No, Warren Buffett Is Not the Best Investor of All Time. That Unofficial Honor Goes to James Simons.
The story of the father of quantitative finance will teach you two key lessons.
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Google is the reference search engine. By far!
When you want to find the answer to a question, your first reflex is to go to Google and type in your query. Google is so much a part of everyday life that many people no longer even say they are searching the Web, but simply “Googling”.
When it comes to determining who is the best investor of all time, you might be tempted to ask Google.
Google tells you that Warren Buffett is the greatest investor of all time.
But Google is wrong!
What? Google can be wrong? Yes, it can!
Because when it comes down to it, Google is simply repeating the conventional wisdom that dominates the Web, namely that Warren Buffett is the greatest investor of all time. Google doesn't have the exact answer to everything, but all it's doing is pointing out the dominant idea on the Web.
If this dominant idea is wrong, then the answer you get will be wrong. And that's the case here!
Of course, I'm not going to tell you that Warren Buffett isn't a legendary investor. Since 1965, his performance has generally been 20% a year. So he has his place among the best. Yes, but here I'm trying to tell you about the best investor of all time, according to the numbers.
Because the numbers don't lie.
Warren Buffett is not the best investor of all time, James Simons is
The real holder of the prestigious and unofficial title of best investor of all time is James Simons. If you're not in the financial world, chances are you've never heard of James Simons.
That's a shame and something I'm going to correct in what follows.
The first thing you need to know about James Simons is that he's not your average financier. This is probably why so few people in the general public know him. James Simons hardly ever gives interviews. James Simons has adopted the famous proverb “To live happily, let's live hidden”.
Better still, it's impossible to invest in James Simons' investment fund if you don't work there!
And yet, James Simons' investment fund has returned an average of 66% a year since 1988. At that rate, you'd make an X10 in just 5 years. Pretty incredible, isn't it?
How did James Simons manage to relegate Warren Buffett and others so far behind in terms of performance over such a long period?
James Simons has done three times better on average every year than Warren Buffett for 35 years. The answer to this question is surprising at first glance, but you'll see that this is where the genius of James Simons lies.
As I explained earlier, James Simons was not originally a financier, but a mathematician.
He could have had a brilliant career as a mathematician at one of America's leading universities, but James Simons wanted to get rich. So he wanted to put his mathematical skills to good use in the field of finance.
James Simons' conviction was clear: mathematics could help him beat all the Wall Street traders, without exception.
From then on, his approach was radically different from anything else available at the time.
By 1988, James Simons was creating complex mathematical models to predict stock market trends. This was the beginning of quantitative finance. Instead of wasting his time analyzing CEO statements or reading company reports, as Warren Buffett might do, James Simons collected a wealth of data that would be impossible for a conventional analyst to digest.
James Simons has developed algorithms capable of ingesting all this quantitative data and drawing ultra-precise conclusions from it.
The pattern becomes clear: massive quantitative data → quality information give you a decisive advantage when it comes to investing.
In the bestseller “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution”, dedicated to his life and method, a singular but highly relevant example of the quantitative data he took care to exploit is revealed.
One metric he analyzed was called “Pentagon pizzas”.
A strange name if ever there was one, wasn't it?
James Simons understood that whenever there was a major crisis brewing in the world, be it the invasions of Iraq or Afghanistan, or periods of great instability in the Middle East, Pentagon employees were working overtime.
But how do you know if Pentagon employees were working overtime without being an insider?
By studying the order books of the pizzerias around the Pentagon, of course!
Pizzerias around the Pentagon see their orders explode during periods of high tension at the Pentagon.
This kind of signal is taken into account by a well-trained algorithm to bet on a new war to come, to be waged by America, the world's policeman.
And war means soaring oil prices...
You can see the kind of conclusions that quantitative algorithms are capable of drawing automatically when they are well-trained. All that's left is to take advantage of them on the financial markets.
I've used oil as an example here, but it applies to tens of thousands of other data points. So you can see how James Simons became the richest mathematician in history in just a few years.
Of course, James Simons' 66% annual return did not go unnoticed for long. His innovative approach was then widely copied, giving rise to a whole new approach to finance.
Quantitative strategy became the secret weapon of the world's leading hedge funds.
Other investment funds did not want to be left behind, and began recruiting mathematicians specialized in financial engineering, generally referred to as quants.
True experts, these quants are paid real fortunes to develop ultra-advanced mathematical models, capable of detecting what no trader can see with the naked eye.
Two key lessons from the fabulous story of James Simons
The James Simons story I've just told you should teach you two important lessons.
The first is that Google doesn't know everything, of course. All Google does is point out the dominant ideas on the Web. If these are wrong, and they often are, then Google's answers will be representative of these misperceptions.
The second is that you should always dig deeper than the answers 99% of people will give you to questions to uncover incredible stories. James Simons' story is just that and shows you that there are a whole host of areas in which you can make a difference to the masses by getting information that few people have available to them.
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