R.T.
What role does luck play in investing?
People underestimate its importance except when things go badly. Then they’re very happy to ascribe it to bad luck, which it may be, of course. One has to recognize that luck plays a meaningful role in everyone’s lives. You get born to decent parents in a good part of the world, and you’re way ahead of the game. And that certainly doesn’t have much to do with skill or hard work. In my case, I was lucky to collaborate with some very good people when I was doing mathematics. I was also lucky in my choice of partners at Renaissance.
How has luck figured into the success of Medallion?
We started off in the ’70s trading fundamentally — we’d read the newspapers, tickers, news wires, and come to conclusions. And we were pretty good at it. The markets were particularly easy. The dollar was going down like a stone, and the long-term interest rates were going up to the moon. So if you would short the dollar and short the bonds, you’d do pretty well; we made a fair amount of money that way. But I began to look at the data and conclude that maybe one could model this. I brought in a friend of mine, Lenny Baum, who was the best code cracker in the world when we worked for the NSA. I asked if he’d like to work with us for a while and try to make some models. I think I was pretty lucky to know that guy, and indeed, we made some models. Now, it turned out that Lenny didn’t really want to use these models because he was doing so well just guessing which direction the markets would go.