Stock Market Wizards

by Jack D. Schwager

  Being a great trader is a process. It’s a race with no finish line. The markets are not static. No single style or approach can provide superior results over long periods of time. To continue to outperform, the great traders continue to learn and adapt. Cohen constantly tries to learn more about the markets—to expand his expertise to encompass additional stocks, sectors, and styles of trading. As Cohen explains, trading for him is an evolutionary process.

  * * *

  Update on Steve Cohen

  Steve Cohen declined to do a follow-up interview. He has continued his phenomenal performance. If the massive bear market that began in April 2000 has made trading difficult, someone obviously forgot to tell Cohen. Since the start of the bear market through August 2002, Cohen was up over 100 percent—and that’s in net terms; his gross returns were presumably at least double that level! Even more remarkable, he has not had a single down month during the entire bear market to date. In fact, he has not had a negative return month in four years (since August 1998). Perhaps somewhere there is a trader with better return/risk numbers than Steve Cohen; it’s just that I don’t know who it is.

  * * *

  ARI KIEV, M.D.

  The Mind of a Winner

  Ari Kiev is not a Market Wizard; he is not even a trader. Why then should you pay attention to his advice? Because Steve Cohen, who is unquestionably one of the world’s greatest traders (see interview in this book), thinks enough of Dr. Kiev to have made him a permanent fixture at his firm, S.A.C. Dr. Kiev began working with traders at S.A.C. in 1992, conducting weekly seminars. This role steadily expanded over the years, and he now spends three full days each week at S.A.C, working with traders both individually and within groups. He also consults with a small number of professional traders at other firms.

  Dr. Kiev graduated from Harvard and received his medical degree at Cornell. After a residency at Johns Hopkins Hospital and the Maudsley Hospital in London and serving as a research associate at Columbia, he returned to Cornell Medical College to head their social psychiatry department, focusing on suicide prevention research. In 1970, he founded the Social Psychiatry Research Institute, which participated in major trials of the antidepressant drugs, such as Prozac, Paxil, Zoloft, and Celexa, among others.

  Dr. Kiev was the first psychiatrist appointed to the U.S. Olympic Sports Medicine Committee and worked with Olympic athletes during 1977–82. It was his work in helping Olympic athletes enhance their performance that years later attracted Steve Cohen’s attention, because Cohen believed that there were strong parallels between top athletes and top traders.

  Dr. Kiev has authored fourteen books, including Trading to Win: The Psychology of Mastering the Markets, and Trading in the Zone, based on his experience working with professional traders; the best-selling A Strategy for Daily Living and a popular anthropology text, Magic, Faith, and Healing: Studies in Primitive Psychiatry Today.

  I interviewed Dr. Kiev at his Manhattan office. (No, I didn’t ask him to lie down on the couch.)

  * * *

  You began your career working with suicidal and depressed patients and then ended up working with Olympic athletes and traders. That’s quite a transition. It doesn’t sound like there would be much of a connection.

  One of the therapies for depressed and suicidal patients is to help them become more sell-reliant and assertive. These same skills are applicable to athletes and traders as well.

  How did you get involved in working with Olympic athletes?

  My kids went to a health club that was run by the head of the U.S. Olympic Sports Medicine Committee, and I met some Olympic athletes there. As a result of that association, I became the first psychiatrist on the committee.

  What sports did the athletes you worked with participate in?

  Bobsledding—my son was on the U.S. world team in 1981—basketball, archery, fencing, kayaking, sculling, and a number of others.

  That’s quite a range of sports. Are there common denominators among the sports or are different approaches required for different types of athletes?

  There are some common denominators, but different sports require different mental frameworks. For example, in bobsledding, you need to start off with a maximum amount of exertion as you run and push the sled. But as soon as you get into the sled, you have to slow down your adrenaline so that you are calm and centered while steering the sled down the course. A similar transition is required in the biathlon, where the athletes race on cross-country skis, with their heart rate exceeding 120 beats per minute, and then have to stop and focus on shooting a target, with their heartbeat ideally slowing down to 40 beats per minute. These types of athletes can condition themselves by practicing abrupt mental shifts between exertion and relaxation.

  In a sport like archery, however, the critical element is for the athletes to be able to empty their minds. For example, I worked with an archer who had won the gold medal in the previous Olympics, and that achievement was interfering with his ability to have his mind totally empty and centered on the target. He needed to develop the skill of letting go of the thought of his previous gold medal win so that he could be relaxed and completely focused on the target.

  How do you accomplish that?

  By relaxation and imagery. There are many techniques, but the essential idea is that you want to notice a thought and then let it go. For example, you might picture the thought in a bubble and then visualize it fading off and disappearing.

  Are there some winning traits that are common across all sports?

  In any sport, it’s very difficult to win a gold medal unless you decide you’re going to win it. Making the Olympic team and winning a gold medal may be a ten-year quest. If you’re going to make it, then you have to start today to do those things that are compatible with what someone who is performing at that level is doing. Most people don’t believe it is possible and settle for not succeeding, or at least not succeeding at the level they have chosen. You have to be willing to put yourself on the line and go for it, even with the thought that you will feel humiliated if you don’t make it after you have promised that you would.

  Promised yourself or promised the world?

  Promised the world—that makes it much more powerful. Promising the result commits you to doing it and leaves you no alternative but to do it if you are going to live by your word. Letting others know that you have set a goal and are committed to achieving it makes it more likely you will achieve that goal, whether it is in the realm of athletics, trading, or something else.

  One procedure I introduced at S.A.C. seven years ago was to go around the room and have each trader promise his results. In the early years, I got a lot of resistance from just about everyone except Steve Cohen, who was always very willing to promise an extraordinary result. It took a long time for people to accept this process, but now it is amazing how much it has become part of the company culture. Almost everyone is willing to commit to making more than he or she did in the previous year, often promising to double the amount. It’s not a matter of making positive affirmations; the key is promising to do something, and then on a daily basis doing what you need to do to realize that result.

  Steve Cohen set a target for this year that was off the charts. He had to plan a strategy consistent with that target. He starts working at four in the afternoon on Sunday and works until ten that night. “I don’t want to do that,” he says, “but I have to in order to play at this level. I don’t want to come into the office at seven-thirty every morning. I don’t want to go through all these charts every night. But it’s what I have to do if I’m going to be true to my goal.”

  Are you implying that simply committing to a higher target makes it possible?

  Believing that an outcome is possible makes it achievable. The classic example is Roger Bannister’s penetration of the four-minute mile mark. Before he ran his sub-four-minute mile in 1954, this feat was considered an impossible barrier that was beyond human physical capabilities. After he ran his so-called magic
mile, many other runners suddenly began breaking this once seemingly impossible barrier.

  As the barriers are being broken down by Steve, other traders at his firm are discovering that they can make a lot more than they once thought possible. One trader who was a clerk five years ago is on target to make $70 million this year.

  What are the implications of setting a target and then not reaching it? Certainly not everyone who sets a higher target makes it.

  The objective of setting a target is not necessarily to reach it, but rather to establish a standard against which to measure your performance. If you are not reaching your target, it forces you to focus on what you are doing wrong or what you may not be doing that you should. The target holds you to a higher standard of performance.

  Why do some athletes or traders excel, whereas others with equal skill manage only moderate success?

  Sometimes when people reach their target and nothing happens, they stop paying attention to whatever the commitment was to get there.

  This explains why some people begin to lose after they succeed. They can’t sustain the effort. When someone achieves his goal, the question is often, “What now?” My answer, which is based on comparing athletes who have won gold medals with those who haven’t, is to set up another target that will provide a challenge. The gold medal winners are always stretching for a goal that is uncertain.

  Failing to redefine the goal can limit success. For example, one ski jumper prepared for the Olympic trials for years by visualizing himself doing perfect jumps over and over. He came to the trials, made the perfect jump, and achieved his goal of making the Olympic team. The problem was that the qualifying jumps ended up being his best performance because he hadn’t visualized or mentally prepared himself for going beyond the trials.

  Some traders have trouble maintaining the discipline that made them successful once they get ahead by a certain amount. One trader I worked with did well at the beginning of each month, but whenever he got ahead by $300,000, he would revert to bad habits. When I pressed him to explain the reasons for the deterioration in his performance during the latter part of each month, he said, “I begin trading each month from the perspective that I am flat. Therefore, I am very selective about my trades and use strict risk control. Once there is money in the till, I get lax. I become overconfident. I stop having respect for the market.”

  What else impedes skilled athletes and traders from excelling?

  There are people who hold the world record but have never won a gold medal. One athlete held the world record in his event and participated in four Olympics, but never won the gold medal. It turns out that the time he set the world record, he had a beesting that distracted him from thoughts like: “I’m not winning. I have to win.”

  Is there an applicable lesson to trading?

  Yes, being preoccupied with not losing interferes with winning. Trading not to lose is not a good strategy. You need to trade to win.

  How did you get involved working with traders?

  Steve Cohen had heard of my work with Olympic athletes and thought it would be relevant to traders. I’ve been working with his firm for seven years. When I started, they were a $25 million hedge fund; they have now grown to $1.5 billion. I know that you interviewed Steve Cohen. I’m curious, what was your impression of him?

  I was struck by his casualness in trading. He was throwing out 100,000-share orders with the same level of emotion that he might use ordering a sandwich for lunch. He also seemed to maintain a constant sense of humor while trading. Another thing I noticed about Steve that I’ve also seen in a number of other great traders is that he can look at the same one hundred facts everyone else sees—some of which are bullish and some of which are bearish—and somehow pick out the one or two elements that are most relevant to the market at that moment in time.

  You saw that? I think part of it is preparation and part of it is experience. The trades he’s doing are not new trades. He has a vast repertoire of trades and is able to access them. Great traders like Steve are also able to notice when the sweet spot is visible and to pile in. According to S.A.C.’s risk manager’s statistics, 5 percent of his trades account for virtually all of his profits. He is also willing to cut his position when he is wrong.

  Do you work with just professional traders, or do you also work with ordinary people who want to become successful traders?

  Just professional traders. I see myself as a trading coach—helping someone who is a trader improve, not teaching someone who is not a trader to be a trader. My job is to diagnose how a trader might be trapped by his own emotional response to the market and then help tweak his approach to correct the problem.

  For example.

  One trader came to me and said, “When I’m winning, I keep winning—I can do no wrong; when I’m losing, I keep losing—I can’t do anything right.” The solution was to create the same state of mind when he was losing as when he was winning.

  How do you do that?

  By getting him to re-create the same mind-set that he has on a winning streak. When he is on a winning streak, he is fearless, intuitive, and makes the right choices. When he is on a losing streak, he needs to visualize, remember, and feel those same positive traits so that when he comes into the office, he has the same attitude toward his trading as when he is in the middle of a winning streak. You repeatedly hear traders say that when they are in a hot streak, they can do no wrong. I’m suggesting that people can re-create that hot streak in their mind.

  Is that what you did with athletes as well—get them to imagine doing their particular event perfectly?

  I once worked with an ice skater who couldn’t do a triple jump. Every time he attempted the third turn, he would fall. I asked him if he could begin to do it in his mind. At first, when he attempted doing it in his mind, he would also fall. I had him keep practicing the jump in his mind until he felt comfortable doing it mentally. In order to be able to do it physically on the ice, he had to first have a mental image of his doing the jump successfully. Not long after he became comfortable doing the jump in his mind, he was able to do it on the ice.

  Another athlete I worked with was a bobsled driver who had crashed at Zigzag in Lake Placid, which is a ninety-degree turn. Subsequently, every time he made that turn, he overcompensated. I had him visualize the perfect run. The actual bobsled run takes about a minute, and you can run through the entire course in your mind in about ten seconds. He practiced coming down the perfect route in his mind hundreds of times. This mental imaging allowed him to overcome his anxiety, and he was ultimately able to make the turn without overcompensating.

  I don’t want to make this sound simple or magical. I don’t mean to suggest that all that is involved is learning some set of visualization techniques. What I do is better described as a dialogue process to find out what is impeding a person’s performance.

  Do people know the answer to that question?

  They frequently do. I worked with one trader who whenever he decided it was time to liquidate his position would hold on to a small part of it, just in case the market continued to move in his direction. On balance, these remnant positions were costing him money. He had to learn to get rid of his entire position when he decided it was time to liquidate, which at first was anxiety producing.

  I’m not trying to badger people. I’m just trying to get them to do what is in their best self-interest. Human beings want to feel comfortable. My job is to be a bit of a gadfly so that I can get them to make the necessary changes.

  Any other examples of personal flaws that prevented a trader from reaching his full potential?

  One trader who runs a large hedge fund is never willing to buy a stock at the market; he is always trying to bid it lower. As a result, he misses a lot of trades.

  How did this flaw come to light?

  I asked him, “How did things go today?”

  “Not so good. I just missed getting into a big trade in XYZ. I tried to buy it, but I couldn’t get into the p
osition because the price was too high. I put in a bid, but the market was already up one dollar, and I didn’t want to pay up for it.”

  I’m trying to get him into a different mental perspective. He has been successful for a number of years. He wins on the vast majority of his trades. Why is he being such a penny-pincher?

  Why do you think he is?

  I think that’s his personality. It’s the way he was brought up. He nickels-and-dimes everything.

  And it’s getting in his way?

  It’s getting in his way of greater success. All I’m trying to do is hear where a trader is at and then help him see what is holding him back.

  What is another example of a behavioral pattern that was holding a trader back?

  One trader selected his stocks fundamentally and then scaled into the position as the stock declined. Even though he had chosen to enter his positions by averaging down, when a stock got back to even, he was so relieved that he would often get out.

  Didn’t he realize that his entry approach would always lead to an initial loss?

  He knew it intellectually, but psychologically he was still experiencing it as a loss. Therefore, when a stock got back to even, he was just glad to get out. The first step was to get him to perceive what he was doing. Now he can stay in much longer. Consciousness is one of the most critical tools I use. In this case, the trader needed to be confronted because he was fooling himself.

  Did he change what he was doing?

  Yes, he now catches himself when he is tempted to get out of a stock when it goes back to even. Not only does he catch it, but I can identify this same tendency in other traders.

  Has his trading improved as a result?

  Dramatically. Last year he made $28 million. At the start of this year, I asked him, “What is your goal for this year?”

  “Fifty [million],” he answered.

  “Fifty?” I asked.

  “Well…”