Hello reader, welcome to the latest issue of HX Weekly!

This Saturday, April 25 would have been the 88th birthday of famed investor Jim Simons, the founder of Renaissance Capital.

While Simons is not as well known as Warren Buffett or Peter Lynch, there is a strong argument to be made that he is the BEST investor of all-time. By a LOT.

In his honor, we are going to share some some pieces we have written about him the past.

While his style of mathematically focused style of investing called "quantitative" might seem to difficult for most regular investors, there is still a lot to be learned from it.

Enjoy reading about the investing #GOAT and have a good weekened.

A Discussion of Quantitative Analysis

How It Can Help Your Process

When I was growing up, I never really considered myself a “math” person.

Mind you - I did very well in my math courses. Consistently got “A” s and was among the top students in any of the courses.

But I was not one of THOSE "math" people!

The kind that thrived off figuring out differential equations and complex algorithms. All that stuff interested me, but I was much more interested in what I would consider “applied” mathematics.

I was less interested in the problem and figuring out the solution and much more interested in how the solution could help me accomplish something I wanted to achieve.

Think of it as not caring to show all the work, just wanting the answer, and then figuring out how to use it!

That being said, I have always been mathematically inclined.

With all the volatility in my childhood, math had an element of certainty that appealed to me. There was little I could control in my life, but figuring out this equation was one small victory in the chaos of my childhood.

Math gave me some degree of comfort. I wasn't interested in figuring out advanced algorithms, but I loved applying math to whatever I was working on to help me find a solution.

As many of you know, I was a massive collector of comic books and sports cards. I still have copies of "spreadsheets" that I put together on word processing documents where I listed my collection and then updated the price (and portfolio value) every month when the price guides would come out.

In that sense, I have always been REALLY into math!

This kind of mentality fits very well in the business of money management. One of the aspects that appealed to me about this profession was the ability to “keep score.”

Every day, you have a scorecard about your success or failure. There are no opinions. Only data and results.

This has always been how I was wired and approached problems.

When I started my money management career in the mid-1990s, this approach was surprisingly not very popular.

Most of the industry focused on "fundamental" analysis and "value.”  They looked at many numbers regarding the company's operations and the prices and values of their portfolios, but there was little analysis of any of the rest of the data.

What surprised me was that there was no objective analysis of how we made money in our portfolios.

The managers would see that a particular stock was making or losing money. They also knew which ones were the big losers or gainers.

Beyond that, though, the idea was always to stick to the fundamental story and value, and that is what counted…

I was a young analyst and portfolio manager in my first couple of firms and did what I was told. However, it seemed to me to be a terrible waste of an opportunity.

We had TONS of data, and I knew there could be ways to improve our process.

Figure out where we were losing money and how to do less of that, and figure out where we were making money most often and do MORE of that!

It wasn't until about three years into running my first stand-alone hedge fund – Stadia Capital – that I began putting many of these ideas into our process.

We had a large investor out of Chicago with several $100 million invested with us. They had been with us for about eighteen months and had consistently asked for data.

We believed strongly in complete transparency, so we provided that data and periodically had meetings with them, and they were always great. They were supportive and continued to add capital.

Then, one day, they called us with some unwelcome news. They were reducing their allocation to our strategy. Not only that, but they said it was likely they would pull the entire stake.

This was not a small amount of money for our firm.

We quickly got on a call with them to ask them, "Why"? Our returns were acceptable then; we grew our team, added other investors, and had good momentum.

They didn't have any definitive answers other than that they had done some internal analysis and didn't think our strategy was right for them.

This intrigued (and frustrated) me, so I pushed them on the analysis and what it said, but they were reluctant to share the data.

When faced with situations like this throughout my career, I have had one response that has worked very well. I got on a plane, flew to their offices unannounced, and said, "Hey, can we sit down and go through this data?"

While they were slightly surprised, they were incredibly cool and impressed. They had never had a manager do anything like that.

Over the next few hours, they took me through several data sets that they used to analyze manager performance.

In their experience, they had found that while many managers were successful – very few of them understood exactly how and why they were making money. Even more so, they didn't understand how and why they were LOSING money.

Our performance scored well on most of their measures, but one "yellow" flag led them to pull the money.

Now you might ask – why pull the money if it was only a “yellow” flag?

Remember, they said they would pull it out in stages and wanted to see if we had improved this analysis.

What was the analysis?

It was pretty simple and was called a "steady state” analysis.

They looked at our portfolio snapshots at the beginning of each month and each quarter. Then they ran a “model” portfolio where they asked how we would have performed had we done NOTHING and not made a single trade, just left what we had and kept it for the month or quarter.

They saw that we were systematically and materially underperforming our "steady state” portfolio. We had good (excellent) stock picks, but our trading activity detracted from our performance. Sometimes by a lot.

Remember that action does not always equal progress. In our case, it meant going backward!

There were many other analyses, but this was their key one.

There is more to the story as we put the process in place internally to try to keep them as investors. However, several of our portfolio managers couldn’t adhere to the discipline. We lost the investor…

The point of the story, though, is that looking at the data or "quantitative" analysis does not have to be as sophisticated as what Jim Simons did. Sometimes, it can be a straightforward analysis to improve your investing and trading.

We encourage you to try this analysis.

Take whatever you owned one month, a quarter, and a year ago. “Freeze” that portfolio and see how it would have done through today.

Then, compare how you ACTUALLY performed. We think you might be surprised by the answer!

Once you have it, figure out what you did poorly and do less of that, and figure out what you did well and do MORE of that!

Looking at the data made Jim Simons the most outstanding money manager of all time, made me a much better money manager, and can also help your returns.

How HX Research Uses Quantitative Analysis

The Key to Our TRADING Strategy

In the last couple of issues of HX Daily, we have been talking about the legacy of the greatest money manager of all time – Jim Simons.

Simons has what we (and most) consider the best track record of any money manager ever, and you can read our thoughts about him and his legacy here.

We also wrote here about how we began incorporating data analysis into our process as a money manager.

In the last hedge fund where I was the Managing Partner – 360 Global Capital – we built a robust software platform that we put "on top" of our fundamental stock picks.  The software engineer who built that for me is my best friend of the last forty years and my business partner here at HX Research.

When I started in the newsletter business a half-decade ago, my firm asked me – "Would you be interested in doing a TRADING publication?"

Trading had always been a big part of our process at my hedge funds and, through time, became a large contributor to our returns.  Those strategies, however, were long-term investing strategies, and we used our trading to add to returns and manage risk.

When they first asked, I had to think about it for a week or so.  How could we extract our very successful trading strategies – used on top of our fundamental stock picks – into a stand-alone TRADING strategy?

It took me a week of thinking, but the more I thought about it, the more I realized that – wow – our trading methodologies could create a fantastic stand-alone strategy.

As a result, the strategy behind our HX Trader publication was created!

We are proud of all of our publications but particularly proud of this one and its long-term track record.

At my prior firm, it had 281 recommendations across five years with an over 78% positive hit rate and outperformed the S&P 500.

More impressively, in the terrible stock market year 2022, it had a 74% positive hit rate and produced a +8.3% positive return with ONLY long positions.  This was in a year where the S&P 500 was down nearly -20% and the NASDAQ Composite Index was -33%.

The KEY to this strategy is its reliance on DATA!

If you have subscribed to the product or read one of the reports, you will see that we follow the same formula for most of the recommendations.

At a high level – we are looking for "winner" stocks that are "winner" companies but have recently become oversold and begun to recover.

There is a lot in that sentence!  What does each of those statements mean?

Let's review a recent example where we produced a +7% return in just eight days.  That is an incredible +318% annualized return!

The company was Live Nation Entertainment, Inc. (NYSE: LYV), and you can read the original report here.

We know the company well as we have been an investor (on and off) since its inception twenty-five years ago and also happen to have other businesses in the music industry.

Let’s go back to the DATA…

What is a “winner” stock?

One that has gone up a lot.  This shows us that the stock market has significant demand for the shares, and eager buyers will likely meet any stumbles.

Here is the long-term price chart on LYV…

Now, "winner" stocks are not always companies that have performed well.  There are lots of stocks that work but aren't companies that have executed.  That is fine, but not what we seek with our strategy.

For us, "winner" companies have high growth, beat expectations, and see rising earnings estimates.

Here is all that data for LYV…

The company has quadrupled revenue and cash flow (as measured by "EBITDA) in the last decade.

Other than the COVID period (when they had to shut down their business), they have beat analyst expectations 90%+ of the time.

Finally, expectations for their cash flow (the blue is EBITDA) have risen consistently.

The DATA shows us that this has been a "winner" stock and also a "winner" company.

Finally, we are looking for the stock to have been oversold but begin to recover.  We measure that by looking at the "relative strength index" or "RSI."

Here is a more recent stock chart with the RSI at the bottom..

The RSI DATA was textbook for what we are looking for in ideas in this strategy.

Again, you can read the note here and learn "why" the stock was down and why we thought it would recover.

Our point, however, is that DATA entirely drove our strategy.

If this stock had not checked every one of the DATA “boxes” we look for in an HX Trader idea, we would not have recommended the idea.

The DATA is where we begin!  We will not do it if the data doesn't support the idea.

How did it end up?

We already told you that we made a solid return very quickly, but here is the chart…

We recommended the stock on April 25 at $88.49 and sold it on May 3 for $94.66.  This is EXACTLY how this strategy is supposed to work!

There are many valid ways to make money in the stock market and many factors that can be used to make investment and trading decisions.

For us at HX Research – just like Jim Simons – it is always the DATA that drives the core of the process.

The Greatest Money Manager of All-Time

In Memoriam of Jim Simons

Last Friday, May 10, we saw the passing of an investor we consider the most successful portfolio manager of all time. 

His name was Jim Simons. He was a mathematician and hedge fund manager who founded the legendary hedge fund Renaissance Technologies. 

There is much to be learned from his story and methods, and we will share those insights this week.

First, though – why do we consider him the “greatest money manager of all time"? 

Let’s put some qualifying statements in there. 

We use the word "money manager" here for someone who deploys capital in securities to generate a return. It is specific to financial instruments. 

The word “investor” can be used for someone who buys companies or hard assets. This is not what Jim Simons did. He exclusively focused on the buying and selling of securities. 

We consider him the "greatest" because he put together a twenty-year track record at his central fund (the Medallion fund) of a 66% annual return.   

He also did this with consistency. This was not a situation where they had one giant year and many mediocre ones. They consistently delivered strong double-digit returns. 

The fund was closed to outside investors in 1993, and they capped assets at $10 billion. In this context, it is estimated that the fund produced over $100 billion in profits for its investors since 1988. 

There are some enviable track records out there by very famous money managers. Those include Warren Buffett, George Soros, Peter Lynch, and Steve Cohen. 

Many of those have made more aggregate money than Simons did with his company. None of them came even close to those kinds of annualized returns with this level of consistency with a substantial ($10 billion!) amount of capital. 

If you were to get those great investors in a room and ask them whether Simons was the most outstanding "money manager" of all, they would likely agree. 

What is fascinating about Simons is that his approach differed from that of all the other money managers. 

Buffett is known for understanding “value,” buying, and holding great businesses for a long time. Soros is known for trading the movements in the global economy, Lynch for buying growth companies, and Cohen for a diverse group of trading strategies. 

Simons? He did one and only one thing – MATH. 

His background was originally as a mathematician. Math fascinated him from an early age, and he had quite an accomplished academic career. After graduating from the Massachusetts Institute of Technology (MIT) in just three years, he went to Berkeley and got his PhD by the time he was 23 years old.  

From there, he went to teaching stints at MIT and Harvard and even worked at Princeton on breaking Russian codes during the Vietnam War. 

Simons, though, developed an interest in the financial markets. He didn’t get his start until he was forty years old when he quit academia and opened an investment firm in a Long Island strip mall. 

Initially, he traded like many others, looking at the news and fundamentals to assemble his hypothesis. He made some money, but he found the entire process incredibly stressful. 

As a brilliant mathematician, he also began seeing clear patterns across the financial markets. These patterns repeated themselves and were not “random.”  They were not perfectly predictable, but you certainly could identify probabilities.  

The combination of his mathematics background, his view that there were clear patterns, and his desire to make money AND avoid stress led him to explore putting together automated trading systems. 

He also had considerable insight into the fact that human psychology interfered with investment success. As he said, he wanted to build "A pure system without humans interfering." 

Simons took an approach that focused on the data and what could be measured. 

One common misperception is that this means he would be a "technical" trader. Looking at just a few variables, such as price and volume, like most technical analyses. 

That is wrong. One of the key differentiators to Simons’ investment approach is that he looked at ALL the data! 

Analyst expectations may have a poor track record of predicting what will happen in the future. Regardless, however, most investors still pay attention to them, and they factor into THEIR decision-making. Changes in them also factor into their reactions. 

Simons' approach may or may not care about those analysts’ opinions. Still, they did care if there was an ability to identify a pattern in them that could produce a higher probability situation. 

Another way to say this is that Simons took "opinions" out of the investing process and focused exclusively on the DATA. 

They wanted to understand how and why something worked the way it did, but by far, their primary (99%?) focus was that it worked that way. 

For us, this is the greatest lesson from Jim Simons' spectacular career, one that any trader or investor can use. 

In building your process, focus on what DOES work. Sure, it is essential to understand the "how" and "why," but the "does" is the most critical part. 

Don’t worry about the opinions of other investors, analysts, the media, etc. Find a process that works. 

Once you identify what works, incorporate it into your plan. Constantly test and retest that plan to make sure that it is still working, but then stick to it. 

Much of our process is built on the same framework as Simons, and we think he would agree with our favorite motto… 

“Plan the Trade and Trade the Plan.” 

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].