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Stock Trading Tips And Lessons From Steve Cohen (SAC Capital)

While writing my small book ("The small stock trader") and developing my own stock trading plan in the last 6 years, I had compiled a few simple tips that I had picked up from Steve Cohen's interviews, which may also be a little helpful for you:

Passion: In an interview Steve Cohen (Cohen) said that he loved trading stocks from his childhood. Friends say Cohen, though now has never been driven entirely by money, and that he loves what he does. In another interview he said that he loves his stock trading job, also, his stock traders teach him about their sectors. "I'm always learning, which keeps it exciting and new." , he added.

Psychology: Psychology really plays a big role in stock trading - that is why he even hired a (Olympics) psychiatrist, Ari Kiev, and told his stock traders that Dr. Kiev could help them overcome such weaknesses as fear of taking trading risks. Some even say that SAC has also hired a few CIA operatives to help its stock traders to identify if the CEOs of the companies are telling the truth. In another interview Cohen said: "You can't control what the (stock) market does, but you can control your reaction to the (stock) market. I examine what I do all the time. That's what trading is all about." Zen-like calm: Best-selling author Jack Schwager once said that even when Cohen is executing a multimillion-dollar trade, he exhibits such zenlike calm, it's like he's ordering a sandwich.

Focus: The SAC's stock traders focus on a single industry, unlike the rest of the hedge funds: some stock traders focus on healthcare stocks, some on energy stocks, some on technology stocks, some on retail/consumer stocks, and so on. In an interview Cohen said: "Most stock traders want to trade everything. One minute they are trading Yahoo, the next Exxon. My place operates very differently. I want my traders to be highly focused. I want them to know a lot about something, instead of a little about everything. As long as they can trade the short side as well as the long side I don't think anyone in this room thinks being focused on a single sector is a negative." He also thinks that it is important to make focused/concentrated bets and have conviction in your very best ideas. Some of the SAC's portfolio managers put about 10% of their funds in one stock. In another interview he said that the lesson of the (2008) market crash was that he couldn't't trade every asset class (currencies, bonds, and commodities) successfully, so he decided to go back to the simple long/short stock trading as his father used to tell him "A shoe maker makes shoes."

Hard work: Steve Cohen really works hard, often after hours and during weekends.

Independent research/thinking: Once Cohen admitted that in his beginning years he was investing his money, poker winnings of a few thousand dollars, on the brokers' tips, and that he had made all the usual stock trading mistakes, which did not work - that is how he stopped using those guys' tips and started doing his own independent research and developing his own stock trading style. He doesn't use mathematics or complicated algorithms, and in an interview he said that quantitative strategies don't allow for fundamental research work to decide what the next quarterly report will be or the next hot product will be. SAC has teams where the stock trader is teamed up with a stock analyst of the same sector because it helps the stock trader learn the subtleties of the industry and understand what catalysts really move the stocks in that sector. He also told that he combines lots of information coming at him from all directions with a good feel for how the markets are moving to make market bets, and that he puts on trades for lots of different reasons: sometimes he trades off the tape, the individual stock price action; sometimes he trades off the sector; and sometimes he trades based on a catalyst. He also closely watched the insider trading, analysts ratings, and short interest in his focus stocks. Furthermore, he often uses "just-in-case" orders, leaving a few open buy and sell orders well removed from the prevailing market prices, in case the market does something stupid.

Zen-like simplicity: In an interview Cohen said that he tries o keep it simple at SAC Capital by just looking at the win/loss percentage and the risk/reward ratio, in addition to focusing on a single asset class (stocks) often in the single sector.

Open-minded flexibility: Cohen recently said: "I think the game is changing, and if it is, I have to react. We won't go off the edge with everyone else." In other interviews he has also said: "As the firm grows, it needs to change and evolve. I also need to do that" and "The markets involve and adapt and you have to go with it." Once he also said that you have to act quick and bet if you have a good idea, as the information is nowadays is very accessible for a lot of people. Learn from your mistakes: the 2008 losses resulted in mass firings and refocusing his trading strategies. SAC experienced the first down year of Cohen's career in 2008, off 18 percent, but it emerged from the credit crisis in better shape than many competitors. It was at that point, Cohen realized, that he had to get back to basics: simple long/short stock trading. Several times Cohen has quoted his father who tells that a shoemakers make shoes. He also added "Everything you thought was true wasn't true. These rocks, these pillars of the industry, were not. The world imploded. We made the right decisions. We made money. We're a survivor." Learn from the best: Even up to know Cohen keeps on learning with a Zen-like continuous self-improvement, even from his stock traders, as the markets always change. In his own trading, Cohen collects ideas from everyone at SAC. He once said: "I'm not doing the same thing that I was doing ten years ago. I have evolved and will continue to evolve… I have tried to learn a few new things like macro and currencies&commodities; the world has changed and it is a micro word: what happens in China affects what happens in U.S …" The SAC-psychologist Ari Kiev once said: "As the market evolves, Steve keeps recreating himself and never rests on his laurels. He always asks himself, what more can I do, what did I do wrong, how can I do better?"

Risk management and discipline: In a recent interview Cohen said: "Risk management in SAC is really important, of course we do also a lot of research, but you have to combine both", because sometimes strange things happen and you have to be flexible, the markets change and you have to be flexible to adapt to the new things. In another interview he had said that he spends most of the day focusing on his losers, because if the losers are being managed correctly the winners will take care of themselves. Active trading: He trades very actively. That's one way he controls risk. Cut the losses short: He has told many times that cutting your losses short is the key and once he said: "My best trader makes money only 63 percent or the time. Most traders make money only in the 50 to 55 percent range. That means you're going to he wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger….I always tell my traders that if you think you're wrong, or if the market is moving against you and you don't know why, take in half. You can always put it on again. If you do that twice, you've taken in three quarters of your position. Then what's left is no longer a big deal. The thing is to start moving your feet." Position sizing: Regarding position-sizing he once said: "I find that too many traders just stand there and let the truck roll over them. A common mistake traders make in shorting is that they take on too big of a position relative to their portfolio. Then when the stock moves against them, the pain becomes too great to handle, and they end up panicking or freezing." Short selling is also a risk management tool. It is important to notice that risk management is not avoiding risks. On the contrary, it is taking well calculated risk with justified risk/reward ratios, and Cohen even once said that he is looking for stock traders who are not afraid to take risks. He wants guys who have the confidence to be out there; to be risk takers.

Discipline: Quote from one of the interviews: "Colleagues praise Cohen for his intensity and singular focus on reading the tape, identifying trends by studying money flowing in and out of stocks. He teaches his traders a strict discipline of cutting losses by bailing out of losing positions fast. His own ability to acquire and distill bits of seemingly innocuous information and then apply them to his trading is unparalleled. He has incredible instinct."

Leverage: SAC borrows as much as $4 for every $1 of its own from prime brokers, including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., which means that leverage can boost the performance of experienced stock traders.

Patience and timing: Cohen says that whether the stock is cheap or expensive is irrelevant; there must be a catalyst that will make it move. When pitching a contrarian bet on a stock to Cohen, his minions must explain what other big investors think of it, and why that's not correct. Regarding intuition, he once told that probably at least 50 percent of he does is gut feel.

Just be yourself: Another important lesson provided by Cohen is that it is critical that your stock trading style matches your personality. There is no single right way to trade the markets. Know who you are. For example, don't try to be both an investor and a day trader. Choose an approach that is comfortable for you. Once he said: "You have to know what you are, and not try to be what you're not. If you are a day trader, daytrade. If you are an investor, then be an investor. It's like a comedian who gets up on stage and starts singing. What's he singing for? He's a comedian." Many say that Cohen is an easy-going guy with a self-deprecating humor. Even once he joked that anyone at office can call him for anything: "A soda. I'll get them a soda. I'm full-service." He describes himself as a regular guy who just wants to be left alone. He says he likes to eat grilled-chicken sandwiches at Top Dog, a local hot-dog stand, and to kick back at night in front of reality television shows." He prefers jeans, sneakers, and sweaters.

Swing trading combining TA with FA: Cohen once said that he is now making bigger bets and holding the stocks longer. He typically holds positions for 2 to 30 days, although some might remain on the books for six months or more, according to a document sent to potential investors in early 2009. Cohen even began investing in small caps in the health care, energy and technology sectors. Furthermore, in addition to a lot of FA research Cohen always considers TA for his entry/exit points. "Any time I enter into a position, I always look at the chart first, it is crucial for entry points", he said.

Focus on market-industry-stocks: He once admitted that his economics education did not help much in his stock trading career and that only a few things they taught were helpful like that 40 percent of a stock's price movement was due to the market, 30 percent to the sector, and only 30 percent to the stock itself, which is something that he believe is more of less true. As just mentioned above, he has tried to learn a few new things like macro and currencies&commodities because the world has changed and it is a micro word - that is why focusing on the big picture, market sentiment, is crucial. He tells his traders that global macro themes are now more important than ever in investing: the development of the next phase of consumer economy of China is very intriguing, and he recognized that there can be more situations like Egypt and Libya.

Poker: Cohen was a very good poker player when he was young, a skill he believed taught him how, and against whom, to bet. He also once told that it was never about the money. What appealed to him was the adrenaline, the competition, the weighing of risks and probabilities. He also said: "I've always been de-sensitized to money. It was just always there. You know? I didn't't think about it. Not really. It's the same with trading. I think about the risk. I think about the trade. I don't think about the money." In another interview he said: "Poker was the biggest determinant in my learning to take risks you just play with great players, no one makes any money. You've got to find players who, well, maybe aren't so great." Competition and secrecy: Several industry insiders say SAC sometimes tries to suss out what other hedge funds plan to do and beat them to the punch. To stop rivals from riding its coattails, SAC sometimes makes head-fake trades to camouflage its own intentions, say former SAC traders. Critics claim that Cohen operates what they call a "reverse desk." Former traders say it works like this: The firm purchases a relatively small amount of the stock, then starts selling it off through various Wall Street brokers. When word gets out that SAC is selling, the Street goes nuts and also starts unloading big blocks. Then Cohen swoops to buy. However, some say that there's nothing wrong with making inconsistent orders in order to prevent your competitors from knowing what you're doing. Cohen has always avoided publicity and some describe him as "incredibly camera-shy and publicity-averse."

Stock trading Karma = you get what you deserve as stock trading is a performance-based job: Former SAC stock traders and analysts describe Cohen as a tough, self-centered guy, but if you do well he perfectly nice, if you do poorly, he has got very little patience. SAC-managers' contracts have down-and-out clauses: lose 5 percent from your peak assets, and SAC can take away half of what remains. Suffer a 10 percent loss, and you could be out. In 2008, 12 portfolio managers and their teams were fired or resigned, according to a person familiar with the matter. The teams are paid based on their own performance, and SAC's higher-than- normal fees ensure that each portfolio manager's take is almost as high as if he or she were running an independent shop. Send Cohen an idea that makes money and you get paid something extra, they say. It is also important to mention that SAC's average net annual return is almost 30 percent in the long run, and considering its high performance fee of 50 percent, the total annual return of SAC is a little higher than 50 percent in the long run - that is why small stock traders should be realistic with their future performance as even 50 percent annual performance in the long run is good. Not to mention that during bear markets your main focus should bet o protect your stock trading capital, for even most of the best stock traders are not able to make money during bear markets.

Focus on the few most important things such as loved ones, job, health, fun, and helping others: Recently Cohen said: "I've been to the mountain top, and there's not much there. My dream is to liberate myself." In his first trading job he threw everything he had into the job, and his marriage suffered. At 23 he had wed his wife, Patricia, and had two children with her. They divorced in 1988. Cohen, by his own admission, went into an emotional tailspin and ended up on Prozac. "Hey, I was depressed. I felt like a failure." he said. Many years after that he had also a serious, life-threatening, surgery, and after the surgery small things just don't matter anymore. He spent more time thinking about the family, more time with the kids. He started playing more golf. "I don't think people change too much", says Cohen. To the question what would he do if not trading stocks he once replied: "I know I wouldn't be tethered to the desk, wouldn't be tethered to Sunday-night meetings. Could be I'd just have the freedom to watch a fucking movie, or hang out with my kids." Cohen's family also makes charities focusing on children and their education, also on military.

I hope you also picked up a few simple stock trading tips from the above article.

Mika (the author of a small book called "The small stock trader")

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.