Author Topic: Jim Simons rennaisance technologies - is value învesting not the only way ?  (Read 7641 times)

scorpioncapital

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2017
    • scorpion capital
I was reading this

https://www.vintagevalueinvesting.com/learning-from-jim-simons/

Over 30 years (an investing lifetime) he beat Buffett and Soros.
By a big margin.

And he did not use value învesting.
Just the opposite . He used technical analysis and computer trading.

So is there a better return to be had than value învesting?
What I want to know is not a justification for why quant doesn't work but rather if it works equal or better than value învesting is there another game in town and is it easier and or more lucrative?


Gregmal

  • Hero Member
  • *****
  • Posts: 3642
Value investing is hardly the only way to make money. Thats like walking into a garage and declaring a screwdriver the only way to fix things.

Many smart guys just prefer it because it acts as a mental valium during turbulent times; thinking they know what the business is "really" worth.

RuleNumberOne

  • Sr. Member
  • ****
  • Posts: 499
My understanding of what Renaissance does is value investing. The only way to make money is to buy high and sell low. If you want to keep the money you make, buy below fair value and sell higher.

They have automated what people like Buffett used to do manually. Scan a huge number of documents, scan every company, and build the ultimate contrarian investor by programming a machine to do it. What you get out of this process of:

   scanning every document/piece of data + a machine-trader   =   a super-Buffett.

What I see is hedge-funds who cannot build such a program resort to momentum investing. The "quant" funds such as Renaissance, Two Sigma, Millennium lack the momentum stocks in their 13-Fs. Munger is right that investing has become a lot more competitive.

BG2008

  • Hero Member
  • *****
  • Posts: 1442
We can all learn to be a bit better at some timing dynamics
For example, I bought Antero Midstream recently.  It was an year end tax loss harvesting candidate.  I bought some at $7 and it started to go down on very little fundamental.  Sure nat gas prices are low.  The stock started out the year at $14 and at $5, it has a ton of tax loss value. So understanding that this tax loss selling wasn't likely to abate until the new year was a key trading decision.  This was literally to avoid "catching a falling knife".  Then they announced a fee reduction in the amount of $50mm which is way less than what people predicted and the shares rallied.  I made a gut call that this is a fundamental development.  It doesn't hurt that the shares were bought at $5.25 or 23.4% yield. 

After you own a company for 2 years, you tend to have a pulse on the trading ranges.  With HHC, I would buy everytime it hits 50% of my estimated NAV.  One of the mistakes that I made with FRPH in late 2018 is not realizing that the new support is really in the low $40s.  When the shares traded from low $30s to mid $60s, the story is now out.  Gregmal has mentioned that GRIF now has a support in the $40 range.  There are more investors who understand the thesis.  So I probably should not expect the shares to trade to high $20s and low $30s again like it did in late 2018.  Is this technical?  Or is it really knowing 80-90% of the shareholder base and having a vague understanding of the price that they will be willing to buy at. 

Another example is with Berry Global.  It's a good business but most investor are very quarterly oriented.  If you pay attention to the questions that other investors ask, they are constantly trying to model out the next quarter.  Volumes are down in 2019.  But it is very easy to grow volume when they are down 6% in the following year especially if you believe that they are temporary in nature.   These are little things that you improve as an investor over time.  I don't have any advice on long term compounders that could run away from you.  You probably shouldn't trade those too much.  But for normal assets where there is a price where you are a buyer and there is a price where you are a seller, it's not a bad idea to keep 70-80% and trade around 20-30% especially in a range bound market.  If anything, it will serve to help you manage risk as the shares trade up 20-25%, it is probably correct to reduce the position size.  Again, these are for normal companies, but not the GOOG or FB of the world. 

Look at the world of MMA.  Years ago, it was all "style vs style."  Now wrestlers are strikers and strikers can defend take downs.  If you don't evolve, you get left behind as roadkill.  But the value framework is still the one that I want to stick to just like a wrestler will rely on his grappling.  Frankly, it does make logical sense to pay up for something that could grow 20% topline with operating leverage.  There is a DCF where that makes sense.  But you need to make sure you are very certain of the ability of these companies to improve their returns and expand margins over time.   

tede02

  • Sr. Member
  • ****
  • Posts: 423
Value investing is hardly the only way to make money. Thats like walking into a garage and declaring a screwdriver the only way to fix things.

Many smart guys just prefer it because it acts as a mental valium during turbulent times; thinking they know what the business is "really" worth.

I like the screwdriver metaphor.

Ed Thorp's autobiography opened my mind up to alternative approaches to investing. So too have people like Ray Dalio. That being said, a value approach resonates with me. It provides a framework for thinking about investment decisions. I think Michael Burry has said that every individual needs to pick an approach that works for their personality type. I couldn't agree more. I'm never going to have the math skills to be a Jim Simons or Ed Thorp. Nor am I going to be a macro trader like Dalio or Druckenmiller. But I do understand market psychology and have the fortitude to go against it if the logic makes sense.

no_free_lunch

  • Hero Member
  • *****
  • Posts: 1707
All investing styles experience an arms race as they are discovered.  Technical / computer model based trading is the same.  It is not easy to beat the market with that approach.

One thing I can tell you is that the majority of terms / strategies that people talk about with regards to technical trading will not consistently beat the market. I have put the time in and tested so many of these strategies. It is all garbage. Sometimes they work, sometimes they don't.  I don't doubt they used to work, just not anymore, it is too out there and too easy to do.   If you want alpha you really have to put your time in or else look in some really obscure corner and get a bit lucky.

The other thing to consider is that with value investing, at least you know what you own, this matters a lot if the market goes south.  If you are using technical trading and you start taking losses, what do you have to fall back on?  If you buy something based on xyz technical factor and it goes down 30%, now what?  If it's a heavily discounted stock with growing earnings then that is one thing, but if you bought for technical reasons, and the company just reported an earnings drop, what reason do you have to continue to hold?  Of course you can put in stop loss but what if those just keep getting triggered and you get bled out?

I would just recommend you take the time to get some software and try out various technical trading strategies.  See how consistently they work.  Get data stretching back to 2007.  What kind of results are you getting throughout the cycle?   Try grouping your stock universe into random clumps of 100-200 stocks and see how consistently the strategy performs across the various clumps.  If it's just for you and you are not some shark trying to sell people on making money out of nothing, you will take the time to really analyze what is happening and across various parameters to rule out any kind of bias.  It is your money after all, nobody to fool but yourself.  If you do this (I did!), you will start to see that nothing really works as well as advertised, or at least that was my experience.

This is why I chose my name.  It is this type of nonsense.  Right, of course you just buy when the MACD crosses the 30 day moving average, or whatever.  Unless of course the s&p's MACD has an upslope.   Unless of couse, in retrospect, that doesn't work.  It's noise. 

I still think the best you can do is dilligently look for high quality companies and buy when you are comfortable with the likely outcome.  It is still very competitive but if you really look hard, you will find little things from time to time and at least you are buying companies that you like.
« Last Edit: December 27, 2019, 12:05:47 PM by no_free_lunch »

writser

  • Hero Member
  • *****
  • Posts: 2139
Value investing isn't the only way to make money. Technical stuff works too. Especially if you hire the smartest people you can find, take a scientific approach, have great data sets, super fast market access, an unlimited research budget, excellent risk management and constantly work on improving your game. I think that that is basically what Renaissance is doing. Probably they use financials a well, scan weather reports, track ship movements, whatever. As long as it generates excess returns. I absolutely don't think they do strictly value. In fact I think they don't give a shit what they do - as long as their mathematicians and data scientists think they have found a statistically significant edge. And I absolutely believe you can generate alpha that way.

That said, 99.99% of all technical traders you find online are idiots and they lack the data, speed and brains and especially self-awareness to make money. With value investing the percentage of idiots is probably closer to 95%. The good thing is that as long as the stupid value investors buy and hold a few random stocks they generate something that approaches market returns as a group, whereas the stupid technical traders transfer all their savings to their broker and high frequency traders (including Jim Simons, probably).
« Last Edit: December 27, 2019, 12:38:20 PM by writser »
I'm sorry if I have offended you. Please contact this forum's safe space coordinator to work thing out.

@thewritser

wabuffo

  • Sr. Member
  • ****
  • Posts: 409
    • Twitter
Especially if you hire the smartest people you can find, take a scientific approach, have great data sets, super fast market access, an unlimited research budget, excellent risk management and constantly work on improving your game. I think that that is basically what Renaissance is doing.

Don't forget another factor - using extreme leverage.  They seem to generate single digit annual returns across their invested capital (90%+ of which is borrowed money and only 10% is their capital).  So lots and lots of extreme leverage.

So that's it.  Extreme leverage ... and, uh...basket options. 

According to this recent article, Rentech appears to use a scheme that masks short-term trading gains by turning them into long-term capital gains via basket options held by their investment banks.  "Rather than owning securities directly and booking gains and losses from trading activity, RenTech would buy a [bespoke] option from a bank tied to the value of a securities portfolio it held".  Rentech would then direct the bank to buy and sell securities in the portfolio and hold it for a year+.

https://www.bloomberg.com/news/articles/2019-11-13/irs-decision-is-bad-omen-for-rentech-tax-dispute-worth-billions

wabuffo
« Last Edit: December 27, 2019, 12:53:06 PM by wabuffo »

writser

  • Hero Member
  • *****
  • Posts: 2139
Good points. Add “extreme leverage” and “dubious tax avoidance schemes” to the list.
I'm sorry if I have offended you. Please contact this forum's safe space coordinator to work thing out.

@thewritser

Gregmal

  • Hero Member
  • *****
  • Posts: 3642
Is this technical?  Or is it really knowing 80-90% of the shareholder base and having a vague understanding of the price that they will be willing to buy at. 

Look at the world of MMA.  Years ago, it was all "style vs style."  Now wrestlers are strikers and strikers can defend take downs.  If you don't evolve, you get left behind as roadkill.  But the value framework is still the one that I want to stick to just like a wrestler will rely on his grappling.  Frankly, it does make logical sense to pay up for something that could grow 20% topline with operating leverage.  There is a DCF where that makes sense.  But you need to make sure you are very certain of the ability of these companies to improve their returns and expand margins over time.

I think the above is a great little tunnel to truly see both sides of the man vs machine debate. It is absolutely an advantage playing around with small cap companies where you know the location and/or names of most of the shareholders. If there's 10M shares outstanding and theres some funky trading activity, with a few phone calls and emails you can likely figure out whats up and start "timing" your next move. However, I would have to imagine, that there are some pretty good programmers out there that can utilize machine learning to size out the shareholder base to a certain degree of confidence as well. You can then calculate the odds of each shareholders activity and use filings/public appearances/etc to refine this, over time, becoming probably just as efficient(likely way more efficient) as any boots on the ground shareholder could be.

However, again, the catch is that often, once patterns emerge and everyone catches on, they stop working. Which is where a good trader/investor again temporarily should have an edge. The machine one would think, relies on past data and trends/pattern recognition to front run the movements. Over time though the sheer volume of data will undoubtedly allow the machine to win. Human error will probably be the difference maker, and somewhat scarier, if the machine realizes it can manipulate price/volume to influence its results- it will. I could tell you how many times, just this week, where I saw huge flushes of volume and large orders lining up directionally, then, out of nowhere, a couple hundred share trade goes through and all of it disappears and the trend reverses.

Everyone has an opinion on what works, and what doesnt. The easiest way to tell? Look at your returns...
Of course theres still a large bunch of disgruntles who believe certain types of returns dont count, or $1 made this way or that way is somehow superior, but money talks. Rennaisiance has been the best. Period.

When friends/family ask me how/what to invest in, I tell them to take a nominal amount of money and go buy whatever they think will be a good investment. More often then not, regardless of what they buy, they come to the same conclusion, this is just as much a mental game as it is a fundamental one. A lot of people dont have any grasp on that though, but its were the machine programs like Rentech will always have the edge because they can quantify emotional via data and then remove the emotion from it. Which even the best of us will never be able to do 100% of the time.