Jim Simons speech on Leonard E. Baum

I had a number of different adventures with Lenny. I met him at IDA here in Princeton. We only lived a couple of blocks away from each other, so... And he liked to walk to work, and I liked to walk to work. So sometimes we'd bump into each other going in the same direction, which is not impossible, and someone has to walk faster than the other, and we'd walk to work together. We didn't do too much in the way of work at IDA, except struggle with trying to prove that what was known as the Baum-Welch algorithm actually worked. Now, there seemed no question that it worked. Every computer experiment showed that it worked, climbing to a maximum point. The only problem was there was no mathematical proof, and there was a lot of struggle, and I left finally without helping crack this thing.

But he and a guy named Ted Petrie did finally write two large papers on the subject. And they proved that this, what's now called the EM algorithm, works. Now I'm told, although I haven't looked, that there is maybe a two-page proof that this works today. But then it was two papers, as I recall. But nonetheless, it worked. Now I went off to, well, to do some mathematics and one thing or another. But at a certain point, I got into the trading business, and I was trading currencies. And I was doing okay, but I looked at the charts, and it looked like they had some structure to them. And I thought, maybe this could be analyzed, and maybe the best guy I knew to do that, Lenny, would come and join me.

And I persuaded him to do so, and together we built a little system, and it seemed to work okay, nothing great, but it did seem to work. But he liked to read the tape. He liked to read the news tape. It was just this big, wide tape, and we called it the doomsday machine because it would go da-da-da-da-da as it scrolled. And then one day he didn't come into work. So he showed up about 1 o'clock, 2 o'clock in the afternoon. I said, where have you been? And he said, well, I'm tired of doing R, and I want to do some P. Now, in IDA parlance or NSA parlance, R is research and P is production. So I said, well, what kind of P are you interested in? He said, well, Margaret Thatcher. has been sitting on the pound, holding it down, but she can't hold it down much longer, and we really ought to buy pounds.

I said, 'Well, Lenny, it's too bad you didn't come in earlier this morning.' He said, 'Why?' I said, 'Because Margaret Thatcher just stood up.' And he said, 'She did?' And he said, 'Well, how much is the pound up?' I said, 'Oh, it's up five or six cents by now.' He said, 'That's nothing. It's going to go up 50 cents. We should buy pounds.' All right, he was so persuasive. We bought some pounds, and sure enough, the pound went up considerably. We made quite a lot of money. From that moment on, he never wanted to look at systems again. He only wanted to read the tape and figure out where things were going. And for the next two or three years, I guess I contributed some, but we made a lot of money with Lenny, based on Lenny's judgment.

He liked to buy. He didn't like to sell short. He only liked to buy and hold. He had the buy-low part, but he didn't always have the sell-high part. Here's an example of that. We had divided the account into two pieces. He managed his piece, and I managed my piece. But at a certain point, we were both in gold. We were long gold. And you might remember, those of you who are old enough, that gold was not tradable for many years, and the price was fixed, but then it was allowed to trade, and it started going up. And we both bought gold, and maybe at around $200, and it went up to $300, and $400, and maybe it got up to about $500. And I said, 'Lenny, you know, maybe we should sell the gold.' And he said, 'No, no, no.'

You can't imagine how high this is going to go. But I sold mine, maybe at $550 or whatever. But it kept going up: $600, $650, $700, $750, got to over $800. Now, one day, at around this point, I was talking to my stockbroker. And he said, "A funny thing happened today. My wife went into my closet, took all my old gold and cufflinks and tie clasps that I don't wear anymore, and went down to the jewelry district to sell them." I said, "Really?" He says, "Yes. She only has to stand in the short line because she's a jeweler." I said, "You mean there's a long line selling gold and stuff?" He said, "Oh, yes." He says, "It takes four hours to get there." I figured this was it. So I got Lenny over to the phone, and I said, "Sell the gold."

Sell the gold. He said, "No, no, you don't..." I put the phone to his ear and said, "Sell the gold." He said, "All right, all right, all right." So, we sold the gold. Well, we sold it at 800 and something. The next day we came in and it was up $20 in the morning. And he was so angry. By the end of the day it had dropped $150. And that was it. It just kept going down from there. So, he definitely called the—like with the pound—a very good instinct of when things had bottomed. And I'll tell you one other story. Once a year, I had a little boat, and I would take the 10 people who worked for us or whatever out for lunch on the boat. And the screens had just come in, where you could watch the prices on a television screen.

And he was busy looking at the screen. And I said, "Come on, let's go to lunch." He says, "No, I'm busy." I said, "Well, what are you busy with?" He says, "I'm buying S&P, Standard & Poor's index, futures on Standard & Poor's index, you know, the stock market index." And I said, "Well, you know, come on, you can buy it when we get back and so on." He said, "No, no, I've got to stay here." I said, "Look, the S&P has not gone anywhere for 10 years," which it hasn't. "What's so special about today?" He said, "No, no, no." I said, "Okay, we're going to go to the boat and you come after." So just as I was about ready to say the heck with it and cast off the boat, he came grumping down the dock. And I said, "Well, did you buy your S&P?"

He says, "Well, I got half of what I wanted." And I had to come watch. I said, "Okay, it'll be there when we get back." And it was there when we came back, about 20% higher. It had just taken, and that was the beginning of the great stock market rally that we had for a very long time. I think it started in, maybe it started in '82 and ended up in 2000 or something like that. So he called the very, very, very bottom of the stock market. So he had quite an unerring... So anyway, we had some very good times together. We made a fair amount of money together. And he was one of the best friends anybody could have. And I just loved him and admired him, as I think many of the people in this room felt the same way.

So there's my anecdotes about Lenny. And pastor and done a lot of things. That's right. And Lenny's friend.