By Rob Curran
Of DOW JONES NEWSWIRES 20 March 2009
NEW YORK (Dow Jones)--The sudden spikes in stocks such as Citigroup Inc. (C) and American International Group Inc. (AIG) suggest that trader psychology is still a more powerful influence than fundamental analysis on this stock market.
The shock of Lehman Brothers Holdings' failure last September and the subsequent market plunge caused losses that had a traumatic effect on traders and investors. A sustained level of volatility not seen since the 1930s may be a side effect of that trauma.
Losses curb a trader's ability to make rational decisions, leading to erratic buying and selling, according to money managers and a psychiatrist who worked for a major hedge fund. The most destabilizing situation for a trader to be in, they say, is a short position - which is essentially a bet that a stock price will decline - that suddenly turns against them.
Bailing out of those bets can cause spikes such as the quadrupling of Citigroup's stock from 97 cents to its high of $3.89 in the last two weeks; or AIG's move from a low of 33 cents to as much as $2 in less than a week. The stocks jumped even though there wasn't a fundamental improvement in the outlook for the troubled companies.
Losses "lead to trouble making decisions, trouble staying with a strategy; they lead to a lack of confidence and demoralization," says Dr. Ari Kiev, a psychiatrist who recently finished a 16-year stint as the in-house trading coach for Steven Cohen's hedge fund SAC Capital.
"It's not officially post-traumatic stress disorder, but it has some of the same characteristics in the sense of not wanting to face the situation again, [and constantly] thinking about it. People get sick to their stomach and feel like throwing up."
Kiev, who now coaches money managers in his independent practice, said he often counseled traders at SAC who were mentally unsettled and even feeling nauseous because of trades that went against them. Prior to his stint at SAC, he helped Olympic athletes with mental preparation.
In his work, Kiev has noticed that trauma was more common after a losing "short" bet.
Short-selling is tougher on the mind for several reasons. If a trader borrowed and sold Citi stock for $1 apiece - and, according to one Wall Streeter, some traders did so, albeit as part of a hedging strategy - the most he could gain is $1 a share. That would be the case if the stock went to zero and the trader never had to replace it. When the stock hit $3.89 Thursday, the trader was down by $2.89 a share, more than double the original stake.
In theory, losses are unlimited when a stock is sold short. Plus, stocks that are popular with short sellers are prone to "short-covering bounces" or "short squeezes." These happen when people notice a sharp move upward and rush to buy back their bet. In the stampede that follows, stocks can gain value exponentially with the slightest fundamental provocation. Some say that's the case with Citi, AIG and other financial stocks.
When a trade goes bad, the trader often feels compelled to double down again and again, says Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund. Even a successful trader using stop losses can fall into this trap, Di Mattia said, and he is constantly on guard against what he calls the "snowball effect."
Quincy Krosby, chief investment strategist for Hartford Financial Services, says traders have experienced their own crisis of confidence in recent months, as losses cause them to "question their judgment."
Psychological healing - and thus reduction of volatility - will likely take a while.
-By Rob Curran, Dow Jones Newswires; 201-938-5176; robert.curran@dowjones.com [ 03-20-09 1130ET
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Thu Mar 19, 2009 1:05pm EDT
By Joseph A. Giannone
NEW YORK (Reuters) - Hedge fund managers may want to get their heads examined.
We're not talking Rorschach tests and distant memories of parents. Rather, psychiatrist Ari Kiev has helped hundreds of star traders improve their market performance by increasing concentration, managing stress and being well prepared for bad situations.
Needless to say, Kiev's phone has been ringing off the hook following months of plunging markets, mounting losses and a record wave of hedge fund investors withdrawing their money. read article
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By Laura Cohn, Kiplinger's Personal Finance, February 2009
To cope with a shrinking portfolio, we suggest that you set spending priorities, tune out the noise and keep your cool. Read the article here
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By Larry Jacobs for Trader's World
The current economic environment has led to big losses for many invested in the markets. Ari Kiev, M.D. has announced that he has launched Kiev Consulting, a consulting firm specializing in peak performance coaching for hedge funds and institutional investors and traders.He is regarded has one of the top coaches in the world and has been working with prominent hedge funds for more than 16 years. He is expanding his services to provide the assessment of new portfolio managers, team building and leadership training.
This consulting practice effectively allows him to broaden his reach and offer customized services to an increasing number of fund managers who need help today and are recognizing the importance of a psychological perspective in managing investments.
His counsel encompasses dealing with the stress of drawdowns, the behavioral dimension of risk management, psychological screen of analysts and portfolio managers and creative approaches to building cultures of collaboration.
Keiv, who has lectured worldwide on the psychology of trading is the author of more than 20 books. His recent works, both published by John Wiley & Sons, are Mastering Trading Stress: Strategies for Maximizing Performance and Hedge Fund Leadership: How to Inspire Peak Performance from Traders and Money Managers.
His other best-sellers include Trading to Win: The Psychology of Mastering the Markets, Trading in the Zone: Maximizing Performance with Focus and Discipline, The Psychology of Risk: Mastering Market Uncertainty, and Hedge Fund Masters: How Top Hedge Fund Traders Set Goals, Overcome Barriers and Achieve Peak Performance. His Web site is www.arikiev.com
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...as the industry soldiers on, how traders handle tense situations can be the difference between survival and devastation.Ari Kiev, The Trading Edge read article
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