This week saw the publication of a remarkable biography. The Man Who Solved the Market chronicles the life and career of hedge fund manager James Simons. Over the past 31 years, Simons’s Medallion Fund has clocked average returns of 66% per year. Even after Medallion’s fees—which are the highest in the industry—investors took home average returns of 39% per year. By way of comparison, the U.S. stock market historically has returned about 10% per year. To further put this in perspective, an investor who put $1,000 into Medallion at the beginning of 1988 would have seen their investment grow to nearly $28 million by the end of 2018.
How did Simons accomplish this? The short answer is that no one knows—or rather, no one is permitted to speak about it. In general, though, Simons, who had been a math professor before he left for Wall Street, developed an algorithmic approach to trading. Instead of engaging in the usual sort of stock analysis—evaluating a company’s products, management and financial results—Simons instead looked for “signals” buried deep within trading data. According to a colleague, Simons doesn’t make money on every trade, but he is right just enough of the time. “We’re right 50.75 percent of the time,” he said, “but we’re 100 percent right 50.75 percent of the time.” Parenthetically, he said, “You can make billions that way.”
As an individual investor, how should you think about this—or should you even think about it?
One approach would be to simply ignore the Simonses of the world, to recognize him as an anomaly. After all, his results have been so outstanding that he is literally in a league of his own. He’s done better than Warren Buffett, Peter Lynch, George Soros—everyone. It’s hardly worth comparing your results to his, just as you wouldn’t lose sleep if you couldn’t keep up with an Olympic swimmer or sprinter. It would be unhealthy and unrealistic to even give it a second thought.
But what about comparisons that are more realistic—to colleagues, friends and neighbors? Should we worry how our successes measure relative to theirs? This requires a delicate balance because you want to compare in ways that are productive and don’t risk leaving you feeling demoralized. Here’s how I’d approach it:
1. Develop a personal yardstick. Everyone has their own goals. Some want to send their children to private school, others want to retire early. Some like to travel, others like to give to charity. Some like the security of money in the bank, others say “you can’t take it with you.” Because no two people are alike, I recommend developing your own personal yardstick for success. Maybe your goal is to save $1 million. If that’s the case, build out a year-by-year plan for yourself, then measure yourself only relative to that plan. This will help you stay on track, and it carries another valuable benefit: If your neighbor shows up in a new BMW, you won’t necessarily have to employ willpower to ignore it or to suppress feelings of envy. You can simply recognize it as part of his plan, and not part of yours. While it may sound like a platitude to say that you should view other people as different, and not better, I really believe that’s the case when it comes to financial planning.
2. Recognize that it’s the journey that matters. My father, who is in his 80s, has a friend who retired on his 50th birthday. While that may seem like the very definition of success, academic research suggests otherwise. Counter-intuitive as it seems, hitting the jackpot isn’t what makes us most content. Rather, it’s the regular day-to-day feeling of progress in one’s work that makes us happiest. Wouldn’t we all prefer more financial security rather than less? Of course, but the research says that, ironically, your neighbor who sold out to Google may not be as happy as the person who is still working toward that goal. It can be anticlimactic and leave people feeling a lack of purpose. They’ve even found this among Nobel Prize winners.
3. Don’t judge a book by its cover. There is an expression among financial planners that you really don’t know someone until you’ve seen their tax return. I have found this to be absolutely true. While I can’t quantify it, I have found very little correlation between people’s bank accounts and their lifestyles. The lesson: Don’t measure yourself against your neighbors or your friends because what you see is just part of the story and may be awfully deceptive.