Steve Cohen is a tape reader? I'm a dyed-in-the-wool Benjamin Graham disciple, and it's very hard for me to believe that people have made billions of dollars by gauging the "feel" of the market.
Cohen would become what Wall Streeters call a “tape reader,” perhaps the greatest of his generation, a trader who bets on stocks based on his intuitive reading of the movements of numbers. It’s a trading style known to some older Wall Streeters, but one that has fallen out of favor in recent decades in the face of computer-driven trading and analysis. From the beginning, Cohen never used mathematics or complicated algorithms, or, at least in his early years, any serious study of a company’s business fundamentals.
“There’s kind of an art to reading the tape,” he says. “I can’t really explain it; it’s about pattern recognition.” When he began trading, “I’m not looking at anything. Just the numbers on the screen. I couldn’t even tell you what the company did, and I don’t care. I’ve always been intuitive like that. It was always seat-of-the-pants.” He shrugs. “I mean, I’m not exactly classically trained.”
In 1978, Cohen graduated from college six months early to take a job offered by a friend of a friend at Gruntal & Co., a sleepy century-old brokerage whose trading floor occupied the 14th floor at 14 Wall Street. Cohen’s first job was in option arbitrage, which involved wrapping a single trade in so many hedges it was practically risk-free. It was boring. Studying tape all day, then going over it again every evening when the other brokers went home, Cohen played stocks on the side, and after a year or so realized he was getting good at it. “It occurred to me that I was more right than wrong on the direction of stocks,” he says. “So I thought, Why hedge them? Why not just buy stocks?” His bosses, looking at his returns, agreed to let him try.
“During college he would call me during class breaks, at lunch, and do a trade or two,” remembers Ron Aizer, Cohen’s broker, who hired and then supervised him at Gruntal. “He wasn’t a Goldman Sachs type. He wasn’t enamored of that prestige. I remember his very first day he made $10,000. He was far more advanced than other people his age. He started playing bigger and bigger as he evolved. I was the one who used to allocate the securities each guy could trade, and I’ll give you the classic line Steve gave me when, you know, I wouldn’t let him trade IBM or some other stock. He said to me, ‘Would you bat Mickey Mantle seventh?’ So I said, ‘I guess not,’ and changed the rules.”
I think value investors might be too rigid in their views toward other investing styles. First of all, I hope there are few others who read this blog because my thoughts will not be very well thought-out.
ReplyDeleteAnyway, the most important idea of value investing is that markets are not efficient, right? If you believe this, markets can be inefficient in a large number of ways. Investors can be short-sighted, can focus too much on quarterly earnings, etc. If that's the case, there's no reason investors can't be somewhat predictable in the ways they're irrational. The fact is that many non-value hedge funds are hugely successful (e.g. Renaissance technologies). Their evidence for an advantage is as large as BRK's. Once we decide that markets are not efficient we should be open to the possibility that there are multiple profitable investment strategies, one of which is value investing. Actually, if I'm not mistaken I believe Fama has a well known paper discussing the anomalous returns of value stocks. Just because value investing works doesn't mean it's the only thing that does. Also, I have had around 6 beers.
Haha. I'm glad you're a little bit lit, because you would have to be to defend tape-readers.
ReplyDeleteWhile fundamentals may not be the only way to analyze stocks, value investing is a larger philosophy than that. Warren Buffett himself claims to be a Graham disciple, but he left "cigar butt" investing behind in the 1960s (after his partnership days). Nonetheless, he invests based on business fundamentals.
While Cohen seemed to transition (as the article reads) to an information oriented investor, he is nonetheless a trader. A guy who pays Wall Street $150million in one year in commissions has to make up a ton of ground compared to a guy who holds onto a stock.
Also, if I were to invest in one of Cohen's funds, I would worry that he had merely flipped a coin and been right often enough to become a billionaire, while his future flips would (still?) be 50/50. Sometimes it's nice to ride a trend, but at some point the hot hand will cool off.
Value investing is appealing because you can value an asset and make a decision to invest based on concrete information, and make an out-sized return. Whatever method Cohen uses is not well-formalized (from an outsider's perspective), and his methods have a structural disadvantage because of hefty fees.
At least at this point, I'm far from convinced.