Sticking to your circle of competence

I recently read a fascinating interview with David Magerman, a Computer Scientist who joined the famous hedge fund Renaissance Technologies in 1995.

Renaissance Technologies is known as the best hedge fund in history, with an average annual after-fee return of 39% between 1988 and 2018.

The uniqueness of Renaissance is that they don’t hire Wall Street-style investment managers. They are solely interested in computer scientists, mathematicians, and physicists being part of their staff. They adopted Artificial Intelligence in the earliest stages of computers. And they made it highly profitable.

When David Magerman joined Renaissance as a junior programmer, he described being placed in a small department of the hedge fund that dealt with equities markets.

At the time, the equities division accounted for 5% of the company’s capital, but it was actually losing a lot of money year after year. The company compensated for this loss by doing well in its other divisions, such as currency exchange, bonds, and commodities.

David rose through the ranks quickly and was responsible for turning the equities division into a profitable one that grew bigger than several other divisions over the coming years. His work contributed to the fund's multi-billion-dollar growth.

David left the fund in 2017 with a 10-year non-compete agreement prohibiting him from creating anything similar until 2027.

What struck me most about the article was when, at one point, the interviewer asked David if he currently invests in the stock market, to which David responded, “The stock market is rigged against the little people. I don’t invest in it”. This anecdote was mind-blowing to me.

Here is a person who was instrumental in turning a failing division of an extremely successful hedge fund into one of the most successful divisions and contributing billions to its bottom line. However, he doesn’t trust his ability to understand the market's fundamentals, doesn’t want to rely on his ability to pick a stock based on its fundamentals, and prefers to stay away from the stock market!

He added: “If I were doing quantitative modeling, I might”

In other words, his entire exposure to equities was about the AI of the computer, which provided instructions on what to buy and sell and then actually did the buying and selling on its own. Human interaction was only about making a computer program that would do its work well. So, David, the human, never gained trust in the long-term success and viability of the stock market.

The lesson? Stay in your lane. Stick to your circle of competencies.

Know what you’re good at. You likely have had success in your business and personal life. Do more of that which you are great at.

If you don’t intend to invest as a professional and dedicate your heart and soul to it, it will likely not work out well.

Not saying you shouldn’t try new skills.

Yes, I love learning new skills. One Sunday, I spent several hours changing a broken bathroom faucet. I had the plumber on call just in case it didn’t work out. And it was a bit of a struggle. It took perseverance, and when it was done, it felt amazing.

But the stakes were low. I wasn’t doing anything that could flood the entire floor and create havoc.

When you’re dealing with your retirement nest egg, you are far better off having a good advisor to help you out.