Wednesday, November 13, 2019

"The Man Who Solved the Market" book about Jim Simons Rentech by Gregory Zuckerman

Some notes on "The Man Who Solved the Market"

It was a team effort. Jim Simons was creating a humans machine cyborg organisation very similar to Elon Musk's approach at his companies. Culture, quick exchange of ideas, thinking, etc, etc.

Question: Did they ever read Buffett? They read 3 academic papers a week, making a habit of continuous learning, but Buffett hasn't really been academically discussed.

When are you making money?

On Page 202 Mercer says that at his old employer IBM, people could fake progress with "parlour tricks" created the appearance of progress. At Renaissance, he and his colleagues couldn't fool anyone. "You have money in the bank or not, at the end of the day, you don't have to wonder whether if you succeeded... it's just a very satisfying thing."

Does Mercer literally mean the end of a trading day? 24 hours? The conclusion he might have could be very different from mine or Buffett's.

Consider the Washington Post example Buffett gives in his speech "Superinvestors of Graham and Doddsville": "The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the PostNewsweek, plus several television stations in major markets. Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million. "

Buffett has cash and is buying shares.

Day 1  $100 cash, 0 shares, Washington Post share price $10 intrinsic value $10 per share.
Total mark to market $100 Total intrinsic value $100

Say the share price falls to $8 and intrinsic value is still considered to be $10, Buffett buys 5 shares for a price of $8 and value of $10 each and increases the intrinsic value of his holdings:

Day 2  $60 cash, 5 shares Washington Post, price $8 x 5 = $40, intrinsic value $10 x 5 = $50 
Total mark to market $60 + $40 = $100 Total intrinsic value = $60 + $50 = $110

Buffett thinks "I made money (increased intrinsic value)!" Mercer thinks? "Parlor trick didn't make money."

Then the share price falls to $4 a share, Buffett buys another 5 shares:

Day 3 $40 cash, 10 shares Washington Post, price $4 x (5+5) = $40, intrinsic value $10 x 10 = $100
Total mark to market $40 + $40 = $80 Total intrinsic value = $40 + $100 = $140

Buffett might think: "This is great. In just a few days I have increased the intrinsic value of my holdings from $100 to $140, With 20/20 hindsight I see I incurred an Opportunity Cost by already buying at $8 and not waiting for $4." 

Mercer might think: "At the end of the day (Day 3) Buffett lost 20% of the money he had in the bank ($100 mark to market to $80 mark to market). He should be fired."

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