The Introduction of Computers to the Finance Industry (w/ Howard Morgan) | Real Vision

The Introduction of Computers to the Finance Industry (w/ Howard Morgan) | Real Vision


[music playing] 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. [music playing]

One comment

  1. Very interesting! He’s extremely healthy and sharp after such a long and vital career. Imagine being top of your game now then being on it like this 50yrs from now. He’s probably 80.

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