While Warren Buffett is widely viewed as the world’s most successful investor, few realise that Jim Simons, who passed away earlier this month, delivered significantly higher investment returns. The recent passing of the 86-year-old mathematician and hedge fund manager has drawn interest in his investment approach, and comparisons to Warren Buffett. But it’s one of the things they have in common that draws the most pertinent lessons for personal investors.
The yin and yang of investing
Many people outside of the finance sphere have heard of investor Warren Buffett, however most won’t have heard of Jim Simons. He was arguably the most successful fund manager in history and his performance speaks for itself. His flagship fund, the Medallion Fund, averaged an annual return of over 60% from 1988 to 2021.
While comparing Buffett and Simons’ investment returns and results is intriguing, their investment strategies are very different. Understanding some of the similarities between these two iconic investors may actually be more valuable than simply trying to determine who was the better investor.
Jim Simons: The Quant King
Jim Simons is the founder and chairman of Renaissance Technologies, one of the most secretive and profitable hedge funds in the world. Simons, who has a PhD in mathematics and was a code breaker for the US government, pioneered the use of quantitative analysis and computer algorithms to trade stocks, bonds, currencies, and commodities.
Simons' investment style is based on finding patterns and anomalies in vast amounts of data, using sophisticated mathematical models and high-speed computers. Simons did not rely on fundamental company analysis and removed human intuition and emotion when making investment decisions.
While the Medallion Fund has impressive returns, Simons’ style had limitations. Once the fund reached roughly $10 billion, Simons had to return money to investors and keep the fund size limited. This was because his strategy had limited investment opportunities at any given time in the market and could only sustain its high returns on a relatively small amount of money in the fund. As a result, in 2005 he ended up returning all client money and from that point on only staff and family were able to invest in the Medallion Fund. The high returns therefore weren’t available to many investors. By contrast, the broader public can invest alongside Warren Buffett.
Warren Buffett: The Oracle of Omaha
Warren Buffett doesn’t need much of an introduction. He is the chairman and CEO of Berkshire Hathaway, a conglomerate that owns and invests in dozens of companies, such as Coca-Cola, Apple, American Express, and Geico. Buffett is widely regarded as the most successful fundamental investor of all time.
Buffett's investment style contrasts heavily with Simons’. Buffett invests based on finding companies that have strong competitive advantages, durable business models, and capable management. He focuses on the long-term intrinsic value of the businesses and the power of compounding to generate long term returns. Rather than trading the short-term fluctuations of the market like Simons did, Buffett bought and held businesses for the long term (often decades).
Unlike Simons, Buffett’s investment style is not constrained by the number of opportunities. Nowadays, Berkshire Hathaway’s market cap is ~$890 billion, and his biggest stake in Apple alone is estimated to be worth around $150 billion. Since 1965 when Buffett first took control of Berkshire, the company has delivered an average annual return of 19.8% per annum. $10,000 invested in Berkshire in 1965 would now be worth over $400 million.
Different but the same
Jim Simons and Warren Buffett both created enormous wealth for their investors. While their investment styles could not be more contrasting, there is one key similarity: they both found a way of investing that suited their skillset, style and temperament – and then they stuck with it for decades.
While it may have been tempting for Buffett to see the quantitative magic Simons was deploying to create eye-watering returns, he has stayed true to what he knows rather than changing his approach. Equally, Simons could have seen the wonders of long-term compounding and the scale at which Buffett could invest. Attracted by the potential to earn higher fees on a bigger pile of funds, he could have grown his firm and accepted slightly lower percentage returns, but greater personal profits. But he too resisted the temptation and stayed committed to his craft.
There are many ways to generate investment returns, but chopping and changing from one strategy to another based on what is the flavour of the month seldom works. Both Simons and Buffett recognised this early. The same applies for individual investors trying to build their wealth. Consistency is key – be it in your investment approach or in your regular approach to saving.
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