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IDEA VELOCITY. What I learned from SAC.

SAC, the infamous hedge fund led b mer!urial, se!reti"e, su#er art !olle!tor Ste"ie Cohen is legendar.

The ha"e re!entl been a!!used of insider trading and it sure loo$s li$e the are guilt. %ut there are a

lot of "er smart #eo#le that &or$ed there that had nothing to do &ith this s!andal. '(s and analsts in

)edgistan dream of toiling there and ma$ing obs!ene ri!hes. As an unabashed trading addi!t and #laer

of The *ame, I &as li$e a moth to the flame. I had to !he!$ this #la!e out. I did. Although b dumb lu!$

and a &ell+!alibrated %S dete!tor, I &as able to a"oid oining them, I did meet &ith them o"er a do-en

times. I learned some #rin!i#les that ha"e !hanged m &a of trading fore"er. or the good. Out of a

s#irit of e/uanimit and gratitude, I &ill share them &ith ou.

0. 12LE O3E4 IDEA VELOCITY. This is so im#ortant and it &ill seem so ob"ious after I tell ou that ou

&ill &onder &h no one tal$s about it. Let5s do some math. Let5s sa ou5re a long+short '( and ou

t#i!all ha"e 06 longs and 7 shorts at an gi"en time. Call it 86 #ositions. If our a"erage holding #eriod

is 9 months be!ause our #ortfolio turns o"er t&i!e a ear, &hi!h is fairl t#i!al for an a!ti"el managed

sto!$ fund, that means ou need 6: #ositions #er ear. That is one high !on"i!tion idea #er &ee$; That

doesn5t sound li$e all that mu!h, but tell me, do ou reall ha"e a dis!i#line in #la!e to !ome u# &ith atleast one, highl resear!hed, &ell+thought out, high !on"i!tion idea #er &ee$< I5m not tal$ing about being

#it!hed a /ui!$ sto!$ #i!$ b the sell+side either. . In te!h, things !hange fast, and sitting on &inners that

ha"e stalled out too long is a mista$e. It5s also !alled !om#la!en!. The onl &a to $no& these

numbers, su!h as our a"erage holding #eriod, number of #ositions, is to anal-e our trading re!ords

ruthlessl and honestl. This is the !on!e#t of IDEA VELOCITY.

8. 'OSITIO3 SI=I3*. When ou find an idea, a high !on"i!tion sto!$ idea, ho& do ou build our

#osition< Do ou s!ale in< Do ou bu half and another half later after ou see ho& the sto!$ trades in"ested, be!ause the are holding 6> in !ash. What $ind of

stu#id logi! is this< If I5m #aing ou 8 and 8: to in"est m mone, then in"est it all; This is the $e

!on!e#t+ I3VEST IT ALL; If ou are so good that ou !an get all of the SB' returns &ith 6> !ash, then

ust gi"e me the !ash ba!$ so I don5t ha"e to #a 8> on the !ash. Let me ma$e m o&n asset allo!ation

de!isions. So an e/uit long+short fund should be 0::> long and some #ortion short. In SAC !ase, the&ould #refer '(s be no more than 06> net long, so that meant the &ould be 0::> long and 76> short

for eam#le. I5m not ad"o!ating that. %ut I5m saing e/uit funds should not !arr more than a minimal

amount of !ash. If ou don5t ha"e ideas for the mone ou5re managing, ou need to re+read rule number

one, IDEA VELOCITY.

. S)O1TI3* I3DICES. (an fund managers thin$ the are great sto!$ #i!$ers. A!tuall, &e all do, b

definition, be!ause &e are !harging #eo#le for our great s$ills+ other&ise the !ould !hea#l in"est in an

unmanaged inde. %ut these same managers de!ide the &ill #i!$ the longs in the fund and then use an

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ET to short against the longs, as a ?hedge.@ WT $ind of ba!$&ard thin$ing is this< So ou !an #i!$

&hat sto!$s &ill go u#, and not the sto!$s that !an go do&n< Does this ma$e an sense< Then the

!le"er among this grou# &ill argue &ith ou that be!ause the mar$et goes u# o"er time, it5s im#ortant to

s#end time on longs and ?hedges al&as lose mone.@ 3O3SE3SE. E"en in a bull mar$et there are

sto!$s that are going do&n. Do ou need eam#les< I%(, ?%ig %lue,@ the bluest of the blue !hi# te!hs,

is do&n 7.6> as I &rite this, "ersus the 3ASDAF u# > for the ear.G I5ll tell ou &hat+ if ou &ant to

#la &ith indi!es, and ou tell me the mar$et goes u# most of the time, I &ill suggest that ou LO3* the

inde and s#end all our time finding indi"idual name shorts instead. Did our brain ust blo& a fuse< Let

me suggest the best a##roa!h and that is #i!$ longs and shorts and ne"er short an inde. If ou don5t

ha"e enough shorts, be!ause ?Shorting is hard@ and all that, then go re+read 12LE 32(%E1 O3E.

6. COLD ST1EAHS. SAC is ruthless, be!ause the em#lo a lot of le"erage. When one of their '( has

a big dra&do&n, the tell them to slo& do&n. This is the one !ase in &hi!h a '( &ill !arr more !ash.

Or /uite sim#l get some of their assets #ulled from them. So let5s sa ou5re !old, our strateg and

dis!i#line is not !urrentl &or$ing, and ou need to !ut ba!$ our #ositions. What do ou do< T1ADE

S(ALLE1. So that means $ee# ma$ing ne& trades. Don5t free-e u#. Did ordan /uit shooting &hen he

got !old< So if ou are going to !ut our #ortfolio in half, sa, to /uell the bleeding, ho& do ou do it