By Ari Kiev
John Wiley & Sons Inc.
204 pages, $49.95
There have been many books written about living with and handling stress, but this among the first one to tackle the subject from the perspective of trading. Thus, it is a welcome addition to Kiev’s other ground breaking trading books. Dr. Ari Kiev, a well-known psychiatrist and trading coach, has a large following in the trading community resulting from his medical practice, prolific writings and lectures on the subject of trading.
The author presents readers with real-life interviews, personality profiles and case studies that illustrate the types of stress that high-powered traders experience throughout the trading day, whether the volatility is flat or all over the map. Even novice traders will understand and see themselves in some of the illustrative examples. Imagine the trading volatility and stress during the day when the Bear Stearns news come out in March 2008 and the markets were tanking. Traders must learn know how to handle their stress to make wise trading decisions on volatile days like this, or they should stay on the sidelines and not get whipsawed and depressed.
Kiev starts out on his journey by providing readers with basic information on the nature of stress, the emotions of stress and the dangers of trading under stress. He describes the four stages of stress and the specific problems that may occur in each phase. Then he reviews fear and greed, guilt, worry, anger and euphoria.
Traders exhibit characteristics that work against them including overconfidence, fear, recklessness and irrationality. Traders need to distinguish between good and bad stress and make sure they learn the techniques for dealing with the latter and maintaining their focus under all market conditions.
The most compelling segments of the book are the actual stories and interviews with traders, most of whom have worked for hedge funds and handle millions of dollars a day. Clearly, these individuals need to successful manage stress or their careers will be short lived.
Three chapters offer particularly keen insights include those on failing to manage risk, ego and obstinacy and failures with shorting stocks. Shorting stocks takes a great deal of conviction and is difficult for many traders to master, and finding shorts takes time and induces stress. Too many traders panic after shorting stocks. They don’t stick with their position fearing a price surge. This stress needs to be offset or the results will not be good.
At the end of the book, Kiev provides a list of three common stress busters, as well as a breathing exercise, an image awareness exercise, a writing experience and a way to conduct a self-evaluation. Learning to live with stress is critical and the author provides insights on ways to accomplish that. This book certainly is one that experienced and novice traders will greatly benefit from. Overall, Kiev offers traders a look into their psyche and ways to handle and minimize stress. Taken to heart, traders can hopefully improve their trading results, and live less stressful lives in their work, family and other endeavors.
Leslie N. Masonson is president of Cash Management Resources, a financial consulting firm, and author of All About Market Timing and Day trading on the Edge. Reach him at lesmasonson@yahoo.com
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When it comes to the art of trading, Steven Cohen is a true connoisseur. Cohen, who spent the first 14 years of his career trading options and equities for brokerage firm Gruntal & Co., founded SAC Capital Advisors in 1992 with $25 million of his own and investors’ money. During the ’90s, while other managers were pursuing more-elaborate investment strategies, Cohen demonstrated that his rapid style of trading could produce consistently high returns — as well as command exceptionally high fees. From 1992 through 1999, SAC had a compounded average annual return of 45 percent — after
taking its 50 percent of the profits — as the firm grew to $1 billion in assets. But Cohen, who says he learned to anticipate how stocks move by watching the volume of shares traded, saw that the game was changing as markets became more electronic and global. During this decade, he has expanded the now $16 billion, 800--person SAC into a variety of longer-term, more fundamentals-based strategies,including quantitative and fixed-income investing, without losing a step. (SAC’s average annual returns still exceed 40 percent since inception.) Cohen, 52, is also a major collector of contemporary art, much of which is on display at SAC’s opulent 110,000-square-foot headquarters in Stamford, Connecticut.
Was it easier to make money in the ’90s than it is today?
Absolutely. I always tell my guys, “You would have loved the ’90s.” It was different, and everyone was smaller. Plus the markets worked a lot better. When I started, the S&P 500 was up 20 percent a year for seven years. And there was the technology boom besides. So you had a lot of tailwinds. It was a good time to be in the markets. And we were managing a lot less money, so you could move it around a lot more easily.
How has SAC evolved during the past 16 years?
We started out as traders. Frankly, we didn’t do a lot of fundamental work. And then, in the mid- to late ’90s, we started transitioning from being a trading firm to a fundamentally driven firm. That continued over the years. As our assets grew, to effectively manage that type of capital, we had to do real fundamental work and analysis. Today we have probably 150 analysts and 85 portfolio managers covering Asia, Europe and the United States.
How has your role changed?
When we were smaller, the firm needed my P&L to survive. Today I still trade, but because the firm is now so diversified, the impact of my trading on the firm’s P&L is not what it was. I actually take more pride now in the building of this firm than I do in whether I make money in my own trading. I take more pride in the fact that this firm is now a real business.
How much time do you spend trading?
Between 9:00 a.m. and 4:00 p.m., I’m usually on the trading floor. I think there’s a dimension in having me out there that provides value for the firm. I’m in the bunker with the troops. Occasionally, I’ll take meetings during the day, but most of the time I’m on the floor. And then, after 4:00, I conduct business meetings.
Has your trading style changed?
In the early days it was a little bit more like trading the tape. The New York Stock Exchange had quotes of blocks of 500,000 to a million shares that were trading, and you could see the price action as it developed. Now, because everything is traded electronically a few hundred shares at a time, you don’t see large blocks trading. So the way I used to do it is really gone. But I could see that happening ten years ago, which is why I reinvented the firm.
Can investors create alpha by trading around positions, buying or selling to take advantage of price moves?
There’s no question that the whole point is to create alpha, and there are lots of ways to do it. And the reality is, if you have a
great idea, you may want to trade around the position a little bit. But I wouldn’t do it a lot, because ultimately, how many great
ideas does anybody really have? You’ve got to make a high-conviction bet when you feel like you have a great idea. That’s really the only way to outperform today.
A decade ago you brought in a psychiatrist, Ari Kiev, to coach SAC traders. Has his role become less important as you’ve moved to more-fundamental investing?
Ari is still an important part of the firm. It was somewhat innovative at the time to bring in someone like him. Investing and trading is a mental game. There’s always something people can work on to improve what they do. Ari’s job is to try to help them identify that and get them thinking about how to do things better. Part of being successful in the markets is being in control of your emotions and making decisions for the right reasons, not the wrong reasons. And the more you can stay in touch with that and what’s going on in your head, then I think the more successful you can be.
Can traders and investors get better over time?
Yes, I think so. But the real question is, Are they wired to adapt? The ones who can adapt are probably the ones who are going
to end up being successful, because markets change. I think one of the reasons SAC has been successful over the years is
because I’ve been very flexible.
Will SAC continue to evolve?
I assume that the game is always changing, and we’ve got to keep adapting to what the markets allow. The world has changed a lot in the past five years. So if you had asked me five, six years ago, “Would you have an office in Hong Kong?” the answer would have been, “I doubt it.” And now I do have one there.
Have you been to China?
I was there about three years ago, and I was just blown away by it. I could start to understand why certain industries and certain stocks have been acting the way they are. Of course, you can read about the growth that’s happening in China, but when you see it, it forces you to think about things differently. China is very far away from Connecticut. And you need to see it to understand it.
How much does SAC invest outside the U.S.?
Probably 15 to 20 percent of our activity is outside the U.S. There’s a lot of opportunity for growth in both Europe and Asia. The game is changing. Stock markets are starting to develop all over the world, and that creates opportunity.
Is the lack of information in new markets a problem?
Those markets are more inefficient. And consequently, you can probably do better over there in the sense that if you do good analysis, you probably create a better edge there than you can here. In a perfect world you would want to transplant some of your own people so that the culture sort of happens over there like it happens here. We try to do that. We’re pretty careful about putting people in places that we’re not sure about. We’re going to grow these businesses slowly and develop a good foundation.
How would you describe the SAC culture?
Entrepreneurial, collegial and independent-minded. We want people who are self-starters and people who know what they want to do and how to execute on their strategy. I tend to be a guy who gives people a lot of autonomy. I tend to believe in human nature. I also believe that if you give people enough rope and enough room, they’re going to create something that’s unique to them. I’ve learned as much from my people or more than they’ve learned from me. These young guys, they’re smart,
they’re inquisitive, and they teach me stuff.
How do you keep employees happy?
Pay them well. I also think it helps that I give people a lot of autonomy. The vast majority of people who have come to this firm
have had a really good experience. We usually don’t lose people to other firms. We tend to lose them if they start their own
firms. So you’re going to have some turnover. That’s inevitable. I started my own firm, so I understand that. And that’s why I
try to keep this firm well diversified, so when and if people leave, the firm just keeps going, which I think is the mark of an
institution as opposed to just a one-hit wonder.
Do you think the huge sums made by hedge fund managers are justified?
I don’t think any of us got into this business thinking we would make the money we’ve ended up making. But that’s the
American way. These are small businesses, and with the amount of hours that people put in to be successful, they ought to be
applauded, not criticized. I’m not forcing anybody to invest with me. And the reality is, I have a lot of my own capital at risk in
the firm. So if I make good investments, I ought to make a lot of money. And when I lose money, I’m losing my own money too.
How does collecting art fit into your life?
On a Saturday, rather than play golf, I’ll go to a gallery and look at art. Art collecting brings in some of my skills as an investor
— my ability to assess risk and figure out what something is worth. I’ve also learned a lot and gotten to know many people who
I would never have met in the normal course of doing business.
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Stress, not market volatility, may have the greatest impact on a fund manager's performance. Over time, highly stressed portfolio managers may find that hey struggle to make sound and timely decisions, so much so that they cling tol osing positions - rationalizing their decisions to hold as good buying opportunities.
Download the reprint pdf here.
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Vision Quest: Resources and skill can take you far. But to reach your maximum potential, you need a long-term strategy.
...as a hedge-fund leader, you not only need to set the necessary vision, but set the strategy for how to get there. A vision gives your team a target for committing itself to working harder than it might otherwise. Download complete article here[ view entry ] ( 438 views )
Dear Dr. Kiev,
Not long ago I spoke to you about the difficulties that I experienced at getting a summer internship. I took your advice to heart and continued to use perseverance to finally land an internship with Merrill Lynch. I will be working at Merrill’s downtown Toledo office which deals with Wealth Management. It is difficult for me to describe the excitement and joy that I have for my future. Your short story about a gentleman that tried to raise several billion for his fund, facing denial in 99 out of 100 people that he met, made me realize that my problems, especially as a student, are miniature in nature and that life is too short for anyone to deny or doubt their own abilities to accomplish anything they desire. For that I am grateful!
I have just one question for you. In your recent interviews about the rogue trader, Jerome Kerviel, you spoke about the importance of ensuring that each trader is a team player and that the funds goals are kept in check among the traders. In order to ensure that the fund is facing the right direction, the PM must have a system that limits the freedom of the trader. In other words, the trader has the right to put on specific trades or implement various techniques, but he/she must also be willing to share their mistakes and progress with the entire team. Steve Cohen makes it very clear that the success of SAC is the result of the team that he was able to create. Based on my research, you were the key figure that brought about the philosophy of Cohen’s firm, especially the yearly target setting approach. My question to you is this, if a trader is implementing various approaches that seize to work within a certain market environment and the PM forces him to limit his trading or stop all together, would such an action destroy the idea of a trader being disciplined to stick with his plan? I bring up this question because Richard Dennis (the farther of the Turtle traders) emphasized the importance of a trader following his system and rules even when things are going bad. The knowledge of the systems long term profitability brings about the discipline and belief in the approach and its abilities of turning out a profit.
As always Dr. Kiev, thank you very much for your time.
Sincerely,
Michael
Dr. Kiev:
Good question. It is a balancing act between the trader's methodology and discipline and the risk management of the positions within the context of the portfolio and the firm's capital deployment. It is an iterative and dynamic process and the best are the ones that can make this trade off as seamlessly as possible-this is based on art, experience,good luck and understanding management. Ari
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