Interesting read from today's WSJ on a trader that has been around for many years...
John
December 3, 1999
Day Trader Profits
For Over 20 Years
By MITCHELL PACELLE and CHARLES GASPARINO
Staff Reporters of THE WALL STREET JOURNAL
You may not know him, but Wall Street does -- he is one of the
original day traders.
Steven Cohen began rapid-fire trading
as an amateur in the 1970s, 20 years
before terms such as "day trader" and
"chat room" entered the financial
lexicon. In high school, he hung around
a brokerage-firm branch in Great Neck, N.Y., studying stocks and
dreaming up trades. In college, he learned to "trade the tape"
before computer screens were the norm.
Such in-and-out trading has spelled financial ruin for many day
traders. Some 70% of day-trading customers lose money, one
study says. But for Mr. Cohen, the trigger-happy investment style
has made him millions of dollars, in up markets and down, year in
and year out. Now, seven years after forming SAC Capital
Management, the secretive trader has become one of the most
sought-after managers in the hedge-fund world.
Mr. Cohen's success shows just how profitable quick-finger
trading can be, at least for those with extensive experience and
ties to Wall Street, and the help of a staff of 90 trading investment
professionals. Mr. Cohen, 43 years old, has become one of Wall
Street's biggest, and most coveted, customers, allowing him to
build an enviable information network.
Getting in and out quickly is his trademark.
"Steve is the single-most successful
practitioner of this style that there is -- bar
none," says John Troubh, who worked with
him at Gruntal & Co. and now runs his own
hedge fund. "Maybe he doesn't capture the
first 10% or the last 10% [of a stock's move],
but he gets the juiciest 80% that gives him
the speed."
But he doesn't come cheap. Mr. Cohen
charges investors in his flagship fund about
45% of the profits, more than double the
20% charged by most hedge-fund managers. His Stamford,
Conn., firm, which is currently closed to new investors, manages
about $1.6 billion, putting him firmly in the hedge-fund major
leagues. His flagship fund has soared 68% this year through
November, after fees, far surpassing the broader market and the
average hedge fund. This followed a 49% gain last year, during
the most dismal hedge-fund year in memory, when the average
hedge fund was flat. SAC has posted double-digit gains every
year since it was formed.
And he has had plenty of losing
trades. "My best trader makes
money only 63% of the time," he
conceded in an April speech.
"Most traders make money only
50% to 55% of the time. The
margin of success is small."
On Wednesday, for example,
SAC bought McDonald's Corp.
shares in the wake of the
fast-food company's agreement
to purchase Boston Chicken
Inc., according to one person
familiar with the trade. SAC's
expectation of a quick stock
pop was dashed Thursday morning, when Banc of America
downgraded the stock, triggering a price drop. SAC quickly
dumped part of its stake at a loss (though it later bought some
more shares).
Strictly speaking, Mr. Cohen isn't a day trader, because he often
holds securities overnight. But he typically holds stocks for hours,
days or weeks, not months. A list of SAC's 10 largest stock
holdings on June 30 shares only one name with the March 31 list
-- which in turn shares only one with the Dec. 31 list, according to
data compiled by Carson Group. By contrast, Julian Robertson's
Tiger Management, which manages more than five times as
much money, had five of the same stocks on its July list of top 10
stock holdings as it did in February.
"I'll tell you what we do at SAC," Mr. Cohen explained in the April
speech. "We trade. A lot. Over 20 million shares a day. A
broker's dream come true. We trade fast. ... It's not growth
investing. It's not value investing. It's short-term catalyst investing."
A spokesman for the fund declined to comment on the portfolio or
its performance. Mr. Cohen has built his positions not by focusing
solely on stocks' long-term fundamentals. Rather, he carefully
scrutinizes stocks' price and volume moves, tries to figure out why
-- then quickly pulls the trigger, say those who have worked with
him.
In August, for instance, Mr. Cohen saw that Microsoft Corp.
shares were getting hammered. He learned there was a window
in which some Microsoft insiders could sell stock. He watched the
stock fall through mid-August, then bought at $83.50, according to
someone familiar with the trades. Within a week, as the insider
selling subsided, the stock was back up at $89. Mr. Cohen sold.
"He's unbelievable at determining when to buy or sell based on
when other people stop buying or selling," says Steven
Heinemann, a partner at First New York Securities, a trading firm,
who used to work with Mr. Cohen on Wall Street and at SAC.
Mr. Cohen doesn't trade blind. Rather, he makes educated
guesses about when stocks will move, or stop moving. When talk
of a restructuring at Bausch & Lomb Inc. began circulating weeks
ago, SAC bought in while the stock was in the mid-$50 range. On
Wednesday, when the restructuring was announced, the stock
leapt more than $4 to close at $59, and it was up another $6.75
yesterday, in New York Stock Exchange 4 p.m. trading. Earlier
yesterday, Mr. Cohen sold about 60% of the fund's stake, a
person familiar with the transaction said.
Mr. Cohen got an early start studying the market. "He was
reading The [Wall Street] Journal from when he was 11," recalls
Ronald Aizer, a neighborhood friend. When Mr. Cohen went to
college, he talked Mr. Aizer, who was then running the arbitrage
department at Gruntal, into handling his trades.
"Some guys liked to play intramural football," says Jay Goldman,
a college chum who later worked with Mr. Cohen and now is an
investor in his fund. "Steve liked to go down and trade."
Mr. Aizer hired Mr. Cohen in 1978, after his graduation from the
University of Pennsylvania, to join his options arbitrage
department at Gruntal. "I wouldn't be surprised if he made close
to $1 million trading the first year," says Mr. Aizer.
After a half-dozen years, Mr. Cohen set up his own trading group
at Gruntal, which Mr. Goldman says was "by far the most
successful" of Gruntal's trading groups. But eventually, like many
successful Wall Street traders, Mr. Cohen hungered to run his
own show. He set up SAC in 1992.
Success came quickly. Investors gained 50% in 1993, after fees,
and 25% the following year. In the hedge-fund world, success
begets growth. SAC's money under management has ballooned
in five years more than 80-fold from $20 million. (Indeed, at year
end Mr. Cohen expects to pare the fund to a more manageable
$1.3 billion.)
Mr. Cohen's rapid-fire trading style can't handle that much capital.
So several years ago, he started hiring more traders and
analysts, spreading investors' capital among them, and edging
toward a more long-term investing style. He divides new
investors' capital between the pool he manages, which continues
to go for quick hits, and such strategies as event-driven value,
quantitative futures, electric utilities stocks, merger arbitrage and
health care. He keeps 50% of profits on his pool, about half that
on the others.
Mr. Cohen aims to drill his traders in what he has called "the SAC
way." Ari Kiev, a psychiatrist, visits the firm several times a week
to act as a trading coach. "All traders have traits that hold them
back," Mr. Cohen explained in a speech. "Traders have to face
their demons. Bad traders blame the market or bad luck. It's
neither. It's just bad habits."
Dr. Kiev worked in the 1970s with Olympic athletes on
maximizing performance. Periodically, SAC traders meet with
him as a group, and in front of their peers, set profit targets for
themselves. And Dr. Kiev, after studying the win/loss ratios of
individual traders, meets with traders individually to hash out such
problems as holding losing positions too long.
That is an important corollary of Mr. Cohen's approach-don't fall in
love with your ideas. Says Mr. Troubh: "I've seen him plow into
stocks and say within a few minutes, 'Geez, this is stupid.' He'll
sell."
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