…I would like to share some words of wisdom from Steven A. Cohen, the founder and famous hedge fund manager for S.A.C. Capital Advisors. Mr. Cohen was profiled in the book Stock Market Wizards by Jack Schwager, released in 2001. Last year, his salary topped $450 million as he remained in the top 10 highest paid managers in the world. In 2003, he trailed the leader, George Soros but passed him on the latest list. Now that you have a brief background on Mr. Cohen, I will pass on some words of wisdom from his interview with Mr. Schwager in the Market Wizards book.
Mr. Schwager Question:
When you put on a trade and it goes against you, how do you decide when you’re wrong? (The question actually relates to him and his traders)
Mr. Cohen Answer:
“This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63% of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be 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”
Mr. Cohen Answer (to another question):
“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 smart thing is to start moving your feet. I find that too many traders just stand there and let the truck roll over them.”
Mr. Schwager Question (asked in early 2000 – before the bear breakdown):
Do you have a scenario about how the current long-running bull market will end?
Mr. Cohen Answer:
“It’s going to end badly; it always ends badly. Everyone in the world is talking stocks now.”
Mr. Cohen Final Words:
“You can’t control what the market does, but you can control your reactions to the market. I examine what I do all the time. That’s what trading is all about.”
I decided to write this blog entry because our philosophy here at MSW is similar to the wisdom that Cohen shares. Market wisdom and education such as the inserts above typically go in one ear and out the other for most novice traders and investors. His rules and words sound so simple yet 90% of all traders fail to follow the basic rules for stock market success.
Similar to what I say every night in the daily commentary, you can control your own actions but not the market’s actions. From 2000 to 2002, Mr. Cohen did not have one losing month with his hedge fund and the fund was actually up over 100% during this two year bear stretch. I would listen to his advice as he may be the best living trader on the planet.
Piranha
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