Using mathematics and algorithms to predict stock market moves is always the dream of every nerd. Out of so many quants out there, Jim Simons of Renaissance fund perhaps is the most well known of all. Since 1988, Renaissance’s signature Medallion fund has generated average annual returns of 66 percent. The firm has earned profits of more than $100 billion; Simons himself is worth 23 billion dollars.

The funds that Simons runs, Renaissance fund and others, are hedge funds– funds that “hedge against bad times”, meaning they are supposed to make money always, regardless of whether good or bad times. Hedge funds are notoriously secretive, you don’t find much discussions about the people nor the profitable strategies for obvious reasons.

So, true to this tune, in this book “The man who solved the market“, although readers will get a good glimpse at the life of Jim Simons, not much is revealed about the specific trading strategies that make him money. Those who are interested in Jim Simons life and how he dealt with his success and tragic would find this book an interesting read. But those who want to learn some trading strategies would be deeply disappointed — there are none. All we know is that Jim Simons uses sophisticated mathematical techniques and algorithms to spot the brief intraday abnormalities and profit from them.

Not very useful, isn’t it?

In fact, this is the paradox that a lot of commercial trading strategy sellers prefer not to answer; if their system is so good and can beat the market all the time, why would they want to sell it to you?

Any successful trading strategy is necessarily self-defeating to a certain extent. Imagine through a crystal ball, you can correctly divine a RM 9 stock today will rise to RM 10 tomorrow, so you quickly buy the stock at current price and sell tomorrow, thus pocket the RM 1 profit. Easy right?

Now what happens when everyone has the crystal ball? The price will quickly bid up to RM 10 in no time, leaving no opportunities for late comers. Only those who are fast enough ( read: the EPFs and large hedge funds with “special connection” to the Bursa market) can exploit the opportunities. So the crystal ball that works for them will not work for you as a retailer.

This is why any trading books will never reveal any true secrets to you, and those they can reveal will expire in no time.

On the rare occasions whereby the authors do reveal profitable trading strategies, you must check carefully under what circumstances they are profitable– do they take transaction costs into consideration? Do they properly consider bid-ask spread? And if you are trading in foreign currencies, do you manage for currency risks? A lot of profitable trading strategies work on paper, or in training environment, but vanish in real life even before they are widely adopted due to practical difficulties.

Of course, with the advent of Internet and computers and the hype of Big Data and AI, a lot of operators are selling the unsuspected their “AI trading systems” that promise to make money every time. It’s always good to be skeptical about their claims. Remember, you can’t even be sure that their strategies work or are just marketing fluffs, and they are neither Jim Simons ( for if they were they would be busy running their own hedge funds, not pattering to you), nor Mother Teresa, so why would they share their profitable strategies at their own expense?

No, to have a go at consistently beating the market, you must have the following:

  • Proprietary strategies, or the ability to come up with new strategies when old ones expire.
  • and good execution by minimizing the bid-ask spreads and transaction costs

So in this sense, playing with stock market is akin to running a business; you need a hard-to-duplicate edge and a proper execution. There is no free lunch after all.