SCOTT WELSH TRADING BLOG

Analyzing the Best Trader of All Time

Analyzing the Best Trader of All Time

Nov. 13, 2019

Can we learn anything from the greatest trader of all time?

I think the answer is unequivocally yes.

People have been following Warren Buffett’s lead for decades, sometimes making expensive pilgrimages just to hear him speak. Anyone who makes “never lose money” his/her first rule of investing has benefited from learning from the Oracle of Omaha.

But he’s not the greatest of all time (he’s 5th).

People have learned a ton from Peter Lynch, who taught us to know what we own and buy businesses any idiot can run.

But he’s not the greatest either (he’s 4th).

Who is?

Without a doubt, Jim Simons (and the fund he created) is the greatest trader of all time.

Need proof?

From 1988-2018 (yes, he’s still going), Simons’ Medallion Fund had annualized returns of 39.1%. And that’s misleading. His fund actually has returned 66% per year over that time. But because his fees are astronomically high, it comes out to 39.1% after those fees are taken out. And even after fees, Simons destroys everyone. (Maybe the first lesson to learn from him is to charge outrageous fees?)

Here’s the list of greatest traders on record:

  1. Jim Simons (1988-2018) 39.1%
  2. George Soros (1969-2000) 32%
  3. Steven Cohen (1992-2003) 30% (insider trading scandal aside)
  4. Peter Lynch (1977-1990) 29%
  5. Warren Buffett (1965-2018) 20.5%
  6. Bill Dunn/Dunn Capital Management (1989-2019) 13.3%

If we want to be the best, it makes sense to study the best. So, what can we learn?

First, it’s interesting to learn that #1 and #6 are completely automated traders. Zero discretion for either one of those traders. If you like trading robots, apparently you can get very rich (Jim Simons and his automated fund is currently worth about $23 billion).

There’s a lot more to learn from Simons, however, and this week we’ll go over many things that will make us better traders.

One of the most important things we can learn from Simons is that he almost failed many times. It’s easy to think that someone is superior to us and that the road to superstardom was one that was ordained from the crib.

Not true.

Simons struggled and could have completely given up several times. Here are some times where he might have flamed out and given up.

He almost threw in the towel right off the bat (this was 1979, the year after starting the fund). Simons wasn’t a trader, he was a mathematician. But he thought he could use math to beat the markets. So he left academia and started a fund to trade currencies. It did okay at first but then hit a big downturn. At that point Simons was using crude trading models and he and his staff’s instincts. It turns out that that was a bad combination. During a big drawdown, one staff member found Simons lying face up on a couch. Simons said, “Sometimes I look at this and feel I’m just some guy who doesn’t really know what he’s doing.” The staff member thought Simons might actually be suicidal. That was Give Up Point #1.

In the 1980s, after tweaking his mathematical trading model, Simons got long too many potato futures positions and was closed out by regulators. It cost him and his investors millions of dollars. They had lost confidence in their model and weren’t even sure why the model was making its decisions. Give Up Point #2.

Simons and partners then drifted back away from math and started looking for undervalued investments while trading the news. It did well for them for a while. But, in 1984, trading on news and intuition backfired when Simons’ partner fell deep into a drawdown of 40%. Simons was forced to close this gut-feel position that had gone wrong. He was so distraught, he halted the firm’s trading and held disgruntled investors of his firm at bay. Simons was so upset he contemplated giving up and focus on his other business ventures. Give Up Point #3.

After moving back into mathematical models and allowing partners to run a new fund for him, he again ran into big losses in 1989. Simons’ fund was down 30% from the middle of the previous year, which was a staggering blow. Simons had to shut down all of his firm’s long-term trades. At that point, he’d spent more than a decade backing various traders and attempting a revolutionary, math-based approach to trading. He wasn’t making progress. A staff member said at this time, “It wasn’t clear Jim had any faith. And it wasn’t clear if we would survive or fold.” Give Up Point #4.

After moving to short-term models and thriving, in 1990 there was another crisis. The firm holding their accounts was rumored to be going under. In a panic, they pulled out their funds. Two days later, their holding firm filed for bankruptcy. It could have all ended there and was Give Up Point #5.

After thriving for almost six years, Simons’ son Paul was killed in a bike accident in ’96. He was despondent. His grief could have taken him out of the game, and rightfully so. Give Up Point #6.

In March 2000, Simons’ fund Medallion got hit hard when the tech bubble burst. It lost $90 in a single day and $80 million the next. It had never lost more than $5 million in a day before. No one even knew why the models were losing. The losses reached the $300 million mark. Give Up Point #7.

Around 2002, Medallion started using sketchy but legal ways to avoid paying short-term taxes. The IRS investigated in 2014 and the investigation is still ongoing in 2019. Give Up Point #8.

In 2003, two prized staff members broke their confidentiality agreements and left for a rival firm. The secrets now out in the open or the feeling of betrayal could have been Give Up Point #9.

Also in ’03, Simons’ other son drowned while diving. The grief from losing two sons to such misfortune was Give Up Point #10.

On August 6, 2007, seeds of the coming crisis were being sown and all quant firms were hit with sudden, serious losses. If Medallion’s losses grew and it they couldn’t come up with more collateral for their positions, they would suffer massive losses. It would likely be a death blow if their positions were sold out for them. Simons decided to reduce some of his positions to try to raise cash and save margin calls. Amazingly, it worked and they ended up 87% for 2007. But it could’ve been Give Up Point #11.

Last, in 2008, Simons became suspicious of a firm that was handling some of his money. Eventually he pulled the money out. That suspicious fund was run by Bernie Madoff. That was Give Up Point #12.

What have we learned from Simons?

We learned that we can’t give up. How many of us take a few losses and bail?

Simons struggled for a decade and then struggled more after that.

He could have give up 12 times, but he never did. That’s what it takes to become the best of the best.

There’s a lot more to learn from Simons.

We’ll be talking more about that this week.

Talk to you soon.

 

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It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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