For more than three decades, Jim Simons blew away the broad market...
In 1978, Simons left his job as a math professor at Stony Brook University to enter the world of finance. He set up shop in a nearby strip mall on Long Island.
Simons did things differently at his company than most financial firms of that era...
In short, he treated the markets like a complex math equation that he could solve.
While most other traders watched financial-news TV and read analyst reports, Simons hired mathematicians and physicists. His team ultimately became a "quant" powerhouse.
These analysts fed massive amounts of data into their computers. And in turn, their computers would uncover tiny patterns that human eyes could never see...
If the price of oil typically dropped on Tuesday, what happened to energy stocks on Wednesday? If gold's value went up one week, how did mining companies react the next?
Now, to be clear, the patterns didn't always work out.
In fact, Simons and his Renaissance Technologies team were only right about 51% of the time. That's barely better than a coin flip.
But a few of their patterns worked consistently. And when you're doing thousands of trades like Simons and his team did, any small edge can add up fast in terms of profits...
The Importance of a Disciplined Approach
Their approach is now known as "rules-based trading."
Rules-based trading involves cobbling together a series of criteria to produce a repeatable approach. And one thing made Simons and his team different from every other trader...
They learned to never let their emotions get in the way.
That didn't happen overnight, though. Like any human, Simons and his team did allow their emotions to interfere at first. And as a result, their returns initially suffered.
But over time, Simons and his team learned to trust their system. They would never override the computer. And they wouldn't give in to fear, greed, or any second-guessing.
During the 2008 market crash, most hedge funds lost billions of dollars. Their investment managers panicked. They abandoned their strategies and made desperate moves.
Not Simons and his team...
Renaissance Technologies' computers kept trading based on their models.
The benchmark S&P 500 Index fell as much as 37% during the downturn. Meanwhile, Simons' Medallion Fund gained an incredible 82% in that span.
That wasn't luck. It happened because of Simons' disciplined, rules-based trading approach.
From 1988 to 2021, the Medallion Fund only had one losing year. Even more remarkable, the fund had just 17 losing months in a 13-year span from 1993 to 2005.
Before fees, the Medallion Fund returned an average of 66% per year from 1988 to 2021.
Most experts consider Warren Buffett as one of the most successful investors ever. And yet, he only averaged 20% annual gains during his decadeslong career.
The numbers are almost too good to believe...
If you invested $1,000 with Simons in 1988, you would've had more than $42 million by 2021. That's far better than the $40,000 you'd have if you had invested that $1,000 in the S&P 500.
Simons proved that finding patterns in the market was possible. He paved the path for folks like me to use rules-based ways to comb through data to find opportunities.
And over the years, Simons' story taught me a critical lesson...
Don't try to outsmart the market. Instead, just follow the patterns that keep repeating.
When Simons died in May 2024 at age 86, it marked the passing of an investing legend. But he left behind an everlasting impression on me – and I'm sure countless others...
Trust systems over emotions. And trust data and math over hunches.
Investing models or systems and data crunching have fascinated me for years. You could even call my interest "an obsession with market structure."
Heck, that's why I joined Chaikin Analytics in the first place...
When it comes to system creation, I'd put Marc Chaikin in the same category as Simons. And longtime subscribers know I use the Power Gauge that Marc created in a unique way...
The Power Gauge helps me decide "what" I should look at.
Like Simons, I don't care why stocks are going up. I just follow the patterns. When the technical signals align with a favorable rating from the Power Gauge, it's time to invest.
The "why" will reveal itself later...
It could be a new product launch or an earnings surprise. Perhaps it ties into a big-picture trend that no one saw coming. Or maybe a famous investor is quietly accumulating shares.
This approach takes massive discipline. Sometimes, I watch a stock for months before the technicals give me the green light.
Put simply, I wait for the data to confirm the pattern. And I use the Power Gauge to help me do that.
It's not complicated, just disciplined.
Good investing,
Pete Carmasino
Editor's note: When it comes to a disciplined approach, that's exactly what Pete just did in the latest iteration of his Chaikin Power Portfolio publication...
In short, the Power Portfolio leverages sector rotation to find the best areas of the market to target during a particular quarter. And just this week, Pete released his new batch of recommendations.
In a special presentation, Pete and our founder Marc Chaikin discuss all the details of this powerful strategy. And they explain how to gain immediate access to the brand-new iteration of the Power Portfolio. Learn more here before the presentation comes offline.
