman:
Sure. So they made that decision in the late '80s, Jim Simons did, and his colleagues to embrace math, embrace models, embrace these systems, a systematic approach to trading, and for a while, it worked really well. We're talking the early '90s and they were making a lot of money in commodities and bond futures, in currencies, but they couldn't figure out equities. They could not figure out how to make money in stocks, and for you and me, that would've been fine I think. I can't speak for you, but for me, it would've been fine. You become wealthy, it's enough, who cares?
Josh King:
Make a lot of money in potatoes like they did.
Greg Zuckerman:
Eventually. One day they conned the market unintentionally, main potatoes, and that was a problem, but they worked out the kinks, and as you say, and by the early '90s, they were making a good amount of money. They managed about 800 million in their hedge funds. It's called a Medallion Fund, and people at the firm were happy, but it wasn't enough for Simons. He said, no, no, no, I want more, and did he want to be a billionaire? Did he want to impact society? Some people close to him, his family members and others think that he really just wanted to get really wealthy so he could have a broader impact, and the only way to do that is in the equity world, because other markets, commodities and currencies are just too narrow, they're too limited. You can't manage billions and billions of dollars, especially with leverage, and you leverage up in those other markets.
Greg Zuckerman:
So he had to figure out equities to conquer the market, to become The Man Who Solved the Market. So he said, "All right, let's try to approach the equity world the same way as we are with these other investing worlds." He recruited different people, it didn't work for a while, and as you said some people at the time were doing things like para trading, which is early quant trading and para trading really just means, as you kind of said, well, all right, Coke and Pepsi, they more or less should trade alike. But when they come out of whack, ah, you buy, let's say for whatever reason, let's say there's a big seller of Coke, someone needs to raise some cash. Coke goes down.
Greg Zuckerman:
Historically, you look at the historic patterns. Well, Coke is much lower than it should be relative to Pepsi. I'll go long Coke and short Pepsi, it's a relatively market neutral kind of trade. That's how a lot of people were doing it. Morgan Stanley was very early in this approach, and what happened was Jim Simons recruited someone who had been at Morgan Stanley and said, "You know what? Let's see if together, we can figure out stocks."
Josh King:
I mean, these are not flash boys. These are not what we now think of as high frequency traders. But one of their big discoveries is let's not get emotional and passionate about these names, let's trade them multiple times a day, not just at the open and close, but in the middle of the day, as many times is possible to follow our model.
Greg Zuckerman:
Yeah. It's a really good point, and it's important to note that these aren't high frequency traders we're talking about, Jim Simons and Renaissance Technologies, they don't get in and get out in milliseconds kind of thing. They've looked at that approach, they just never really figure out how to make much money with it. Their computers are high powered, but they're not the most powerful, they don't co-locate, they don't put it a second away. They don't try to get in front of everybody else. They're looking for patterns in the market, and generally speaking we're talking moments to months is what they say, but you can think about two day kind of patterns. Sometimes it's us. Sometimes it's a little bit more short term patterns and yeah, they didn't trade like the flash boys, but they made a commitment. They made a decision and even a discovery that their patterns, they can discover more patterns that are short term relative to longer term.
Greg Zuckerman:
So it used to be that one point they were trading much more longer term, and then they made a decision that was really a turning point for the firm where they said, you know what? Our data seems to suggest that we can really figure things out. We can see the market much more clearly when we're trading short term rather than the long term, and they became sort of the, again, the pioneers in that approach.
Josh King:
We're going to get it much more into Jim Simons and Renaissance in a minute, but I want to focus on Greg Zuckerman for a minute. We had Stuart Frankel, who's the owner of the stock brokerage firm, Stuart Frankel & Co on our podcast who relived his days at summer camp, where he had the Wall Street Journal delivered to his cabin daily. He talked about the beginning of his career in investing when he put all of his Bat Mitzvah money into IBM, you also used your Bat Mitzvah money, was that where your interest in business took off?
Greg Zuckerman:
That's where I lost my money, and one would have thought that would've doused my interest. I read a book by Ray Dirks who maybe some old timers remember, and it all about low PE stocks, and I was an impressionable young man and it kind of made sense.
Josh King:
Growing up where? Where were you?
Greg Zuckerman:
Providence, Rhode Island actually. My father's an academic. My mother taught and then sold insurance. So I didn't really have anybody in the house to guide me, I just found it fascinating how markets worked. I'll never forget that I was amazed once when I was looking at the back of Skippy Peanut Butter and it said it was owned by a company that also owned other things.
Josh King:
Unilever.
Greg Zuckerman:
Yeah, there you go, or one of those and they owned jam and they owned other kinds, I'm like, wait, there isn't just a Skippy company, it's owned by some conglomerate and they put the businesses together and somehow they work and why would they own more? I just find that kind of fascinating. I loved business, I loved how people were making money and yeah, in camp I literally had my counselors go and buy Barrons and bring it back from me from their days off, and I was trading, I was calling up brokers during breaks in camp and losing all my money, buying these low PE stocks. So I realized later there's a reason sometimes stocks have a low price earnings ratio because they're not great stocks, and that's what I put all my money into.
Greg Zuckerman:
So there were expensive lessons. Well, I didn't have that much money, but there were painful lessons, but yeah, I always wanted to get into the investing world. I was fascinated by the trading world and how people made money, lost money and the personalities. So I would read all these books, Adam Smith and basic investing books early on, and I stumbled into my career because I graduated college in 1988, traveled for a year or two, and I went to go work on Wall Street and I couldn't get job. It was a difficult time on Wall Street, I'd gone to a good liberal arts school, but I had no experience whatsoever. I didn't know anyone, and I kind of started some businesses and they failed. Some of them did okay, some of them didn't, I'm kind of entrepreneurial, I had some different ideas.
Greg Zuckerman:
Finally I interviewed to work for a little newsletter. It's called M&A Report, some financial newsletter, and I didn't have any clips, so they gave me a test and the test was to write about a leaked document, a pretend leaked document. I remember sitting there, I'm like, wait, they're going to pay me to write about Wall Street. How cool is this? I never even thought about, I loved Wall Street. I love writing, my father was an academic. So you can put the two together, I didn't even cross my mind and I humbled into this career and I don't think I would've been great as an investor. I don't really have that temperament or as a trader, for sure. I like figuring out why things work and why things happen and digging into these stories, and so I kind of stumbled into this career.
Josh King:
So in 2003, you win the Gerald Loeb Award for the demise of the telecom provider WorldCom. We had David Faber in the seat that you're sitting now talking about all the coverage that he did of Bernie Ebbers, early days at CNBC. Then 2007, just prior to the financial crisis, you're part of the team that won the award for breaking news coverage of the collapse of that hedge fund Amaranth Advisors. A year later, you're the finalist for the award, for your coverage of the mortgage meltdown, 2015, you win for the series of stories you wrote about highlighting the discord between PIMCO's founder, Bill Gross, and other members of the firm. I mean, think about the last 20 years, Greg, has there been any better beat than the financial beat?
Greg Zuckerman:
Oh my God I love it. You got personalities. There are stakes involved, big money, politics involved. You can write about anything. When you write about finance, there's all kinds of ways to get into themes that are applicable to everyone, and again, they're just personalities. As a writer, you need colorful personalities, and that's what we've had. There is a challenge lately because as we shift to passive investing and quant investing, you don't have the same kind of personalities, but I've been blessed. I've written about all kinds of people, David Teppers of the world, Bill Gross, Mohamed El-Erian I'm the one who broke up the stories about them fighting. I'm the one who broke the story about the London Whale, and I just don't know if you're going to have those kind of rogue traders like you used to. So I feel a little bad for younger financial journalists in some ways.
Josh King:
I mean, is it because you don't quite have as many great stories as Mohamed El-Erian and Bill Gross, or maybe because you have a lot smaller of a news hold than you used to. I mean, I'm looking at your digestive, your Jim Simons story in the journal, it's about two thirds as wide as it used to be in terms of the space of a page, Fortune Magazine is one fifth of its former size, business week is now subsumed into Bloomberg. Are there still the outlets where a good, long narrative tale about business personalities can thrive?
Greg Zuckerman:
It's a good question. I do think we at the journal, but elsewhere as well, we still value and treasure good journalism and longer stories. They're not as long as you suggested as they used to be. I think the average story when I first started at the journal was about 1,200 words, and now it maybe 800, 900 words, but you know what? A lot of readers don't read past all the way to the end anyway, and we're still eager, we're hungry for good stories. I think the real challenge is just that Wall Street is more boring than it used to be. The people on Wall Street, you don't have the people, the risk takers that you used to. In some ways it's a good thing, I mean, for society don't necessarily want people-
Josh King:
Those who covered Adam Newman might beg to differ a little bit.
Greg Zuckerman:
True, but it doesn't have any impact on society. Yes, they blew up, but I covered the mortgage meltdown and the financial crisis and people embracing much too much in the way of risk in 2007 and earlier years as well, and thankfully you don't have those same kind of risk takers as you used to, or LTCM, remember LTCM in 1998, you don't have that. Those were scary times because they had an impact on their broader economy and broader society, and thankfully as a citizen, we don't have those kinds of concerns like we used. I'm not going to say there aren't going to be rogue traders. I'm not going to say you're in a blow up, but you don't have like it used to. I used to cover hedge fund, blow ups once every few weeks, and they were sad for the investors, but they were fun for me and for readers, and there were lessons to be learned.
Greg Zuckerman:
I'm a sports guy, and I wrote sports books with my kids, and I tend to write a lot about home runs and strikeouts. I think there are a lot of lessons that can be learned from people and individuals and companies making huge, amazing, remarkable breakthroughs, and I wrote this book about the energy breakthroughs in this country and who it is that found all those oil and gas that's changing the world, and I like to write those stories, the home runs, but the strikeouts are also, there are a lot of lessons in strikeouts too, how someone could have blown up or gotten some risky, put on such risky positions, again, the London Whale and others, and you don't have that same kind of risk like you used to you better risk management today. So it's great for society, great for me as a citizen, but bad for me as a financial journalist.
Josh King:
Greg Zuckerman, The Man Who Solved the Market is going to attract a lot of Wall Street investors and math quants alike as readers to be sure. But you also wrote this for people like me, for readers outside the financial sector, those who might not be as familiar with stochastic differential equations or hidden Markov models. How did you take complex theories and topics and turn them into a gripping page turner, something that anyone listening to this podcast would enjoy?
Greg Zuckerman:
It was so hard, because I'm not a math guy, and that's part of why I did this book, partly to learn. But also I figured if I could figure these out, these math concepts, Markov models on other kinds of things, then maybe I could relate them to the average reader to make it an entertaining read. So how did I do it? I had a lot of help. I'm so thankful there are quants mathematician, scientists out there who took their time to explain concepts to me over and over again. So I'm going to read something really briefly, and Jim Simon was very helpful too. Not about secrets, he didn't open up the Kimono, but about all kinds of early math that he did later on, et cetera. So I'm going to read you something at one point, I got really stuck on the word holonomy, do you know what holonomy is?
Josh King:
No.
Greg Zuckerman:
No, I didn't either. So it's a concept in geometry, and he was really sweet and he emailed back and I said, "Can you dumb this down? I don't know if you're familiar with the office and Michael Scott's episode where he says, "Pretend I'm in eight year old?" So that's kind of how I felt. I said to kind of Jim, pretend I'm an eight year old and he said, "Sure, sure, sure." So I'm going to read your verbatim what he emailed me back. "If it is helpful, holonomy may be defined as parallel transport of tangent vectors around closed curves in multiple dimensional curved spaces." This is him dumbing down-
Josh King:
Trying to dumb it down for you like Michael Scott.
Greg Zuckerman:
Yes. Exactly. Then I like Michael Scott said, "Oh, okay, pretend I'm a three year old." This is what I was up against trying to understand this stuff, and some percentage of your audience is probably going to say, "Well, yeah, I understand those concepts, that's simple stuff, Greg." But it wasn't to me. So the gamble, I think on part of my publisher was if Zuckerman figure this thing, maybe he can orate it to the average guy because God knows Zuckerman is the average guy.
Josh King:
After the break, we dive into the world of Renaissance Technologies and The Man Who Solved the Market, Jim Simons, that's more of our conversation with Gregory Zuckerman right after this.
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Josh King:
Welcome back, before the break, Greg Zuckerman and I were discussing his career in financial journalism and his newest book, The Man Who Solved the Market, how Jim Simons launched the quant revolution. You write about this time that suddenly the Medallion Fund and Renaissance Technologies put its glasses on, they had clarity that they hadn't had before. What's the turning point moment?
Greg Zuckerman:
The turning point moment is 1990, when they realized they can find short term patterns. Until then they did maybe 80% long term trading and 20% short term trading. Then at that point they said, no, no, no. We got to shift things into 80% short term, and also they found different, interesting, early approaches that led to a lot of money. Things like breaking up the day into bars and comparing the bars. What happens in bar 34 versus bar 36? Can you go long? Can you go short?
Josh King:
What's a bar?
Greg Zuckerman:
A bar is like an interval. So eventually they got to five minute intervals, and they broke the day up into five minute intervals, basically five minute bars, and later others would do the same, but they were just early and five worked, shorter than five didn't really work so much, longer than five didn't work as much as five. So there were these approaches, but it wasn't just finding as they call them signals, ways to make money, trades, and that's another surprise to me. They spent as much time gathering data and they were so early doing that, today everything's about data-
Josh King:
Going to crazy lengths to gather the most obscure kinds of data.
Greg Zuckerman:
Right. Today everyone's like, data is the new oil and all that kind of stuff. We're talking the '80s where they were buying up everything, gathering everything, jotting down everything, writing, comparing, judging, and at the time no one cared about this stuff. They were going down to the Fed and taking up ancient stuff, and they eventually got ancient stuff going back, I don't know, a couple of hundred years, 1700, we're talking about trading different markets and they were cleaning it. Who was cleaning data in the early 1980s? This guy, Sander Strauss I write about in the book and it wasn't so much Simons telling them to do it, a lot of the credit is just these people, individuals super smart, creative, hardworking, innovative individuals coming up with these approaches.
Greg Zuckerman:
So he was cleaning data. So they were doing things like developing and gathering data, but they were also testing how their trades were affecting the market. Early on, they call it slippage. So in other words, you've got a great trade, okay, whatever, IBM, you got to buy 11:00 on Tuesday and you got to go short, Apple, whatever. But how much is that going to affect the market? How much can you put on in a trade? Can you put on more? Exactly what the impact will be, all kinds of risk management that again can be seen as sort of sleepy and boring, and yet Jim Simons really valued this stuff.
Greg Zuckerman:
Later on, others did too, but he was really a pioneer in that regard. Today they use other kinds of data, every kind of data, but they were the ones early on saying, forget about instinct and judgment and figuring out the story and talking to executives and corporate CEO, corporate CEOs, they're salesman that's why they got to their jobs, they're great salesman. So don't be wooed by them, don't be swayed by what they're saying, and in effect, just look at the pricing patterns of the market.
Josh King:
One of the patterns in this book is that we are not just talking about one man, Jim Simons, but about many personalities who not only helped create and run Renaissance, but also helped lead the financial revolution based on quant methods. One of these personalities that we haven't talked about yet, Greg is Robert Mercer who has been credited with helping put Donald Trump in the White House. How would book be different if Trump had done what most people expected to happen lose in 2016?
Greg Zuckerman:
Well, that's a good question. It's also the case that I don't think Trump could have lost without Bob Mercer, and I'll just tell you a little bit about Bob Mercer. Basically, as I had suggested earlier until around 1994, Simons was running a well-respected smallish shop. They managed about 800 million at the time was actually sizable, but they couldn't get much bigger. They were only doing commodities and such, but he wanted to make it in the world of stocks. That's the only way to really become a billionaire and to build your firm.
Greg Zuckerman:
So he recruited a guy named Bob Mercer, along with a colleague named Peter Brown. They were working at IBM at the time. They were speech, predictive speech, speech translation, and like many of their colleagues they had no interest in stocks, no interest in investing and trading. They were scientists. They were interested in science and mathematics. But once again, Simons said, "Come over, you might enjoy the challenge" and you get hooked, you get hooked whoever you are by the trading world. There's a lot of energy and passion and fun when you're making money there's fun anyway.
Greg Zuckerman:
So he got Mercer to come over to work at Renaissance, and for a while, we're talking about over a year, they didn't make much headway. They were in charge. He and Peter Brown were trying to make it happen with stocks and come up with algorithms that could be profitable, and I talk about it in the book, they had this remarkable breakthrough in 1996 and they were off to the races. You got to give a younger programmer named David Magramin some credit.
Greg Zuckerman:
I write about it in the book, but basically there was just a mistake they had made, a glitch in their programming, and these are kind the top brains scientists out there, and yet even they can make mistakes, fat finger kind of thing. There are a couple times throughout the book where it's sort of humbling, but it's also reassuring that even these guys make huge, dumb mistakes, and they made one dumb one where their model didn't update the SP 500's number. It was a static number, the number was from a few years earlier and it wasn't being updated and it hurt the risk management, it hurt how they were hedging their positions. You can read about in the book, I won't get into too many details.
Greg Zuckerman:
But basically Mercer and Brown are the ones who helped Jim Simons turn the corner on equities, and they were off to the races, and when they figured out equities, they could raise billions of dollars, they could invest tens of billions dollars, eventually even over $100 billion including leverage, and it was all because of this guy, Bob Mercer, who's just a really quirky, unusual individual. He's a right-leaning conservative, he hardly talks within his own firm, very quirky, collects guns. He doesn't really interact with people other than to kind of pester them, especially the liberals within the firm.
Greg Zuckerman:
So for years, he was sort of seen as like this odd, unusual guy internally, and let's say in the lunchroom, he would pick fights with people, not vicious ones. He was sort of a amusing in some ways. He was seen not in a negative light for many years within the firm. He was just like this conservative guy who liked to get into fight, get into it with liberals in the lunch room, but they would go back and forth and they would sort of enjoy themselves, tweaking each other.
Greg Zuckerman:
Then lo and behold, as the 2016 election approached, people within the firm became aware that Bob Mercer had these outside interest, very conservative leanings, and he became much more important to us all in society, in the world of politics and the world of right-wing politics. So what happened was basically 2016, he and his daughter, Rebecca Mercer became more involved in conservative politics, and they became convinced that an outsider was necessary to run the country and first to win the election, to win the nomination, but then win the election to change the country, and they really thought the nation needed to be changed.
Greg Zuckerman:
They were very angry about Bill Clinton and then later, Hillary Clinton. They did subscribe to some unusual, unorthodox opinions, both about society and other things too. I mean, Mercer funds this guy out and Oregon who collects urine and analyzes urine and thinks there's some benefits to that, who knows? Maybe there is some. He's got all kinds of other unusual/radical views, that again, people internally were sort of amused by until around 2016, and then so yes, the primary season comes and they support Ted Cruz, but then when he bails, Rebecca Mercer has lunch with Ivanka Trump and they decide, Mercer decide to get in with Trump.
Greg Zuckerman:
For a while if you remember, by the summer of 2016, Donald Trump was floundering, his campaign was not doing well, there all kinds of the scandals and the Billy Bush episode. Rebecca Mercer literally went up to him at an event, I write about it in the book and said, "You got to bring in on these two people that I really like a lot, Steve Bannon and Kellyanne Conway." Trump's like, "Well, yeah, okay, sure." I mean, they had to try something at that point, and Bannon in Conway, you can like, them, you can hate them, they stabilized that campaign and they turned that thing around and it was all because Rebecca Mercer and Bob Mercer are the ones who urged or almost forced Trump to take them into the campaign.
Greg Zuckerman:
Again, I write about in the book, but that really stabilized the Trump campaign and they eventually won, and with Trump winning Bob Mercer got all this kind of clout, which was gratifying I think for him and for his wife to have that kind of power and to have that say so in the country, in his direction. But people internally at that point started getting uncomfortable because there was criticism from the outside, there were boycotts. This is a secret, a quiet firm out Long Island, and there were people protesting in front of the offices and they started worrying about, and Jim Simons started worrying about morale. Now, Jim Simons is a fascinating guy because he's a liberal, he supported Hillary, he was the third biggest supporter for Hillary.
Josh King:
This is the person who wrote the letter against Maxwell Taylor and said, "Rebuild Watts."
Greg Zuckerman:
Exactly. Exactly. So Jim Simons himself was really uncomfortable with what Bob Mercer was doing politically, and yet he likes Bob Mercer, Bob Mercer was a great executive. Even as a CEO, he did a great job as a manager. So Simons believed he owed him a lot, respect and otherwise, and frankly, Simons liked the fact that Mercer was making a lot of money for him. So Simons was torn. His friends were saying, "Jim, you got to do something. Bob Mercer is at your firm. He's the CEO, co-CEO of your firm and he's putting Donald Trump into office." So Simons was uncomfortable with that, but he also, it's his friends and you can't fire someone for their politics.
Greg Zuckerman:
So he was really torn and uncomfortable, and eventually Jim Simons, and again, I'm telling you the whole book here, but not the whole book, you still got to read it, but he had to go to Bob Mercer and say, "Hey, our morale is really being impacted." They were worried about whether they could keep hiring, and when Jim Simons and Renaissance hires, they're not competing against, D. E. Shaw and Goldman Sachs, they're really competing against Facebook and Google. That's what they say is they're a competition. So they were concerned that they wouldn't be as competitive when it came to hiring, and eventually Simon's went to Mercer and said, "Hey, I'd like you to step down, stay at the firm, but not be the co-CEO."
Josh King:
Has this created a level of peace and happiness among at least this pair? Then it's not a big firm, it's only a couple hundred people.
Greg Zuckerman:
Yeah. To some extent, I really do think it calmed things down. They they're not targets as much, and also Bob Mercer eventually broke up his relationship with Steve Ben and Steve Ben, and also left the White House. So he's not as involved here today, Bob Mercer with the administration. But as you suggest, yeah, it's a relatively small firm. It's remarkable. They've had all these profits. I mean, over $100 billion of profits, now it's about 300, 320 employees for many years it was a couple hundred, and yeah, it's part of the remarkable nature of the story.
Josh King:
What surprised you most in your research of Renaissance and the time you spent talking to Jim?
Greg Zuckerman:
I guess there were a lot of things, but one of them is how hard it is to trust models, even for these kind of individuals. So last year, and this kind of shocked me, last year, end of last year, remember how Mark was falling apart and everyone's getting nervous. Jim Simons is on vacation in Beverly Hills with his wife and he is looking at TV like you and I, CNBC and such, and he's seeing the market just collapsing. He picks up the phone and he scrambles and calls his wealth manager and says, "Hey, shouldn't we be buying some protection here?" The wealth manager said, "Well, let's wait a couple days, Jim, let's not panic."
Greg Zuckerman:
This is Jim Simons, his whole life, he's 81 years old, he's worth $23 billion. He's the quant, he pioneered this approach of turning decisions over to models, to a system, not to use your intuition and instinct, and yet he's the one who's panicking like you and I would. So it's a lifelong challenge to defer to models and not to use your judgment. It's true for all of us. I think it's something to be said, we all get nervous about things like self-driving cars and it's a process and just the idea of using models and not stepping in and altering things, and that was kind of shocking to me.
Greg Zuckerman:
I would've thought, oh, by now, Jim Simons no way he would kind of trade like you and I, but it sounds like it's a constant battle. It's not just he, I write about it over time within the firm, people panic and get nervous and scared just like you and I. So in some ways they're much more like the average person, like myself than I would've expected
Josh King:
One summary of your book states, Jim Simons failed to anticipate how his success would impact his firm and his country. So as you reflect now, what kind of impact do you think he's had, and is there anything that he would've done differently through this career progression of his?
Greg Zuckerman:
Hmm, that's interesting. So he's had clear impact on the world of math and science, physicists still to this day, cite his paper over and over again. He's broad impact on all kinds of areas. I get into it in the book when it comes to trading, he's the pioneer, he's on a pedestal. You think of Buffet and some other kinds of people he's right up there if not higher, I mean, his returns are better, and he is the reason, or one of the reasons why we as an industry, the financial industry has shifted, and today 31% of trading is done by quants, and that's not just Simons it's others as well, but he was the one that they were aspiring to.
Greg Zuckerman:
So he's impacted the industry, and as you suggest, also, in terms of science and philanthropy, he's done remarkable stuff. When he's remembered, he may go down a for that stuff as much as the investing. So he's trying to find the evidence of the origins of life, whether the Big Bang actually happened. He subsidizes math and science teachers throughout New York State, and gives them $10,000 each so that they don't go and leave for private industry and firms like Renaissance. There's hypocrisy there, I mean, they are very aggressive in terms of tax.
Greg Zuckerman:
They converted short term gains to long term gains and the IRS is going after them. So you can argue there's some hypocrisy, but I also do think that much if not most of what Simons is doing with his money is of real great value. They're trying to cure autism, and I do think he may be remembered as much for sort of the philanthropy and science and math, as much as his remarkable record when it comes to trading.
Josh King:
Greg Zuckerman, as we wrap up your third book written under your name alone has already made the New York Times Bestseller list, are you already coming up with ideas for book number four?
Greg Zuckerman:
Yeah. I've got ideas. I don't know how great they are. So if your listeners have good ones, please reach out to me, email me, I'm on Twitter. I'd love to hear constructive criticism, love to hear ideas, but yeah, I'm always looking for another one.
Josh King:
Well, book number three, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution is a great one. Thanks so much for joining us in the Ice House.
Greg Zuckerman:
Oh, great to be here.
Josh King:
That's our conversation for this week, our guest was Gregory Zuckerman, special writer at the Wall Street Journal and author of The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. If you like what you heard, please rate us on iTunes so other folks know where to find us, and if you got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at @icehousePodcast. Our show is produced by Theresa DeLuca and Pete Asch, with production assistance from Ian Wolf and Stephan Romanchich. I'm Josh King, your host signing off in the library of the New York stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE, nor is affiliates make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content here-in, all of which is presented solely for informational and educational purposes. Nothing here-in constitution offered to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
