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JUSTINE UNDERHILL: In this episode
of "How I Got My Start in Finance,"
we meet Howard Morgan, one of the original members
of Renaissance Technologies.
He is a quant hedge fund legend.
He shares his story with Real Vision's Grant Williams
about the start of a new business model that
revolutionized trading.
HOWARD MORGAN: I consider myself a lapsed academic.
I started out going to Cornell for a PhD in operations
research and computer science, which I got in 1968.
So it was a little before most people were--
GRANT WILLIAMS: --aware of computers.
HOWARD MORGAN: Yeah, known about computers at all.
I had been very lucky.
In '65, at City College, my mentor said to me--
when he asked me what I'm doing next year,
I said I'm going to MIT for physics.
And he whispered in my ear, just like in The Graduate, and said,
you don't want to do that.
He said, computers.
And fortunately, I listened to him, and went to Cornell,
and then taught at Cornell and Caltech
and then at the University of Pennsylvania for about 12,
14 years in total.
And at Penn, in 1973, I brought the ARPANET to Philadelphia
with machine 50 on the ARPANET--
I think now we have about 10 billion devices on it,
but we had 50 then-- and learned about what
the future was going to be.
And through most of the '70s, I was one of the world experts
in what we called in the 70s the office of the future, which
meant word processing and electronic mail and voicemail.
In fact, when I said in 1980--
I think executives one day will type their own emails
and not have their secretaries print them,
the Philadelphia Inquirer printed that with a ha-ha-ha.
And the Secretary's Union picketed my office,
because they thought I was the end of secretaries.
So I did get that one right, however.
GRANT WILLIAMS: You did and then some.
I think we're going back the other way now.
A lot of these executives are getting people
to type their emails for them.
HOWARD MORGAN: Well, or Siri.
GRANT WILLIAMS: Or Siri, yeah.
HOWARD MORGAN: Or Siri.
And that's something else that we did a lot of research
back in the 70s and 80s, which was voice recognition and voice
synthesis.
But it was a little too early for that.
GRANT WILLIAMS: Background and computing
was obviously a big factor in your first--
when you lapsed you would fall into capitalism.
HOWARD MORGAN: Very much so.
So I had helped start a company in the mid 70s with a fellow
out at the Rand Corporation.
And that company did Unix, it was the first Unix license
actually.
And Jim Simons, a friend of the founders, who
is still a professor, funded it through himself
and some friends.
And so I met Jim.
And in 1981 we started doing some investing together.
And he said to me in early 82, he said, look,
I made some money now with some of this trading.
I made more than I can do with just trading.
So we want to do some more venture as well.
So why don't you take a leave of absence
and we'll start Renaissance.
And so in April of 82, Jim as CEO and me as president,
we started Renaissance Technologies.
And at that time had about $70 million
to invest $35 in the quant trading.
And it wasn't quite black box, but it
was quant oriented trading, and $35 in venture.
And we did that for seven years very successfully.
Until at the end of seven years Jim said, look,
the venture has a 25% IRR--
rate of return, which is top decile--
but it takes five or seven years to get that liquid.
And I've now got the trading to where it's a 38% IRR at net
and I can cash in tomorrow morning
if I just want to go home.
So let's take the venture out of Renaissance.
So Renaissance then went purely quant trading.
That was right about the time Medallion Fund started.
And I then kept my office next door to Jim
and did venture capital on my own
for the next 14 or 15 years.
And then started some more organized stuff.
GRANT WILLIAMS: We'll come to that in a second,
but I'm fascinated go back to the early days of Renaissance.
Because I mean, they changed everything.
I mean, you two guys changed the investing world.
In the early days you're obviously
trying something that--
there were a few people doing it,
but nobody really kind of figured out how
to put it all together.
What were those days like?
HOWARD MORGAN: Very exciting.
I mean, Jim had assembled a team of mathematicians and computer
scientists and some astrophysicists.
And the goal was to use statistical models
to beat the markets.
And he believed that could be done.
He believed it meant really good data science-- what today we
would call big data science.
And no one was doing that at the time.
And putting together that level of intellect
and putting it on a problem of taking these time series of all
the data you could get and collecting it
over long periods of time.
Renaissance has more market data,
I think, than almost anyone else does.
And they've got it going back into the mid 70s.
And everybody else, now you can buy market data.
But it's very different what you're buying
and what they're keeping.
They also became one of the largest
users of computing power.
Certainly in the late 90s they had more processors
per employee than Google.
They had thousands of processors.
When everybody else was working with a few computers,
they realized that with big parallel processing algorithms
you could do much more interesting data analysis.
And they successfully built that.
And a lot of that team was out in Stony Brook,
not in Manhattan where Jim and I were mostly.
But guided by Jim mostly, I threw in my computer science
knowledge where it was helpful.
But was more focused on the venture side.
It really did change the world because the Medallion Fund
delivered astonishing returns and continues to over what
is now a 30 plus year period.
And that's never been done.
GRANT WILLIAMS: When you looked at the results of this, I mean,
even for you guys it must have been--
these can't be right.
These numbers come to be right.
I mean, their truly extraordinary.
HOWARD MORGAN: Well, yes.
I mean, but I think in some ways it was--
one of the ways we used to talk about it
was think of it as a casino and we're the house.
GRANT WILLIAMS: Right.
Right.
HOWARD MORGAN: I mean, because in fact almost
everyone else was playing with emotion.
And I know Charlie Munger, Warren Buffett's partner,
has been quoted as saying when people say,
why are you guys doing so well and the rest of us aren't?
And he said, it's because you invest on emotion
and we invest on logic.
JUSTINE UNDERHILL: Renaissance Technologies
was able to apply data science to the world of finance.
While that might seem like a norm today,
Howard Morgan was there when it all started.
He knew then that with the advancement of technology,
the future of trading was ready for more logic and less
emotion.
For Real Vision, I'm Justine Underhill.
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