Steve Cohen - The Billions Man
Learning from Legends
For those who do not know Steve Cohen, he is Bobby Axelrod of the Billions series!! At least, Bobby’s character is closely based on that of the hedge fund manager Steve Cohen.
Cohen is a billionaire and in 1992, he founded SAC Capital Advisors with $10 million of his own money. The hedge fund became known for its high-risk trading strategies and achieved significant returns during the dot-com bubble and its aftermath.
SAC Capital faced legal troubles, culminating in a guilty plea for insider trading in 2013, resulting in $1.8 billion in fines.
He is also the owner of the New York Mets, a Major League Baseball team.
Here are my notes from one of his old interviews:
On Risk Management
You gonna take risk, you're gonna lose money. I think the three things is: liquidity, leverage, and concentration. Those are the three rules. If you're in illiquid stuff, that's a problem. If you're using too much leverage, that's a problem. And if you too concentrated, that's a problem. So doesn't mean that if you have one of them, maybe it works, if you have two of them, uh oh. If you got three of them, you're whistling past the graveyard.
As Charlie Munger says, you do not want to get into a lollapalooza situation with these three factors liquidity, leverage and concentration.
On Areas of Focus
I don't look at my winners, I look at my losers as I'm losing money. Why am I losing money? I'm focused on my losers. If I'm making money on something, I'm good. I'm focused on why something's not working. And try to figure out why. It may be that it's just -- could be part of some sort of factor move or sector move that I actually think is wrong, and I'm willing to hold on to it. But I'm focused on my losers. Am I missing something? Is there something changed? That's where I focus on. And if I feel like something's changing, or I feel like I don't know why, I will reduce. Just because some -- I get a lot of work from my people, analytical work. We're only right 55% of time, 52% of the time. They're not right 80% of the time. So I've got to sit there and use my judgment and see what the markets are telling me. And listen, I can always come back to that name if I feel like things have changed or the timing's better. And so, I use my eyes. I look around, see what the markets are telling me across asset classes. And perhaps I get better uses for my capital. So I'm always focused on where the portfolio is not working.
This is the most important takeaway for me from this interview. Always focus on what is not working. Peter Lynch also said something similar, “Most people water the weeds and cut the flowers—when they should do just the opposite”. You have to be more focused on the weeds in your portfolio.
On Gut Feeling:
It's your unconscious working. It's something that is triggering thoughts that are more than just... it's your eyes, it's your brain, it's your intuition, it's your experiences that you're picking up that is more than just a balance sheet or an income statement or some recommendation. It's not just something that just blows past you. When you're you're sitting in front of screens all day, your brain is working, you've got to listen to what's going on in your brain.
On Knowing Yourself
I am really aware of the mistakes I might make, really aware when I might sell something when, let's say, I'm drawing down, and I need to reduce. So which positions do I reduce? Do I reduce the easiest one or the hardest one? The one that's working versus the one that -- these are the conversations you have in your head, like how do you... these are decisions that matter. And what's the conversation going on in your head? And how are you going to deal with it? It really gets down to knowing yourself and knowing the mistakes that you make, the common mistakes, and avoiding them. And doing it, and knowing, and being aware. I'm not sure everyone's aware. I deal with this all day long.
Investing success has more to do with human psychology than probably any other discipline. There is a constant chatter going on in an investor’s mind. Investing is about the future and all the information we have is about the past. So, emotions like fear, greed, envy etc are very dominant influencers of investor behaviour. That makes it essential to understand ourselves as investors - what we are most likely to do under a given circumstance. One reason I integrate quantitative methods into my investing is to make systematic decisions based on data and not emotions.
On Common Pitfalls
I think people sabotage themselves. People are afraid of success. You can have some people, really bright, and somehow, they just somehow--when you get to the end of the year, they just haven't somehow performed at a level that they expect themselves to. People have a funny way of looking at the world and the way that they cut the data, and they're not honest with themselves. And because they're not honest with themselves, or that they are maybe not looking at things the way the world really is, as opposed to the way that they want the world to be. It gets reflected in how they run their portfolios. This is a conscious fight on a daily basis. This is the are in a war that people have to fight to get to what the truth is, and ultimately what success looks like. How you get closer to success. And the more truthful you can be with yourself and the more that you can be reflective and get to real transparency with yourself, the more likely that you will fix the problems that you have, and deal with the issues that you have, so that you can perform at a level of maximum performance. The more you're willing to ignore it, the more that you're willing to blame the outside world for your problems. It's the market -- you always hear people say, Oh, well, the market -- it's the market. Like, What the hell does that -- I don't even know what that means. As opposed to -- what did you do? The world is going to exist whether you like it or not. Like I always say, I gotta live in this world, I don't create it. The world is happening. Okay, what are you going to do about it? And it's amazing how people attribute outside forces to what's happening to them, as opposed to being accountable and dealing with it.
Another very important learning is to see the world as it is and not as we wish it to be. A lot of mistakes happen because we “believe” something is true or will happen and refuse to look for disconfirming evidence.
On handling failure
When you go into a slump, you have to identify why. Has your process changed at all? Or has something changed that you haven't identified yet. And so, weekends are really good times to think about stuff because your mind's a little more free.
When something is wrong, look at the process instead of the outcome.
DISCLAIMER:
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
SEBI Registered Research Analyst - Cupressus Enterprises Pvt Ltd - INH000013828.
Registration granted by SEBI and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.