DealBook -Peter Lattman
The founder of SAC Capital Advisers, the $12 billion hedge fund in Stamford, Conn., sat for a rare wide-ranging interview with Paul Tudor Jones, another hedge fund manager, where he discussed his favorite stocks and a whole lot more. The interview was part of a two-day conference at the Waldorf Astoria hotel in Midtown Manhattan sponsored by ISI, the Wall Street research firm.
The conference was closed to the media, but this DealBook dispatch is based on detailed reports from several people in the audience.
Other than complaining about his bad back, Mr. Cohen is said to have appeared at ease during the hourlong conversation before a packed crowd. Mr. Jones, who joked that he was playing the role of
Charlie Rose, pressed Mr. Cohen on a variety of topics but did not — no surprise — ask questions about the government’s insider trading charges against two of his former traders.
Mr. Cohen talked about how he got started as a trader, reading the stock tables in the daily newspaper as a child and hanging around the local brokerage firm near his house in Great Neck, N.Y. There “was something in my blood, something that I loved” about trading that has stayed with him. He had a little money to trade and began putting it at risk.
Mr. Cohen’s first stock investment? Perkin Elmer, which turned out to be a winner. He said he had ignored an alternative recommendation from his father, a garment center executive, to buy a fabric maker.
He spoke about his 14 years at Gruntal, a New York brokerage firm where he worked before forming SAC. He started in the firm’s options arbitrage area. But he found himself quickly bored of hedging stocks because he would see the firm selling a position up 20 cents — when if he had only held on it would have gone up a dollar.
In his 20s, Mr. Cohen said he had his own “pad” and was earning “seven figures” at Gruntal. The firm paid him 60 percent of the profits he earned — “pretty generous” terms, he said — but he eventually wanted more money to manage so he took a pay cut and started SAC.
He said his fondest market memory came from his time at Gruntal when he was short the market heading into the crash of 1987. “I made a lot of money,” he said, “and I also covered on the open the next day.” Had he not done that he would’ve put his firm out of business, he said.
During the early days, he described SAC as a “pure trading shop” but soon realized the business was scalable. So he said he went about hiring “people who were smarter than me” and who were “young and hungry.” The hope was to turn SAC into a more “fundamental shop,” meaning a firm that focused less on trading and more on security analysis.
Considered a gifted “tape reader” with an uncanny knack for predicting stock-price movements, Mr. Cohen said that because of the rise of electronic trading and the way that orders were chopped up, “tape reading is a lost art that today is not very useful.”
“I always tell my traders that they would’ve loved the 1990s because it was a fairly easy time to make money,” he said, referring to the enormous bull market rally, particularly in technology stocks. “A lot of my money came from that period. It was a tremendous time in the market.”
“In the ’90s it was balls to the wall, long and short with no hedging,” he recalled, according to people at the event. “I could be long at 12 p.m. and have by book totally short by 3 p.m.”
Mr. Jones asked whether age — Mr. Cohen is 54 — factors into being a trader and whether his style has changed as he’s gotten older. Mr. Cohen said that “the sustainability of actively trading as you get older becomes more difficult.” And he also pointed out that “to make an impact running big capital you have to express your ideas in size.”
He described the investment process at SAC, which he said employed about 100 portfolio managers and 150 analysts. A lot of his employees’ best ideas get pitched to him, he said, with some having short-term catalysts and other more longer term.
Mr. Cohen expressed the view that it was important to make concentrated bets and have conviction in your very best ideas, explaining that most SAC portfolio managers tend to run with their largest positions at 10 percent of their portfolio. Mr. Jones agreed with this investment philosophy, though they acknowledged another school of thought — executed at hedge funds like Renaissance — that believes in high diversification.
When asked about quantitative strategies like statistical arbitrage, Mr. Cohen was unenthusiastic. Such strategies, he said, “doesn’t allow for fundamental work to decide what the next quarter will be or the next hot product will be.”
That said, he always considers technical analysis. “Any time I get into a position, I’ll look at the chart first,” he said. “I always default to the chart. It is critical for entry points.”
Mr. Cohen said that the starting point for an idea came from one of his staff via a note. Then he either talks to the analyst or has one of the sector heads — who report directly to him — speak to the analyst. These days he say he feels pressure to act on ideas because “information flow” has gotten so “compressed.” “If you’ve got a great idea you’ve got to get it into the book fast,” he said, explaining that the window on any insights you have about a stock is closing a whole lot faster than it did a decade ago.
What’s the biggest mistakes you’ve made, Mr. Jones asked?
“In stocks or in my personal life?” joked Mr. Cohen. He then said his
Volkswagen short in October 2008 — an investment that hurt many a trader — caused a $250 million loss in a week. He and his team were able to mitigate the damage and walk away down only $75 million on the trade.
He also remembered getting his clock cleaned on a long position in
Tenet Healthcare in 2002, losing $75 million to $80 million on the trade. He described the stock drop in Tenet because of a scandal as one of the worst days of his life.
Mr. Cohen said it got worse when he came home that night and his wife was orchestrating their Christmas card photograph and made him dress up as the King of Clubs. Sure enough, the picture eventually showed up on the Wall Street blog Dealbreaker, he said.
Mr. Cohen says that these days his trading has become much more complex than in the late 1990s, when he was more trading focused. But he says he still watches the screens all day and is always reacting, tending to make changes when things are moving against him. “I spend most the day watching my losers because if those are being managed correctly the winners take care of themselves,” he said, according to people at the event.
He manages risk a number of different ways, he said, including using Barra risk models and constantly monitoring his net exposures. He says he hedges with S&P futures “all day,” and although they are a positive driver of profits he makes most of his returns come from individual stock ideas.
His lessons from the market tumult in 2008?
“Leverage, concentration and illiquidity are the three things that can kill you,” he said. SAC’s big losses came from new areas that they had entered, like corporate debt. The firm got bigger for the sake of getting bigger, he lamented, and now realizes that they can’t do everything. Quoting his father, Mr. Cohen said, “A shoemaker makes shoes. You have to stick with what you’re good at.”
As for the current market he described it as “grinding every day.” But “underneath stocks are exploding, and everything I’m seeing today looks bullish,” he said. “I’m not going to get negative just for the sake of being negative.” He added that it was a strong January and while there’s the potential for dislocation over summer when QE2 ends but that this is shaping up to be “a typically classic year” for the market.
His favorite sectors are mobility apps and businesses that create faster networks or enable consumers on the Internet, citing
Netflix and OpenTable as examples.
Mr. Cohen, who said probably 25 percent of his investments were made outside the United States, has been emphasizing to his traders that global macro themes are more important than ever in investing. For this reason he went to Davos, Switzerland, last month for the
World Economic Forum and said that he found “the development of the next phase of the consumer economy in China is very intriguing.” He recognized that there “could be more situations like Egypt” and “you have something going on here that could be a tinderbox.”
His top stock picks?
Two natural gas businesses —
Williams Companies and Plains Exploration, and Green Mountain Coffee Roasters, which hit an all-time high Monday after rumors that a deal with
Starbucks was brewing.
They wrapped up with a discussion about philanthropy. Mr. Jones is the founder of the Robin Hood Foundation, which has received tens of millions of dollars from Mr. Cohen. Along with his wife, Alex, Mr. Cohen has become increasingly philanthropic. He also said that he had recently begun focusing on politics “as a way to express a view of what needs to be done in the country.”
“I feel like I’m one of the luckiest guys in the world,” he said. “I had no plan for any of this. As I got older I started to realize I don’t need all of this money. I’m married to a very generous woman. There’s something to be said for giving and helping to change people’s lives.”
