RuleNumberOne

Why don't activists move companies away from all-cash to all-stock compensation for their employees? That way the non-GAAP profits would shoot up. If this is done gradually, it might even come across as "expanding operating margins".

I think the future lies with companies that don't have a GAAP P/E. While companies with a P/E such as AAPL and MSFT have tagged along with expanding P/Es over the last 3 years, an ever-rising P/E is uncomfortable. The future for those without a GAAP P/E is limitless. Any company with cash compensation should have activists intervening and moving them to all-stock compensation. That would make the "non-GAAP" profits boom.

Over the last 7 quarters, Italy's GDP growth rate has been either -0.1% or +0.1%. Isn't that strange? At the peak of the Eurozone debt crisis, sometime in 2010-2012, Italy's GDP office refused to announce the GDP growth rate to stem the panic. So anything is possible with Italy's GDP office. https://tradingeconomics.com/italy/gdp-growth

This would help me understand people's perspectives: when did people on this thread start investing actively? Spekulatius started sometime in the 1980s if i remember correctly. I started in 2006. How about the rest?

Let me put it another way to show that I wasn't cherry-picking. Why can't companies that build an app on AWS show a profit? GOOG, FB have their own clouds - servers, switches, databases. They are in a different class altogether. But WDAY and NOW are apps on AWS. Can anyone explain why companies that are an app on AWS never seem to show any profits despite strong revenue growth? On the other hand, Vertex Pharmaceuticals (VRTX) shows a $1 billion profit on $3.7 billion in revenue (similar revenue as the profit-less WDAY and NOW). VRTX is one of the top Renaissance Holdings whereas "cloud" stocks are nowhere to be found. @cameronfen i looked at the last 5-10 13-F filings of Renaissance.

Half of what you say is what works against the other half. It is much easier to rollout a global service, which is why even after many years the return on capital has stayed at zero. WDAY and NOW IPOed in 2012, but the return on capital (as in Profits divided by Capital) have been zero. Compare this to the high-tech companies such as GOOG, MSFT, CSCO, FB, and so on. They had very wide GAAP profit margins right at their IPO because they had wide-moats. What specifically are the companies that deserve the high multiples? I think it's more than just interest rates. As Bezos mentioned in his talk in Germany, try building a business around space exploration. It is very very difficult - there is little to no infrastructure that is available for a private company to use. This is unlike the internet oriented businesses where the "railroads" of fiber, towers, routers, servers have been laid out for anybody to use. Moreover, many of these businesses have minimal/zero cost of acquiring a marginal customer, unlike the more traditional brick and mortar businesses. This zero marginal cost, together with universality - its so much easier to rollout a global service now at limited cost than before given the global internet "railroads" - are critical factors underlying this. Most of these businesses are not asset heavy, they are not labor heavy, they have high incremental margins, so high returns on incremental capital and so deservedly command higher multiples in many cases. Sure there are ridiculous valuations out there, there are bubbles, but I increasingly see the traditional value investor not noticing the melting ice cube and the changing business landscape where Zero Marginal Cost and Universality are becoming common. One could argue that these interenet/SAAS oriented businesses also have to pay exorbitantly for Adwords/FB/AWS et al (by some estimates 50% of all the VC $$ go to that) but the overall margins/returns profile for many of them are still superior to classical businesses. Sure the biz life cycles are materially shorter now but the growths during their peak phases is also materially higher.

It has to be interest rates. That is the only way you can explain the difference between CSCO (P/E 14) and ServiceNow (P/S 17). Renaissance doesn't own any cloud stocks in its top 20 positions (except a small position in Atlassian at #20). I think the "fundamentals-based" investors are the ones who buy momentum stocks like ServiceNow.

Is this growth versus value or just imbeciles who want to play Cinderella until the clock strikes twelve. At today's $283 share price, never-profitable NOW had a market cap of $56 billion at a P/S of 17.3. Meanwhile, CSCO pays a dividend yield of 3.1% and is at a P/E of 14. CSCO was available at an EV of $48 billion in 2012! If you want to bet on which company will be around 20 years from now, you can be sure CSCO will still be the dominant networking company whereas ServiceNow may be displaced by some other AWS app. Nobody is making companies that compete with CSCO whereas "cloud" startups are a dime a dozen (not exactly a dime, because they are able to raise giant sums of venture capital).

The bizarre thing is the low interest rates that have inflated market caps of unprofitable tech companies have also made huge amounts of venture capital available to startups that compete with those same unprofitable tech companies. For example, I think Gusto ($200 million Series D) is a better product than Workday. I can also think of at least one startup that targets ServiceNow ($75 million Series B). Such startups are able to raise large amounts of venture capital.

The only cloud stock I found in the Renaissance Technologies 13-F is TEAM and I think it was around position #20. If something breaks, either too much inflation (e.g. we run out of workers) or too much speculation (e.g. speculation pushes every unprofitable cloud stock into the S&P 500 with a $50 billion market cap) or too much debt, Renaissance will outperform the market in a big way again I guess.

I think it is proportional to interest rates. A higher interest rate will result in low return-on-capital companies getting kicked to the sidelines. Look at today's addition to the S&P 500: ServiceNow (NOW) - Never made a GAAP profit - $53 B fully-diluted market cap. - CY 2019 revenue guidance $3.24 billion giving it a P/S > 16. Do you think NOW will ever be able to pay a dividend? It started as just a website to file IT tickets. We just need to add more such companies to the S&P 500 to lift its P/E. Low-tech, no profits, no dividends.

Until I read the book I thought quant traders didn't make money. It was an eye-opener. But it seems there have been a lot of people copying Renaissance over the last few years. Shouldn't the advantages that quants have get competed away? WorldQuant manages money for or is owned by Millennium management (the same firm that two Renaissance people defected to as described in the book). Citadel and Two Sigma are hiring computer science grads from universities and creating a campus environment. https://www.bloomberg.com/news/articles/2017-03-06/citadel-joins-two-sigma-chasing-quants-in-campus-recruiting-push "Two Sigma will take over “The Bridge,” a space on the new Cornell Tech campus on Roosevelt Island in New York, where engineers and entrepreneurs will work. The hedge fund staff will collaborate with Cornell students and professors on machine learning and data science projects, creating a pipeline of academic talent to the firm. Job candidates will put on virtual-reality glasses to watch a video that explains how the hedge fund sees the world awash in data. The students -- handpicked from 400 applicants -- are competing in a datathon hosted by the $26 billion hedge fund Citadel. Ken Griffin’s firm is upping the ante in the industry’s chase for data scientists and engineers, hosting 18 competitions at universities across the U.S., Britain and Ireland this year. The prize in the final data championship: $100,000. Igor Tulchinsky, the founder of WorldQuant, is pitching a perk that breaks the tradition of hedge-fund secrecy. The $5 billion firm is hiring at least 15 teams of quant managers for its Accelerator platform, offering them the right to keep their intellectual property. The quant hedge fund has also opened more than 20 offices in 15 countries, including emerging markets like Russia and Romania, to find engineers. Talent is distributed around the globe, Tulchinsky said at the Milken conference, “but opportunity is not.”"

Robert L. Mercer (the Renaissance guy) last published a research paper in 1995. Robert E. Mercer is a professor somewhere and he is still publishing research papers. Yeah, it is very easy now to run the latest algorithms on any amount of data compared to the 1990s. Lot of machine learning packages available. But the key is what inputs to feed - how do you structure the inputs. His research at least as of 2019 is predominately neural network based. Transformers, LSTMs with attention that like what is hot now and what was hot 3 years ago in language models with neural networks. He has some other stuff but I am sure his work is mainly Neural Network based. I bet by now there is no way Rentech are not using transformers to forecast these time series based on his expertise and what works. It is likely he ran a giant transformer with like maybe 1billion+ parameters on the time series of every single financial asset and with maybe slight modification is running the same transformer to predict movement in those given assets. If I had to guess you can copy the structure of the largest transformer, megaton-ln, from here: https://blog.exxactcorp.com/megatron-lm-unleashed-nvidias-transformer-megatraon-lm-is-the-nlp-model-ever-trained/ , steal the transformer base architecture from here: https://github.com/tensorflow/tensor2tensor and with little coding knowledge but 2 or 3 million dollars to spend on AWS you can likely replicate 50% of there returns just by training it on every possible asset class time series. My guess is that’s the core of the model and all the ml smarts in the world gets only somewhat marginal improvements from there.

I think they also use some sentiment analysis of analyst reports or news articles for drug companies. Drug approvals in the case of NVO and VRTX, merger in the case of BMY and CELG. The appearance of CMG could be explained by detecting an outlier in the sequence of winners. I think the publication of this book will result in a lot of competitors. They have shown it works and there are a lot of smart people out there who can replicate these results - who never tried before because they had no idea such techniques would work.

I know very little about neural networks, but the speech recognition research that happened in IBM in the 1990s was antiquated long ago. But suppose we start with what kind of queries can neural networks answer that would be relevant to stock trading? Fill-in-the-blanks. Given a sequence of winners and losers for training the model, the neural network could predict missing winners or losers. E.g. given the set of today's winners, which stocks are missing from the list... 5000 stock tickers per day over 10 years would be a total of 12.5 million words for training. They would still need to add fundamental data as input to justify why a stock flips from reliable winner to loser and vice versa. If multiple stocks are missing from today's stock market winners, there are likely no outliers, as opposed to a single stock missing from the list of winners...

Edit: the links don't work. Need to Google for author-name followed by "dblp" Robert Mercer's papers are here: https://dblp.uni-trier.de/pers/hd/m/Mercer:Robert_L= David Magerman's papers are here: https://dblp.org/pers/hd/m/Magerman:David_M= No doubt these ideas were used at Medallion "Jelinek wrote, "The performance of the Renaissance fund is legendary, but I have no idea whether any methods we pioneered at IBM have ever been used. My former colleagues will not tell me: theirs is a very hush-hush operation!" If they didn't use any of it, they would have told their lead co-author Jelinek.

Owning drug stocks with Liz and Bernie hovering is very painful. Bernie caused a lot of pain to drug stock investors in 2016. Humans don't want that pain. Machines don't feel the pain and Renaissance is content to let the machine do its thing. When it came to Valeant, it was not just Bill Ackman. The list of Valeant luminaries included Lou Simpson (12% of portfolio), Sequoia Fund (> 30% of portfolio), Glenn Greenberg (36% of portfolio), Wally Weitz. They probably derived conviction from each other.

Good points cameronfen. Another item to add is conviction - machines have a lot more compared to humans. Six of Renaissance's top 10 positions right now are drug stocks. A "fundamentals-based" hedge-fund builds its portfolio around the hedge-fund favorites - FAAMG, V, MA. The only stock in that list that appears in the Renaissance top 10 is FB at #10. The Renaissance people are betting their own money on models that they themselves built. Who would think of betting their money on drug stocks in an election year with Liz and Bernie tweeting threats all the time. Even when "fundamentals-based" investors jump into drug stocks, they come out with a Valeant as 10-30% of their portfolio. Hard to say "fundamentals-based" can in any way be superior to Renaissance's machines. Yes but the idea is you trade every single stock, every commodity, every currency pair and derivative contracts. After all a neural network that can follow one trend has an easier time of generalizing to other assets. With that you can manage a lot of assets. Making money through stats arb doesn’t mean they use neural network or even any sophisticated AI. The neural network is actually a pretty new thing. Any alpha/ideas employed by hedge fund human traders can be automated by Stats arb. But it’s not easy to apply most ideas in equity to other assets. AFAIK rentech is not stat arb typically (although at this point they probably do a bit of everything). I think stat arb is not just programming hedge fund ideas. It is but is grounded in mathematical or at least statistically valid arbitrage opportunities ie actual situations where the same asset has different prices. Rentech is mainly a trend following quant shop, which means they use techniques to identify then follow trends. While you don’t have to use cutting edge machine learning to identify those trends, most of the big quant shops have teams that apply machine learning and deep learning to these problems. I know for sure that Rentech hires machine learning phds. I’m not saying generalizing a statistical model is easy, but it’s much easier if you have one model the follows trends to extend that to other assets and even asset classes. While they might pick up fundamentals, to some extent when you are trading based on trend a lot of that is probably picking up subtle behavioral reactions to price movement and that generalized across any asset class.

Buffett's principles will always remain valid. No doubt he would win a stock-picking contest with any Renaissance employee even today. But Renaissance is like the Google of the investing world. Someone who has read all the newspapers and encyclopedias of the last 100 years can beat any Google employee in a trivia contest. But they can't beat the search engine. The typical hedge-fund portfolio consists of FAAMG, V, MA, PYPL, BKNG. Whereas the Renaissance 13-F looks completely inhuman, hundreds of positions entered and exited without any regard to market cap. If they were made to file a 13-F every week, we could get a better idea of what the Renaissance machine does.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman Which book are you referring to?

Greg Zuckerman, the author of the Jim Simons book says the people at Medallion believed the individual investor who did a buy-and-hold was not losing to Medallion, but instead it was other hedge funds that were on the losing end of Medallion trades. Medallion made 98% in 2008. You needed a machine to make 98% in the 2008 rollercoaster. And I think it is the emotional individual investor who loses to the machines.

I think their returns just came from writing software for momentum trading. By automating trend following, they were able to do it more thoroughly than other hedge funds doing it the old-fashioned manual way. I think it also allowed them to change directions very rapidly compared to the manual approach. Which also means their returns must have gone down in recent years compared to the past as other automated trend-following funds came into existence. Looks like they traded EVERY stock in the market. Out of the 8000 stocks they traded in 2000, I think 7000 would have prices moved by a big fund like Medallion/Renaissance alone. When other automated trend following funds entered who were also able to change directions instantaneously, their returns should have gone down. It makes sense that 90% of the trading in the stock market is done by "algos".

From the book: "In January 2000, Medallion made 10.5%. By March 2000, the fund was sitting on over $700 million of profits...Then came true trouble...The tech bubble burst on March 10....Medallion lost about $90 million in a single day in March; the next day it was $80 million more. Medallion's losses now approached $300 million....Medallion trades about eight thousand stocks. There was no way they could quickly revamp the portfolio. After several more all-nighters, a couple of researchers developed a theory about what was causing the problems: A once-trusted strategy was bleeding money. It was a rather simple strategy - if certain stocks rallied in previous weeks, Medallion's system had taught itself to buy more of the shares, under the assumption the surge would continue. For several years, this trending signal had worked, as the fund automatically bought Nasdaq shares that were racing still higher. Now the system's algorithms were instructing Medallion to buy more shares, even though a vicious bear market had begun."

I think the Norway central bank made this equity weighting recommendation because it has data that we don't. They manage Norway's sovereign wealth fund and want to get the hell out of European stocks.

https://www.ft.com/content/23e4aa46-c8b2-11e9-a1f4-3669401ba76f Norway wants to own even more US equities (i.e. even more than its current 3:1 ratio). Norway doesn't want anything to do with European equities. " The world’s largest sovereign wealth fund should slash its investments in Europe and increase them sharply in North America, according to a recommendation from the managers of Norway’s $1tn oil fund. ...which currently gives Europe a share of 19 per cent and North America 57 per cent. Norway last changed the regional allocation of the fund in 2012 when it previously cut back on European equities at the height of the eurozone government debt crisis. At the time, European equities accounted for 50 per cent of the total while 35 per cent were in North America. "