Steve Cohen zeroing on sell discipline in his recent communiqué could not be more timely, in view of last week’s stock market volatility, which is typically experienced at the end of a long term secular bull market.
“We are offering up everything we’ve learned about Sell Discipline over the last 30 years”, writes Steve Cohen.
“We are offering up everything we’ve learned about Sell Discipline over the last 30 years”
Steve Cohen zeroing on sell discipline is not what brought the legendary trader to fame and fortune
Indeed, Steve Cohen would gain a heads-up on information and be in an out of trades like someone taking a cold shower, hence his nickname “rapid-fire trader.” Steve Cohen set up SAC, a fund management firm, as a kind of corporate espionage agency and paid huge commissions to banks for information.
Steve Cohen’s insider dealing scandal and his get out of jail card made him not the most popular trader on the Street and some voices are now objecting to his lecturing on trading.
Nevertheless, Steve Cohen zeroing on sell discipline relates to any investment process
In many ways, it is a purer test of investment discipline than what one chooses to buy. Moreover, the rise of indexing makes for new challenges. But Steve Cohen’s Point 72 notes that the decision to sell pushes different mental buttons from buying security.
“Steve Cohen set up SAC, a fund management firm, as a kind of corporate espionage agency and paid huge commissions to banks for information”
Steve Cohen’s Point 72 points out that selling a position defines investment strategy just as much as what goes into a portfolio. It is also a critical aspect of attention management, especially when it comes to losers.
Steve Cohen zeroing on sell discipline is viewed through the optics of the trader’s sell mantra “that you can always buy it back”
In other words, buy low and sell high, which is the mantra of Wall Street. But this tired old Wall Street mantra can also get you into big trouble unless you factor in value investing into the equation.
There is always a reason why a stock price falls and if that reason is due to fundamentals, such as a failing business model or poor management performance don’t be the fool that buys into a sucker’s rally. Avoid the dead cat bounce recoveries, which could be triggered by short sellers closing out their position and banking profits. Sure, you can always buy a stock back but don’t be the gullible one that catches a falling knife. If a stock price is plunging for fundamental reasons steer a wide berth, even if the technicals are screaming at you to buy as they can be fake buy signals to dupe trader’s into loss-making trades. It’s natures Venus fly-trap. The beautiful seductive flower that lures its prey in and then devours it.
“it took me years to understand the deeper value of selling to a trader: Getting something off your sheet early is more about mental bandwidth management rather than just limiting losses” – Steve Cohen
Steve Cohen zeroing on sell discipline is about cutting losses
The resident psychologist at Steve Cohen’s SAC Capital role was to discuss and evaluate a trader’s mindset regularly. Meeting with traders often centered around not the traders winning trades but the ones that had gone awry. The psychologist would coach traders on how to remain emotionally and financially strong and to avoid being hijacked by emotions after a big loss. A defeating loss can cause some traders to trade through the pain, denying it, not learning from the loss and creating more turmoil for the trader. Some traders may withdraw completely and fear to trade again. Other trader personality types might fight back, revenge trade, take even bigger risks and in the process sometimes dig their own grave.
One major difference between successful traders and failed ones is how they handle trading losses
Successful traders treat losses as an opportunity to learn and improve their trading. So selling loss-making trades was every bit as important to the firm’s success as riding winning bets to their full potential.
In a few words, Steve Cohen zeroing on sell discipline can be summed up in one paragraph.
“Now, sell when the tape says you’re wrong” is hard, especially if your investment approach is analytical. But the easiest way to trigger any trader into a meltdown is to say “the market has it wrong… this stock shouldn’t be going against us” said Steve Cohen’s Point 72.
“But it took me years to understand the deeper value of selling to a trader: Getting something off your sheet early is more about mental bandwidth management rather than just limiting losses. Losing positions have a way of sucking you into unproductive analysis and self-loathing. That time is much better spent looking for the next winning idea” he added.
“it’s not money until you sell” – Steve Cohen
Steve Cohen zeroing on sell discipline is about selling when you can and not when you have to
“We got that drilled into our heads from a SAC trader who went by the name of “Booty” in the room because his first trade lost real money and everyone said he would get “the boot” as a result, ” said a former SAC trader. “If you break trading’s cardinal rule of cutting losses early, and you get an embarrassing nickname” said the former SAC trader.
“It is a reminder that the best exit point is always when the market most agrees with you. That’s what makes selling so hard – it is essentially a contrarian action. Traders have it easier than longer-term investors since they can always buy it back” he added. But the best sell point is most often when everyone else wants to buy and visa versa.
Steve Cohen zeroing on sell discipline was also discussed in the context of the ETF-based index investing
The marketing of popular investment strategies like growth, value, momentum and industry Sector has trapped many ETF investors into concentrations that would under a different structure trigger “sell” decisions. For example, Technology stocks are 36% of the MSCI Momentum Index and Financials are a large overweight in S&P 500,
Sell to maintain investment diversification is a classic investment strategy but in a market increasingly dominated by y index-based investments, it is harder to do.
Finally, Steve Cohen zeroing on sell discipline highlights one obvious but overlooked fact, “it’s not money until you sell”.