Long Term Investing vs Day Trading
Is long-term investment better than trading? When I first found out who you were it was from one of the guys in my office and you’re an internet phenom, your style of investing couldn’t be more opposite than mine. Let’s start with how you got started in this business? – Sure, how’s it going everybody? Thank you for joining, first of all, thank you for having us. I got started when I was a senior in high school.
I had my bar mitzvah gift money just sitting in like Series EE bonds like going nowhere and I was a tennis player. I had surgery on my arm and I couldn’t play tennis anymore so my parents gave me control of the bar mitzvah money, they thought I would lose it all, and instead, by the end of my senior year of high school, I made over a hundred thousand, by the time I graduated college it was nearly two million.
I gravitated towards low-priced much-hated penny stocks. So how much did you start out with? I started with 12,000. So 12 grand to a hundred grand in what style of investing? I- Just buying penny stocks as they broke out. I didn’t know at the time I was actually That they were penny stocks? – Well no, I knew they were penny stocks I didn’t know that they were being promoted by a boiler room, so I recognized the pattern, I would buy around 3:50, 3:55 p.m.
Eastern, before the market closed and almost nine times out of 10 they would Gap Up the next day because the boiler rooms were promoting them overnight to people at dinner and the buy orders would pop up the next market, no pre-market, so you would get the Gap Ups. – So let’s walk into your show that you first got known for in a mainstream style. So I was on Wall Street Warriors, drunk in every episode– – Why? – Going through a tough time.
I was very depressed. My hedge fund was down 30% they thought that it was because, you know, I got cocky because of all the success, it was just because I didn’t know shot about investing, I was a trader. So trading and investing, two different animals as you know. – So let’s know where you are today, so when I saw the video of Lamborghini’s, you know, flash, I looked at you at a go, man this guy’s flash, I’m about cash, we couldn’t be opposites, but yet the conclusion here is that you gotta know what style of investor you are, or speculator, and what works for you.
So what have you learned from, you know, going through the boom, the bust, and the echo of your style of trading? – Yeah, and opposites attract, I like you, you know, I don’t mind that you, what do you have a Mazda, a Subaru, a Hyundai– – Something like that. – I don’t know, but no, it’s about cutting losses quickly for me, that’s rule number one.
When I was an investor I had no risk management, now as a trader that loss helped me understand why I failed, the loss I’m very grateful for. Now you won’t see me lose more than 2 or 3% on any trade. – So let’s talk about that. How long is your average trade? – Between 30 minutes and two days. – 30 minutes and two days? – Yeah, somewhere around there. Sometimes like two hours, sometimes a day, never more than two days. – And how do you do your research in this? – So I’m always looking for big percent gainers.
I don’t wanna be stuck in a mining company going nowhere with a big promise of a story where their stock is doing nothing. I focus on stocks hitting new highs every single day. We might not have the boiler rooms anymore but we have weed stocks, we have CBD, even though the markets were down as a whole last year my main account was up over 70% focusing on weed stocks, focusing on CBD. I don’t care what sector’s hot I just focus on that because that’s the volatility that I need.
And how do you buy your stocks? Do you have a stockbroker? – So I’ve heard there are stockbrokers, I don’t know, I don’t know this, I’m mean I just, everything I do is online, it’s all digital. But I got a business card from somebody last time saying that they were a stockbroker and I actually framed the business card ’cause I feel like it’s an artifact. I feel like if I– – It should be in a museum? – Like a museum of Wall Street, like awe once upon a time the great stockbrokers, but no.
I use, you know, interactive brokers, E-Trade, it makes it very simple. – So do you play only the North American stocks or do you do international, different time zones? ‘Cause I see all these videos of you canoeing and making money. Now let’s pull the veil off of marketing and the real world. – Yeah, so I bring my laptop everywhere, I do trade from some crazy places.
I was in South Africa on a rhino operation, a trade actually happened while I was in the operation and we had wifi in the bush, that was a real trade. Usually, I’m in Asia, I’m actually heading to Asia tomorrow might and the market is open at night there so I trade U.S. stocks, Canadian stocks, it’s tough ’cause I pull all-nighters, you know, it’s not the best time zone, but I love it.
You’re pulling all-nighters, still doing the boozing that you did in Wall Street Warriors? – I can’t drink for shots anymore. Now I’m drinking coffee. I just started drinking coffee, I’m 38 now and in my 37th year I joined the coffee revolution. Who here likes coffee? Yeah. – Aw, ya gotta love this. So what about private placements, so a big thesis of my MS thing is, the alligator, you sit back, you do a ton of research, you go to the site visits, you get positioned well with the warrant upside.
Do you do any private placements? – Not at all. You can’t manage the risk, I don’t have the patience so I can’t cut losses quickly, I just, it’s not my style. That’s you and your Subaru’s and Hyundai’s. (laughing) – Well, when you own the dealership it’s kinda good selling Hyundai’s and (voice covering voice)– – If you own 500 Hyundai’s that’s fantastic, 500 Hyundai’s equals half a Lamborghini. – (chuckling) Yeah I don’t know about that one.
Now, what about asset allocation? How do you manage how much you put in towards a trade? – So I don’t like risking more than 30% of my account, I know that’s aggressive for people, but remember I’m cutting losses very quickly so I’m very. – So let me clarify. – Yeah. – 30% of your account in one trade? – Correct, I only take one or two trades at a time, no diversification, no hedging bull. I’m specifically focused is this stock gonna move, you know, usually, I’m buying big percent winners so they’re already up 30, 50% on the day.
Can they spike even more? Does it have news? Does it have legs? – So a question I would have, ’cause it’s not my style, but if I was watching this marketing– – You made that clear. – Yes, ’cause I would love to put our portfolios up and I think the next time we will do this. – Yeah, let’s do it. – In your newsletter do you make the trade then tell your subscribers about the trade or how do you handle not front-running your own subscribers or, you know, your followers? – So different newsletters have different amounts so I mainly trade with the $12,000 account.
So I’m buying like 500 shares, a thousand shares. – How the hell do you buy a Lamborghini with a $12,000 account? – I’ll teach you, you grow it over time, it builds up over time, but then, you know, I have like an Agora Newsletter where I don’t trade the stocks at all, Agora doesn’t, you know, allow any trading. For me I wanna teach people– – Can I, can I freeze you there? – Yeah, sure.
Why would anyone ever wanna follow someone if you can’t put your own money in, but you want them to put your money in. I just don’t understand that fundamentally. – I don’t want anybody to follow any of my picks. I want them to learn the strategy. So whether I have money– – So it’s just an education. – It’s all education and that’s the beautiful thing here.
I have five millionaire students now and my top student has turned 1,500 into 7.4 million, he hates my picks. He actually is mainly a short seller. So he’s gravitated towards a different strategy, but you learn different angles. This is the beauty of investing. You could be an investor, you can be a trader, you can be a short seller, you can hold for five minutes, you can hold for an hour. You find what suits your personality and we’re all different people here and this is what I love about this.
It’s not just about hot plays, or hot picks, or new technology, or some amazing gold find, find what works best for you and what you’re comfortable with. Like, even if I made a million dollars on one of these mining companies I would hate it because that’s not my style. – Don’t lie you’d be out buying a Hyundai or a Mazda. – Not at all I would be donating the money, I would donate. I donated 4.5 million in the past three years, but it’s not my style. You have to find your style that’s what I love most about this.
Long-term investment in stocks does not involve emotional investing decisions.
I get to travel, I get to trade, I get to teach, and I do it based on my personality. – Okay so now I really wanna pick into your brain about where do you see the resource sector? I’m sure you’ve looked at gold or copper, or silver, what is your belief in the gold market? – I see the resource sector and it’s usually on the, you know, the columns of like the biggest percent gainers, or the biggest percentage losers, it’s usually unchanged or close to that. So I don’t even look at such a boring sector because it just doesn’t move enough for me.
I do like it when, you know, a mining company strikes gold or they find diamonds, or they find, you know, amazing oil and the stock goes up 30, 50, 100%. To me, that’s a catalyst. There are so many stories. You guys will hear so many stories, and girls, over the next few days, and in your lifetime, I just have learned to ignore stories.
Everybody is a storyteller, every CEO is positive about their company and most of the time it just never plays out and most people are full of shots. I’m sorry I expect the least and I’m never disappointed, yeah. What about the role of marketing. You’re part of the Agora Franchise, I’ve seen some pretty aggressive marketing on that.
Where do you see the future of the newsletter industry going? – I think that you have to be real. In the past, a lot of newsletters and a lot of companies, especially in the resource sector, put out like these pipe dreams, like oh we did all this, and then you never match up to expectations. So with whatever your market, whatever product, you wanna be as close to a real as possible.
Like this could actually happen. Like my top student actually did turn a few thousand into several million. It’s not just me, I have several students like that, and if you have that real stuff the internet will reward you. If you’re fake the internet will crush you. The internet is the future with all of these sectors and you want to just be real.
You don’t need to have these highly glossy magazine ads or these photoshoots, just be as real as possible and it’ll shine through eventually. – So what about currencies? Do you play these? – I use a lot of currencies in my travels, I don’t trade them. I don’t think that you have a good enough edge either way.
I’ve seen so many moves come out of the blue and I see too much leverage. You know, if you look at the odds, five out of six, forex traders blow up in the first six months. I just like penny stocks because you have a lot of idiots in this sector, and in this niche, and you can beat the idiots.
It’s like playing Mini-Me in basketball, you know, like if you have like a little midget and he’s trying to shoot and you’re just blocking him all day, and it’s not his fault he might be the best midget basketball player in the world, but he just doesn’t have any height, and basketball’s a height game. So to me, that’s penny stocks. Forex you’re competing against, you know.
LeBron James, you’re competing against all these great traders, I can’t compete against that. If I’m going one-on-one with LeBron James as I’ll just lie down and say, you win, but if it’s a midget I’m talking that game and I’m betting on it. (laughing and clapping) – So looking back at your use of proceeds we had Have you ever played basketball with a midget? – Have I? – Yeah. – No.
So I think next time we talk, a round of applause if you think this is a good idea, should we bring a midget to play basketball. – No. (laughing) – I hear some laughs I’ll take that as applause. You need to understand the edge and for most people, it doesn’t matter how good a thesis is with an investment or a currency, you have no edge.
And so if you do this trade over and over and over again your account’s just not gonna build. – So what about cryptocurrencies? – I mean they have a great pump and dump pattern so I love it. That’s the volatility that I need. You can make money on the way up and make money on the way down, that is at least volatile.
But I don’t believe all the idealistic bullshit where it’s like oh, this is gonna change the world, why aren’t more companies using it? It’s changing the world of, you know, kind of like an underworld economy, I know a lot of drug dealers who use cryptocurrency. – Why do you know so many drug dealers? – Dude I’m all over social media.
I get the craziest– – Are you buying your Lambos off them? – No I just, people come to me and I meet drug dealers, I meet strippers, I meet all kinds of crazy people. – Where do you hang out? – On Instagram, this is all on Instagram. Are you on Instagram? – I think my marketing teams are, I have no idea. – You need to get on Instagram if wanna meet these amazing people.
No, I just– – That’s the difference about being flash and cash, I, you know. – For me, it’s interesting to see the way the world works. Cryptocurrency is a big boom to the black market of the world with drugs and all kinds of nasty stuff that frankly is very questionable and the government I think is going to step in, but for me that at least sector is volatile.
That’s what I want. Where’s the volatility in these commodities? Where’s the volatility in mining? I see gold, I looked up the price of gold to prepare for this interview and I see it’s up 8%, down 8% over the past year, it’s flat. It’s freaking unchanged. Why are we even talking about something that’s unchanged? Cash was the best-performing asset of 2018.
You don’t have to come to a conference, you don’t need anybody to just have freaking cash. – Actually, vanadium beat it, uranium beat it, so research does matter. – Fantastic I can’t even pronounce those things. For me, cash wins. It beats all the hype. – Okay, so you don’t use a broker which I can get– – I use an online discount broker. – There you go, online discount broker.
What about research reports, do you read any of this or do you just look at gainers and momentum? – I mean most penny stock research reports are paid for promotions. – Of course, but I’m talking real research not stuff from, you know– – Well I look at. – Marketing firms such as– – Yes. – Starts with an A and ends with an A. – Yeah, so I mean, hey, hey. (laughing) Listen there are different kinds of research reports.
I put out research on the companies that I’m actually trading. They might not all be fundamentally based, but a lot of penny stocks in just technical. So for me, I’m looking at the technicals, I’m looking at the volatility, and I’m looking for the stories. You know when a story sells it can have hype, it can have legs, it spreads all throughout conferences like this, everyone starts talking and that’s good for momentum.
I’m also a short-seller so I short scam, so yeah, I read through SEC filings a lot too. – So what percentage is long versus short? – In the last year I was like 80% long, 20% short in previous years it was flipped. I go both ways. I made millions of dollars each way, for me, it’s three out of four stocks that follow the market I wanna follow that trend.
Now with a $12,000 account, I’m assuming you’re using severe leverage? – No leverage whatsoever. No leverage? – No, I mean E-trade you can short you just need $2,000 in your account. Interactive brokers are actually great for shorting stocks under $2.00 a share, E-Trade’s a little less, but you don’t need to take a big position, you don’t need to be one of this good till zeros, I know a lot of people they say, oh, this is a scam I’m just gonna short it for three months.
For me I’m looking for that first red day, I’m looking for the crack in a lot of these promotions. There might not be the wolf of Wall Street anymore, but there are lots of little wolves, and they have these little mini promotions in stocks, you know, in cryptocurrency, in weed, in whatever weird metals you just said, you know, unobtainium, I think that was in Avatar, that might be a promotion these days.
I mean you can promote anything if you have a story and little blue-green characters. – So do you follow the promotions of newsletter writers that go, okay I’m gonna short that like even within in your own universe of Agora world? – I’m not– – ‘Cause almost, like 80%– – No, no. In the newsletter, readers are owned by Agora. – I would not agree with that.
Agora does not take compensative promotion– – No I’m not saying – paid promotion. – But they’re doing a. – I’m talking about paid promotions. I short sell paid promotions so those kinds of stocks are fantastic. It’s not a question of if, it’s just a question of when – When, yeah.
Because these companies spend, or insiders, or the CEO, somebody spends hundreds of thousands of dollars, maybe millions of dollars investing in a promotion, not investing in a company, it’s just logical that it’s gonna crash. But a lot of these promotions go further than you think. You know Bitcoin, a lot of people ripped on it before it went up thousands of percent and all the other cryptocurrencies.
So now we’re going to play long or short okay? Regardless of what the product is it’s just the equity. – Yeah. – Long or short, but you’re forced to buy okay? – Okay. – So you’re either gonna go long or short. – I can’t, I can’t, no trade? – No, I’ll have to say no trade. – Cash is a position, okay. – I agree. – And oftentimes the best– – How many alligators are there in the crowd. There’s not enough of you.
Can I be a hippo, can I just chill in the water and then eat people when they come into my pond? – You can do that too, but a sniper, you hold positions for two hours, you can’t take a big chunk of something for two hours. – Correct, I’m taking a quick shot, a kill shot, and I’m sitting there waiting for that shot for hours. Have you seen, Enemy at the Gates? – No I haven’t. – Or American Sniper with Bradley Cooper? – Yes I have. – I’m gonna send you the DVD, or you might have VHS.
DVD, I thought everything’s on Instagram now? – You might have VHS tapes I’ll send you a VHS. – No I don’t, I thought everything’s online, you don’t have Netflix where you live? – Instagram is only one minute. – I know those drug dealers don’t want any evidence on this online. – Exactly Instagram is only one minute, you can’t watch it.
Long term investing in stocks is stress-free
Okay so, Tesla, long or short? – What’s the time horizon? – Well you, I don’t know, two hours to two days? – Is there a– – I’m kidding, over the next 12 months. – Short. – Gold? – I mean it’s gonna be unchanged so it doesn’t really matter. – U.S. dollar? – If I’m long or short I make nothing, I lose nothing. – [Marin] U.S. dollar? – Long. – Me too actually I agree with you on that. – [Timothy] Hell yeah. – What about something, Facebook? – I’ll go long just ’cause it’s down so much already, but again, this is not my kind of a play so.
Google? – I’d go long. – Now let’s get into your world. – The marijuana sector as a whole, where do you see it going over the next 12 months, ’cause Vancouver’s been an incredible printing press for these companies. – Yeah, I mean everyone was all excited about legalization, but it just, when legalization came it came and went and all the stocks just tanked. I think that marijuana stocks will continue as they have been, there’s a lot of criminals, there’s a lot of shady characters, you gotta be careful.
Most of the companies will do nothing or fail and they’ll all have amazing hype before they fail. And then there might be one or two plays that, you know, really do well. So some names that you believe in that actually will work out? – I don’t believe in any of them so, cash is a position. Right now I am 100% cash, mind you, okay.
The stock market went down a lot, it went up a lot, I’m freaked out, I do nothing when in doubt I do nothing. So you asked me for names, I’ll look for the biggest percent gainers over the next week, the next two weeks, and the beautiful thing is that the biggest winners will show themselves. You’re not gonna miss anything. Everyone’s so afraid of missing the next big winner.
If you just look at the big percent winners you’ll see them popping up, you’ll see them spiking for one, two, three days. If they are gonna spike for one, two, three years, you’ll see the beginning of an uptrend. You don’t have to be there on day one. And I think a lot of people have this problem where they wanna try to predict the next big winner ahead of time and so then you’re just, you’re throwing out 10 picks and none of them are gonna be the big winner.
So with this strategy of the, you know, trading philosophy that you become famous for online, and the Millennials just gravitate to it, right? So we’ve talked about why do you use the Lamborghini as marketing ’cause in the days past, how many people have heard of John Vu. – Tom Vu. – Tom Vu. – Tom Vu.
Sorry, Tom Vu, and the Rolls-Royce and I know you bought a Rolls-Royce and I believe your uncle drives it around? – Yeah, my uncle uses it to get laid in Miami. I’m barely there. So for me again it’s about being real. Notice how I’m real about who drives my, you know, Rolls-Royce, but I did buy it I don’t rent it for a day. And the key is being real.
My latest millionaire student found me because he liked my Lamborghini on Instagram, which inspired him. Once you get beyond the flash you see that I have 6,000 video lessons. So I think it depends– – So let’s talk about that. – Yeah. – That’s what, so when I initially came across you and me, Jane talked to me– – Yeah, you just see the flash– – And I was like – And you make assumptions.
Oh, this is interesting. And then we got to know each other, I went okay, there’s something here. Talk about these videos that people can learn, like what can you learn? – Yeah so– – So where to buy, a Ferrari or a Lamborghini? – Yeah, but I actually do have a video on that. But they’re mainly technical videos, just basic technical analysis, how to read SEC filings, how to read level two.
Are these real short videos or? – All kinds, I have about 1,800 hours of total content from video lessons, DVDs, and live webinars, Q&A, live training, you can see my screen. So it’s showing every single thing that I learned the hard way over the past 20 years. ‘Cause I didn’t have a teacher so, even though I was successful I was blind for a while, I was just looking in the dark. I didn’t have my risk management, I didn’t have cut losses quickly for the first eight years.
So I had no risk management. When you have no risk management, when you have no education you’re bound for a fall it doesn’t matter how successful you get, you need to have risk management. So a lot of my video lessons are boring as (bleep) about risk management so the Lamborghini gets people watching. You’re gonna wanna watch an hour-long video on cutting losses and where to put your stop-losses and trailing stop-losses unless you have a motivation why should you actually use this.
So I use the visuals to get people to study and the data shows that it works. – You suck ’em in with the flash, and then you teach ’em how to make cash. – So what I tell, I said this to Larry King when he interviewed me, it’s like teaching, it’s like going up to a homeless man, right, and you have two different bottles in your hand.
One you have like green juice, it’s like kale and spinach, and in another bottle is Jack Daniels, and you ask the homeless guy which does he want? Which one do you think the homeless guy wants? He wants– – Well we are in Vancouver, they’ll probably go with that green juice. – No, no, no, you’re ruining it.
Compounding works in your favor with long term investing in stocks
The homeless guy would probably want the Jack Daniels so I put the green juice– – You’re making such assumptions here. – Listen we’re gonna go up to 10 homeless guys, I’m gonna– – I wanna know where you hang out okay? – Instagram, they have free wifi at McDonald’s. No, listen, so you put the green juice in the Jack Daniels so the homeless man thinks that he’s drinking the alcohol meanwhile you’re tricking him with healthy nutritious green juice, that’s what I do with my people.
I trick them into studying for what’s good for them and it pays off over time if they study enough. People come to me who just want hot stock picks, I say get the (bleep) away from me, I don’t want that. There’s an ugly bald guy on CNBC he’s right about 35% of the time, he’ll tell you when to buy, buy, buy, and sell, sell, sell, that’s not me. – I love it. So what– – See I have a lot of friends. – What recommendation do you have to a struggling sector such as the resource sector where socially there’s a big argument about who issues a social license.
It’s not attracting the Millennials, it’s a difficult business, and it’s in a bear market. What do you recommend for someone who’s had big success in the marketing of yourself to these, and you can’t put a Mercedes, or a Lamborghini, or a Ferrari on the title of these things? – No, I’ll tell you, what I do in any market that’s barren I get the (bleep) out.
You don’t need to stay in one, who says that you have to do this all your life? – But that’s truly how you make the big scores in the echo. – For me, I go from hot sector to hot sector, okay. We had CBD, we had weed– – No, no, no, no, you misunderstood my question. – We had Ebola, we had medical, we had China, we had shipping stocks. – I’m talking to the management team to attract Millennial investors.
Yeah, get the (bleep) out. When the market is bare when there’s nothing to do go do, like create a little CBC subsidiary, create a Bitcoin subsidiary and at least get your stock moving. They were doing it all the time and maybe, who knows, maybe that’ll even pan out. – Okay, note to mining executives, do not do that. – Why not, be adaptive. You don’t need to stay in the same– – But to build a mine.
Terrible sector. – You actually do, the focus factor matters. – I understand, okay, for long-term success in business, but that’s not gonna attract Millennials. – But you can’t run a company in two-hour time frames. – But you didn’t ask me for business success, you asked me for marketing success.
So here, we’ll compromise, you do the boring stuff where the stock doesn’t move and maybe it pays off 10, 20 years from now, and you can afford like (bleep) an unobtainium steel hip or something. But in the meantime buy some little CBD startup, buy some little Bitcoin, whatever sector is hot, and market that, and that way you can do both.
You can ride the hype in the short-term and then win in the long-term, win-win. – Okay, now let’s talk about the real-world (voice covers voice)– – That is the real world. – No it’s not. – I saw lots of little mining companies, and lots of companies in boring sectors buy Bitcoin. They bought into it and even though they– – And how did that work out for them? – Their stocks were fantastic they were able to raise money.
For how long? – Until they raised money. You don’t need a high stock price all the time, you rise, right, you raise it, you get it up, you can freakin’ do financing. – So I think the fundamental difference of what I’m trying to get at is net asset value, how to build true value to your company to attract.
But if you’re a mining company that’s gonna go bankrupt ’cause you can’t raise any money at least you should raise money using a high stock price. Use what the market will give you, get that money– – But if you have a quality asset you won’t go bankrupt. – But do you know how many quality assets are undervalued for one year, two years, five years, you know you’re a crocodile. I don’t have that kind of patience.
You’re sitting in your (bleep) Hyundai ’cause that lasts like 20 years, I’m sitting in my Lamborghini, the motor’s gonna burn out in a year or two. So I need money now and I want returns now. I don’t have patience, the world might not even be here in 10 or 20 years. I don’t if you’ve been looking at the geopolitical situation. – I’m sure we’ll still be here in 10 or 20 years.
I mean you’re waiting for it to be here, I’m not taking that chance. – Oh god, I love this. So have you ever done a private placement? – I have I’ve done a few little startups, Ticketfly, StockTwits, did decently, but again, it wasn’t my specialty so I wasn’t comfortable. I actually made money on those two. I had another loser, overall I might be plus or minus $25,000, but I learned I’m not comfortable with that so I stopped.
– So what I was trying to get at is, what should the resource sector as a whole do to appeal to the Millennial investor, not whore itself out to the trend of the day, I’m talking about bringing the Millennials. Because when you go to school, I started out as a teacher, you know mining is bad, and all these things, it’s engraved, it’s actually gone backward in society, yet it’s the backbone of society.
Long-term investing in stocks enables you to save more on taxes and commissions.
As a marketing guru, what do you think the sector should do to attract Millennials? – Yeah I mean going back to the future of the market and finance I think and social media, just be real. You don’t need to hire a whole camera crew to, you know, look at this mine, and make it into like this glossy pamphlet. Glossy pamphlets are dead in my view.
Okay they might work on like 80-year-olds and I see of few them hobbling around here, but for me, I want the younger people interested, and that means just being real. Like just get out your iPhone, start filming, start talking about it. Give like an hour-long Instagram Live or a YouTube Live.
Answer everybody’s questions, just be real about it and if you are real, again, you might not be rewarded today, but you’ll be rewarded in time. And it’s so much easier like it’s crazy how social media has made things easier. You don’t need to spend a lot of money on ads or anything like that, you just use your iPhone or Android, for some weird people. (laughing) You probably have an Android too don’t you? Oh my god, you have an Android.
This is iPhone versus Android. – How much money do you wanna put on that? – I don’t even care I don’t gamble. – Are you kidding me, listen to what you do. (laughing) – I don’t know because your face is a scary poker face, you might have an iPhone, I don’t even know what this is? – It’s an iPhone. – Okay, there you go, but I don’t gamble when I don’t have odds, that’s what you have to understand. For me I’m– – Oh, crocodiles know about odds.
I’m focusing, I mean that there’s so long, I don’t even know how you like to wake up during the day. You might not even have to wake up for a day or a month because the stock hasn’t budged. You might not have to wake up for a year, like oh, is this 2019 or 2020, I don’t even know, gold hasn’t budged. – It moves, don’t worry. – Unobtainium moves, okay.
When Avatar, the next movie hits, unobtainium is gonna go to new levels. – Unfortunately, that’s not a true element so I live in– Avatar, Avatar. – I live in the world of not drug dealers, strippers, and Lamborghini’s. I lend money to people who need to make their payments on the Lamborghini. – Do you lend money to strippers? – No I do not.
Anyways, so if you had to start all over again– – Yes. – With everything you know what would you be doing today as a career. – I would be, again, trying to be real and pitch my services to somebody who’s not real. – In all truth, pitch your services being real, so you’re not gonna be a fraud, okay we get that, I’m talking about a sector– – No, no, no, no, not even fraud, I’m saying, be like I guess– –
Who you are. – Not even who I am like the way to say it is like– – It sounds like such an Instagram thing, be real. – No, like be unedited, my bad okay. – Okay. – So I’m talking about just going live and starting little conversations like this. We don’t know what questions, like let’s take some questions whatever. – Sure let’s do it, any questions for Tim Sykes?
You go with the moment that’s what I would do and it doesn’t matter what sector– – Anyone got a question? I think there’s a gentleman walking up to the microphone, just go up to the mikes. We’ve got four minutes for questions. – Some of the older people need a few more minutes to get to the mikes, give them time. A Mr. Damion Reynolds, what’s the question?
So can everyone hear me? You’re a mining promoter of course they can hear you. – Unobtainium, is the energy metal that fuels Tim’s. Ooow. That’s what unobtainium… – But how is it. – I think your microphones are on now. – What he’s saying. – You’re on. – So Tim– – Yeah. – You’re full of. – How? – You are full of.
Even though I show– – Do you know who you’re sitting beside? – I do, the alligator. – Do you know who you’re sitting beside? – The alligator. – Do you know how, alligator, he’s an alligator the size of 15 (bleep) hippopotamuses. – I don’t care. – Do you know light he’s been on you? Dude, dude let’s walk through this. – How about you go home already?
I’m looking for a moment and I’m doing $12,000 two-hour trades. – Yes. – Buddy you don’t have enough hours in our year for a (bleep) worth of trades to make the kind of money you’re trying to sell us that you make man. Your simple math doesn’t add up. – But I– – Show me, baby. And now it’s a dead industry. – (voice covers voice). Timmy, talk to me my brother, it’s a dead industry.
So why are you here? – Because it’s fun. – You know what you’ve done, you know what you’ve done young man? – It’s fun. – You know what you’ve done young man, it’s fun, go, yo Tim, take a look at the audience. You haven’t talked to the audience once so why don’t you talk to the audience, Timmy? – Okay- – He’s been real. – No, no.
And why don’t you tell them what they can do, by the way, the 80-year old hobbling around, you know what they’re hobbling around with? The life, the pain of their life where they’ve tried and they come to listen to your (bleep). Now, now if– – Let’s all calm down. – If Marin sells them to do something and you know what, you know what, everything in this world, you know what it comes from?
What? – Two things, you know what those two things are? – Tell me. – Tick tock, you got three seconds mother (bleep) tick-tock, go. – No tell me I’m entertained. – Something you grow, something you grow, and something you mine. – Yes. – And the stuff you grow sits on top of the stuff you mine. You need to track it okay? Okay, next question. – No, no, no. – Give me your mic. – Okay, let me answer that for a second. – Okay, okay. – Thank you for your– – This kind of went sideways.
Give him a round of applause. Give him a round of applause. Seriously I like the passion, this is what I’m talking about, being real. You can’t be afraid when it gets real. We don’t know what’s gonna be said, this is why I show every single trade, over 20 years, with my income tax returns, with my audits– – I get it. – And I have a charity that has now been built by me single-handedly, raised over five million dollars total, four million-plus of my own money.
And that is built on education and training prophets. And I’m totally transparent about that and it’s good to be real. I see you’re freaking out a little bit, but it’s okay. – Well I saw two big guys about to go at it. – No, no. – And I’m a vegan who’s trying to lose weight. – Listen– – Okay, one more question. – We’re sharing knowledge here. – One more, I get it and Damion’s a great guy. – I like his spirit of conversation.
One more question and then I’ve got a surprise for everybody and then it’ll kind of put the whole alligator conclusion. Yes sir. – I like the spirited conversation though. I’ll be a little bit less spirited– – Oh, it’s okay. – Honestly, my first impression of you was also, I shared the same impression, my first is, he’s too flashy, too cocky, all in your face, lucked out on penny stocks went to 10,000 to a million, anyone can do that, but pushing that out there to get a lot of people to buy your course, I didn’t like you at first. I just made it– – Thank you.
For the first time right now, last five minutes, I’m actually willing to talk with you and see maybe you’re right. Some people don’t learn what they need to, they’d rather hear what they wanna hear not what needs to be said. – Thank you. – So there’s a chance where the Lamborghini is actually a good way to teach them the stop-loss, trailing stop, I liked how you picked those two, in particular, to use as an example.
So I am myself trying to educate people for 10 years I’d love to sit down with you and see, you know, how to get the message out to more people how to be the top 1% of day traders by not just making more money, but protecting their losses ’cause most people think, you know, it’s all about going all in, 50/50. – Well don’t buy a Lamborghini to start your career out on. Last question, last question right there.
Hey guys, hey Tim. – Thank you. – Hey Tim’s it’s George from Agoracom, how are ya? – Hey George how’s it going? – Hey it’s more of a statement ’cause I think I’m one of the few guys in this room that’s actually a hybrid because as an Agoracom we help companies build long-term value– – Oh I love the promotion factor coming up. – No, no– – Alright.
But as a trader on Tim’s platform, because my trades are actually tracked on Profitly, I think there’s a lot of value to doing both. I don’t see how you can do one or the other and all I wanna say was I think Tim got a bit of a bad deal there. – No, it’s. – There’s great value in long term– – I appreciate it, listen I appreciate all the conversation, this is what it takes.
We should be talking about our differences, we should be talking about different strategies, different beliefs, conversation debate is good and you can’t be afraid of what happens. I’m not always right, I’m wrong roughly 30% of the time. But rule number one is to cut losses quickly.
Stock Market Battle: Day Trading vs. Investing (who wins?)
We got ourselves a battle in the stock market, day traders averse investors. Which one is actually better? Who is going to win this battle? Well, I’ll just start right at the get-go. It’s really just a matter of personal preference, but, and I didn’t really come up with this idea on my own, and I don’t know if they were really coming at me, or just trying to, but they said something I was like, you know what, I can make an Article of that, because that’s a really, really good point, and it really illustrates the difference between day trading and investing.
So if somebody says, well, I’m a day trader, and then somebody else says I’m an investor. Okay, what does it actually mean? Now sure there’s a time element, meaning the day trader is going to be, you know, buying and selling a stock in a very small amount of time, relative to an investor, but there’s also something else that at the core,
you need to understand about these two, and I see it quite a bit often, where day traders are way too focused on the stuff that investors are usually focused on, and so I figured from that point of view, I’ll try to kind of accomplish a lot of different little miniature lessons here, in and of itself.
So let’s first get to this comment. But before I get to it, the main dynamic here that needs to really kinda be focused on is the idea of understanding. You’re gonna see the word, but that’s really the overarching principle that separates what a day trader is doing, and what an investor is doing. So, let me get to this comment first.
“I’m sorry charts, have little to no value. “Maybe read their financials and news on what’s happening. “That’s enough to help you understand the downtrend.” Clearly this person, not a fan of technical charts, which if you’re not familiar with, that’s just a tool that a lot of people out there use, but that’s fine.
Everybody’s got their opinion, but the whole, hey, understand the downtrend, and what is a downtrend? Well first off, if you’re brand new, all that’s telling you is a stock is doing this, right.
It’s down-trending it’s going down in value, and this person is you know what, hey, charts, they’re not going to help you understand the downtrend. Understanding in what way? Well, why is it down-trending? What’s causing it to downtrend? And you will get that, to their credit, by reading financial statements, by going through cash flow statements.
Maybe you’re looking at the management, and you’re thinking, well this guy’s a terrible CEO, but I mean, yeah. So you could, by looking at that stuff, you could understand why the stock is down-trending, but it’s not a question of that really, it’s a question of, should you even care about understanding? That’s what it comes down to is should you understand? And as day traders, no, you shouldn’t understand.
You don’t care. The only thing as day traders that you care about, is well the fact that’s in a downtrend, and that’s it. Because as day traders, we’re trading price movements. We’re trading volume, and if you know it’s in a downtrend, that’s all you need to know. You don’t need to know the why, you don’t need to know any of that.
Just hey, it’s in a downtrend. Okay, now you can start to form trade plans around that. With that being said, now, of course, if it’s in a downtrend I’m not saying you don’t go and scan the news headlines real quick, and just read the headline. All right, yeah, got it. I understand the overall context.
There was some sort of bad news that came out, but as day traders, especially if you’re somebody that’s really doing micro trading, a day trader is not gonna look at that and be like, all right, well let me go check through the cash flow statements. Let me go look through the financial balance sheets, and all that, and then, you know, no.
Is day trading a good idea?
Because, as day traders by the time you get through all that stuff, who knows, maybe now it’s in an uptrend, and it could change that fast. So, it’s all a matter of should you even be trying to understand? Now the flip side of the coin, as an investor, should you be trying to understand why it’s down-trending? Absolutely, you should, because you’re gonna be in it for more of a long-term haul.
You’re gonna have a longer-term game plan. So yeah, it would definitely be very wise to understand why the downtrend is happening, but as day traders, we just want to know what is happening, and if a downtrend is happening, well, here you go.
Check out a news release real quick. Read the headline, and then get back to starting to form a trading plan around what is happening, and what in this situation what is happening is a downtrend.
But you don’t need to understand why it’s down-trending, and a lot of times people get that mixed up. They show up and I’m a trader. Oh, I see this acting a certain way, and then they start digging through all this stuff, and they make things way more complicated than what they need to be. So, it’s okay to not understand why a stock is moving in a certain way, that’s okay.
It’s okay to have no idea what this stock does. I’m trading ticker symbols all the time. If you’re like Clay, what do they do? What is their business model? I have no idea. I don’t know anything about this. Now, of course, you have the famous ones Apple, Amazon, stuff like that, so of course, I would know what that is. But some stocks out there, I have no idea, and you don’t need to either.
Now again, as an investor, do you need to understand their business model? Do you need to understand what they do? Of course, you do. But as a day trader, no, you don’t need to know any of that.
Trading vs investing
You just need to know what’s going on, and that’s why charts are very popular because that’s what a technical chart is, is a chart is gonna tell you what’s going on with the price, and then the amount of activity, or in other words, the volume that that stock is getting, and this person, maybe being a little short-sighted, a little narrow-minded.
Apparently, they think that only investors exist, but no, there are many different branches and many different strategies out there. But to call the charts totally worthless, because they don’t help you understand why something is down-trending, that’s true. I love charts, and I will be the first to admit, you’re absolutely right. Looking at that, which is essentially a chart, a line chart, in a very simple form.
That’s not gonna help me understand why it’s going down. Now if you say, well Clay, technically speaking, it’s going down because there’s more supply than demand. Well yes, I get that, but from a fundamental standpoint, I don’t know why that’s going down. I just know that it is going down, but the flip side is, well maybe I just don’t need to know why it’s going down.
Maybe I just need to know that it’s going down in the first place. So that is really the big battle that goes on sometimes, are you have investors saying, oh, technical analysis is garbage, and none of that stuff works, because it doesn’t help you understand anything about the company, and that’s fine. And then you have traders saying, well, why are you bashing charts, like I’m doing right now.
We don’t care about what the company does. We don’t care about why something is doing what it is. We just care about, well, what is it doing? So that’s the battle that goes on. Who wins, it’s a matter of strategy. Me personally, I do both. I have my retirement accounts are all investments.
So yes, I care about it, I’m trying to understand why price movements are acting in certain ways, but I also have my trading accounts where I don’t care. I just want to know what the price is doing, and then I can start making decisions from that point of view.
So that’s the big difference between an investor and day trading, is all about kind of what you need to understand, and really, should you even be trying to understand it in the first place?
And once you start to answer those questions, that really kind of will narrow things down in terms of what is an actual valid strategy that you can be used in the market. So, if you have any questions or comments on this, please leave those down below in the comment section. I do read and will reply to all comments.
Do you have any experience with this? I’m curious, have you ever had an investor, or who knows, it can go from both sides, but have you ever seen this debate occurring before, where one person’s saying, charts are totally just worthless, and then the chart people like, financials are worthless, cash flow statements.
The $25 Billion Day Trader that Even Warren Buffett Acknowledges
It has been said that a good investor must always strive to crush his most cherished beliefs. Well, during Berkshire Hathaway’s 2021 annual shareholder meeting Warren Buffett and Charlie Munger crushed one of mine. What do you think of quants? Jim Simons’ Medallion fund has done 39% net of fees for three decades which, proves that it works. But they were very smart.
Yes, they got very rich. Very, very smart. Very smart and very rich, yes. And very high grade, by the way. Jim Simons. But we are not trying to make money trading stocks. We don’t think we know how to do it. Charles Darwin used to say that any time he found evidence that contradicted his previous convictions he had to write it down in the first 30 minutes because otherwise, the mind would reject the evidence for cherished beliefs.
Well, how about reading a whole book and making a video about it? During the last few years, I’ve read tons of books on personal finance and investing, and I settled down on a conclusion that value investing and fundamental analysis is the way to go, while day trading and studying price charts is just pure bogus. Or, you know, bots trying to sell you something. Enter Jim Simons.
Jim Simons is the world’s richest mathematician. Forbes estimates his wealth to be at a staggering $24.6b currently. He gained most of this wealth through conquering the world of trading by starting the “quant revolution” with his company Renaissance Technologies and the Medallion fund. The Medallion fund has the best track record of any hedge fund in history. It has averaged a 62.9% return per year before fees, and 37.2% net of fees, versus 11% for the S&P 500.
That is the most impressive investment record I’ve ever heard about, it’s even better than Warren Buffett’s, although it has been accomplished with a much smaller capital. So, should you abandon value investing to become a day trading quant? Let’s not get ahead of ourselves here, but we’ll get to that.
The Man Who Solved the Market: Jim Simons’ Investment Philosophy
we shall take a closer look at the Medallion fund’s success and reveal a few of its secrets. You’ll have to stay put for that, but I think that a quote from agent Smith from the movie The Matrix may be used to set the stage: “Never send a human to do a machine’s job.” This is a top 5 takeaways summary of The Man who Solved the Market. Written by Gregory Zuckerman.
And this is The Swedish Investor, bringing you the best tips and tools for reaching financial freedom through stock market trad… investing. Takeaway number 1: From $0 to $25b Before getting into the how’s of Simons’s incredible success, let’s first have a look at the what’s. What did Jim Simons do to go from $0 in 1938 to $25b in 2021? Simons was born in 1938.
Jim Simons Early life and education
Early on, he began to read a lot. I know, surprise, surprise! Jim Simons is another one of those successful people who read a lot. To be honest I do not think that the medium through which you consume information matters too much, what matters is that you strive for more knowledge.
Simons enrolled at MIT in 1955 and was even able to skip the first year of mathematics thanks to his extensive high school curriculum. He decided early on what he wanted from life – coffee, cigarettes, and lots and lots of maths. Simons was quite the adventurous type. Together with two friends, he decided to go from Boston to Buenos Aires, riding scooters. They named the trip “Buenos Aires or Bust”.
Well, they busted in Bogota in Colombia, but it must have been a crazy trip nonetheless. While getting his Ph.D. at the University of California, Berkley, Simons had his first dabble in stocks. He got up early each morning to drive to Merrill Lynch’s office in Los Angeles, just in time for the opening of the Chicago exchange. He would stand there to watch prices flash by and make a few trades.
Simons got his Ph.D. by age 23, in 1961. At age 26 he got a job as a code-breaker at a US intelligence unit, targeting old Soviet Russia. Simons learned something important about hiring people here. The unit worked very well while primarily focusing on hiring people for their creativity, ambition, and brainpower, rather than any specific expertise or education.
Another important lesson from this place was its motto: “Bad ideas are good. Good ideas are terrific. No ideas are terrible.” In 1968 Simons published a mathematical paper on something which I find quite difficult to pronounce, let alone understand: “Minimal Varieties in Riemannian Manifolds”.
To this day, the paper has been cited 1722 times, which counts as an incredible success for a paper on geometry. Also in 1968, Simons was asked to build and lead a maths department at Stony Brook University. It’s been said that the extroverted mathematician will look at your shoes during a conversation rather than his own.
Well, Simons was extroverted, period. And he had an unusual knack for leading his fellow mathematicians. In 1978 Simons had had enough of the world of academia though. He wanted new challenges and solving the market, conquering the world of trading, was something which no one had done before, which sparked his enthusiasm.
Jim Simons the Numbers King
He called his first hedge fund “Monemetrics”, which was a play of words combining “money” and “econometrics”. Simons was hinting that he would use math to analyze the financial markets and score big time. Simons utilized his unusual combination of being an exceptionally skilled mathematician himself while possessing some incredible leadership and interpersonal skills to hire and get the most out of many fellow mathematicians.
He realized early on that he wouldn’t solve this puzzle by himself. In fact, the book might as well have been called “The Men Who Solved the Market”, but you’ll hear more about these people and their contributions later, because that’s more about the how’s than the what’s of this incredible trading success. In 1982 Simons renamed the company to Renaissance Technologies, a name that it holds to this day.
In 1988 Simons launched the Medallion fund, which is the most successful hedge fund of all time in terms of returns on capital. While others were still relying on instinct and intuitions for their trades, Simons employed automated algorithms, tons of data, and advanced mathematics, but again we are getting ahead of ourselves.
Medallion didn’t charge the usual rip-off fee of 2/20 that other Wall Streeters did, no, no. They charged 5/20, eventually raising that to 5/44! These are insane numbers, but in Renaissance’s case, it proved to be worth it. In 1990 the Medallion fund had its first year surpassing a 50% return. It scored as high as 77.8% before fees for the twelve months. Simons kept up his leadership skills.
Jim Simons Renaissance Technologies
He created a culture of unusual openness at Renaissance. Moreover, he used smart monetary incentives, where people were paid bonuses, but only if the company reached certain levels of profit. This money was paid out over many years to keep people in the firm. Renaissance had almost no employee turnover. Simons also had an important role to play in the hiring process.
He wanted people who had little or no connection to Wall Street and generally accepted business dogmas. In 1993 the Medallion fund closed to outside investors, from now on it was only available to employees of Renaissance and their families. In the year 2000, Medallion had its first year exceeding a 100% return, achieving a stunning +128.1%.
In 2003, stocks had officially taken over as the most important trading instrument of the firm from previously having focused on currencies, commodities, and bonds. In 2005, Jim Simons received a personal gain of $1.5b, which was the highest compensation among any hedge fund manager that year.
Simons retired as CEO of Renaissance in 2009 and handed over the role to two of his colleagues – Robert Mercer & Peter Brown. Simons stayed as Chairman, but eventually left that post too, just recently in 2021, but he remains on the board of directors. He earned a cool $2.6b with his financial stake in the company in 2020, reaching an estimated personal wealth of $24.6b.
Okay, let’s now get into how Jim Simons (and his colleagues, I should add!) was able to achieve these stellar results in the Medallion fund. Takeaway number 2: Medallion is a short-term predictive algorithm The secret to Renaissance’s and the Medallionfund’s success has been to employ tons of data and advanced mathematics to develop automated trading algorithms.
Renaissance was one of the pioneers of using machine learning and applying it to the world of investing. Today, this black box algorithm is an exceptional short-term predictor of market movements. The Medallion fund holds on to positions for an average of a day or so, but sometimes as little as minutes or seconds.
It executed 150,000 – 300,000 trades per day back in 2000, and probably even more of them today. One employee expressed that Medallion’s goal is the following: “[To] scrutinize historic price information to discover sequences that might repeat, under the assumption that investors will exhibit similar behavior in the future.”
Jim Simons Palo Alto Networks Inc.
Simons understood quite early on that the stock market moves because of a complex process with many, many inputs. Some of these inputs may be difficult or even impossible to understand. They may not be related to traditional fundamentals such as earnings, dividends, interest rates, or similar, but there may be some other, more obscure reason for certain moves.
However, eventually, they will all be reflected in pricing data, so Simons decided to study that data. What type of human behavior is it that Medallionis able to take advantage of? Well, to Simons, it didn’t matter as long as the patterns reappeared with a certain degree of statistical significance, but it can be interesting to speculate a little. Medallion’s profits probably stem from human biases and misjudgments.
We may have a few of the suspects in Daniel Kahneman’s famous book Thinking Fast and Slow Loss Aversion – people hate losing more than they like winning – Anchoring – one’s judgment is skewed based on previous prices and experiences And – The Endowment Effect – you like what you already have more than what is objectively sound One of the core strategies ever since the inception of the fund has been to rely on mean reversion.
Early on, back in the 80s & 90s, the Medallion fund used simple linear regression models to the plot, for example, the price of crude oil vs the price of gasoline. If you look at enough data points you can spot a trend line, a linear relationship between the two assets. When gasoline is cheap compared to oil, you’ll buy gasoline and short oil and vice versa.
Jim Simons on the hedge fund industry
Then you wait for the prices to go back to “normal”, reverting to the mean. Today, Medallion uses a technique called “statistical arbitrage” which is about identifying a small set of quantifiable market-wide factors that best explain certain stock market movements. If, for instance, Exxon tends to move in tandem with petroleum prices and interest rates, Renaissance identifies that.
Then they bet on the stocks that have moved the least in the direction of their market-wide factors while betting against those that have moved more than the factors predicted. Again, reversion to the mean. Today these relationships often consist of multiple variables and the relationships no longer have to be linear, so they are often difficult to identify for the naked eye.
To identify such relationships the Medallion fund needed data. Mountains of data. Takeaway number 3: Medallion requires TONS of data One of the former CEOs of Renaissance Technologies, Robert Mercer, said it best: “There’s no data like more data.” This became something of a mantra at Renaissance. Any data that could be quantified and was deemed to have some potential for predictive value was gathered.
Newspaper stories, internet posts, insurance claims, nothing is too obscure. An employee named Sandor Straus noticed the need for data early on if Simon’s wish for a fully automated algorithm was to become reality. Back then, having more data than your competitors meant buying books from the World Bank and magnetic tape from various exchanges.
The data went back as far as WW2. Straus collected more than even Simons thought was necessary, among other things, he started to collect the intraday tick prices, betting that it would become useful to them at some point. Straus even began to model data itself for a while. There were gaps in the data at certain periods due to unexpected circumstances, such as when a major flood had suspended Chicago trading.
Atlassian Corporation Plc (Atlassian)
Sometimes, modeling data is as possible, just like it is possible to sometimes determine the shape of a missing jigsaw puzzle piece. Today more than 300 people are employed at Renaissance and they have more than 30 people with PhDs with the primary focus of cleaning up different data feeds so that they have the best data available for making short-term predictions.
While studying this much quantitative information, Medallion must be careful as to not run into data overfitting. If you look at enough data you are bound to find some signals that seem statistically significant just by pure chance.
For example, a quant investor called David Leinweber had identified that US stock returns could be predicted by combining the yearly butter production of Bangladesh, the cheese production of the US, and the population of sheep in Bangladesh and the US (true story!).
For this reason, Medallion always starts to trade new signals with smaller amounts of cash, gradually ramping up the capital committed as profits roll in. Takeaway number 4: Medallion is based on advanced mathematics As I said before, this book might as well have been called “The Men who Solved the Market” as Simons definitely couldn’t do this alone.
He employed various mathematicians who were specialists within their fields. Among the men who solved the market were: Lenny Baum, who was an early employee that helped Simons with something called Hidden Markov Processes. James Ax, who held the largest stake in Medallion’s predecessor, Acxiom. Ax was a great algebraist and exceptional at exploring correlations.
René Carmona helped incorporate some stochastic differential equations into the models. He began applying so-called Kernel Methods to analyze patterns in the data sets. He was the first one to implement a full black-box approach, where they allowed the computer to teach itself which patterns were most important.
Elwyn Berlekamp, who helped with advanced game theory. He even founded a branch of mathematics called combinatorial game theory. Berlekamp had also worked for John Larry Kelly Jr., the creator of the Kelly criterion. The Kelly criterion determines how large or small a certain trading position should be.
It can be used for value investing too, by the way, something I’ve discussed previously in a summary of The Dhandho Investor by Mohnish Pabrai. And then there were of course Robert Mercer and Peter Brown who were appointed co-CEOs of Renaissance in 2009. They both brought even more experience with Hidden Markov Processes to the group, but most of all, they were exceptional computer scientists.
Monster Beverage Corporation (MBC)
Simons headhunted both of them from IBM’s former speech recognition team. Takeaway number 5: Don’t try this at home! Here’s a little thought experiment for you. Since 2003, the Medallion fund has primarily been trading in stocks, although they also do trades in commodities, currencies, and bonds.
Also since 2003, Medallion has returned an average of 73.7% per year, before fees, while the S&P 500 has returned on average 10.6% per year. The returns could be explained by the fact that Medallion uses leverage, but to say that that explains the full overperformance, I think would be a little bit foolish.
No, Medallion is also just on the right side of trades. This leaves one questioning: Who does it “take” these profits from? Who is on the other side of the trade? According to a 2019 CNBC article, index investors control nearly half the US stock market. If you are an index investor and you’ve been investing without buying and selling too much since 2003, you would have received that 10.6% in average returns.
The medallion cannot have “stolen” profits from the index investors, as they will get the average almost by definition. Then we have the long-term investors who invest based on fundamentals and hold over longer time periods. That’s the Warren Buffetts of the investing world. This represents an area where Renaissance and its mathematicians haven’t been able to produce any above-average profits yet.
In 2005, Renaissance founded a new fund called Renaissance Institutional Equities Fund, or RIEF, to take in outside capital without risking the profits of Medallion. Supposedly, this fund would make similar long-term predictions as the Medallion fund has been doing successfully for the short-term ones.
To this day though, it hasn’t been able to do that. That’s a 9.1% return on average for all the full years since RIEF’s inception, versus 9.9% for the S&P. The forecasting methods that Renaissance uses are similar to weather predictions – very useful for saying what is likely to happen in the coming hours or perhaps days, but not useful for longer time periods than that.
Therefore, it is unlikely that it’s the acolytes of Warren Buffett who have been the pray of Medallion either. Who’s left? It is the traders. Renaissance’s profits stem from fellow speculators, both large and small.
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The people who do not have a trading algorithm that trades without being| influenced by emotions, who do not have access to the same amount of data, who do not have access to some of the greatest mathematicians of our time, but who decides to take a short-term gamble in the stock market, nonetheless.
The people who buy a course in day trading from a “guru” on Udemy and draw trendlines on a head and shoulder pattern. Simons came to this conclusion himself, that these must be the people from who Medallion is “taking” profits, and it is good for you to know as an investor too. Do not think that you can do this at home.
The only thing that will happen is that you’ll hand over your hard-earned money to Renaissance or some of the other quants. What was it that agent Smith said now again? “Never send a human to do a machine’s job.”
So: – Jim Simons became one of the richest people on the planet through his Medallion fund – The fund is a short-term algorithm that scrutinizes historic price information to discover sequences that might repeat, under the assumption that investors will exhibit similar behavior in the future – To do this, the fund requires tons of quantitative data.
Moreover, Simons needed the help of a few of the world’s greatest mathematicians – Finally, don’t think that you can do this at home. As a smaller and private investor, I’d still opt for the value investing approach of Warren Buffett over a day trading, technical analysis approach, any day. Value investing is an area where the machines haven’t caught up to us yet.