steven cohen (Trades, Portfolio) is a legendary investor with a net worth of around $17.5 billion this year. He founded SAC Capital in 1992 before converting it to Point 72, a family office focused on asset management, in 2014. However, after an SEC settlement, Point72 converted back into a fund as Cohen wanted to expand. By 2023, the company had reached approximately $27.2 billion in assets under management.
In this discussion, I will summarize a 2018 interview with Cohen about his investment strategy and philosophy. Additionally, I will share updated details on its cryptocurrency-focused activities. Let's dive into it.
How did he come to invest?
Cohen said he had a passion for investing since he was young. At just 12, he used to watch the ticker "all day" at the local brokerage in New York. He even went so far as to get a job alongside the brokerage so he could go watch the ticker on his breaks.
As he got older, the guru managed to get into the prestigious Wharton School of Business despite having stayed up all night playing poker before his exams. While in college, Cohen would trade in his tuition, which his middle-class father had deposited into his checking account. Luckily, he didn't lose any money, but didn't gain much either. According to him, the lessons he learned were more valuable than anything he could have learned in class.
Start of career and creation of SAC
After graduating, Steven managed to get a job in the trading company Gruntal through a connection with his brother's friend. He started doing options-based arbitrage, which he found easy, and made an $8,000 profit on the first day because “markets were less efficient” at the time. From there, Cohen expanded his process to earn $100,000 a day, before moving on to managing a $75 million portfolio with six traders.
The growth made it easy for Cohen to move on to starting his own company, SAC, in 1992 because he was used to hiring people and just needed more funds. He started with $20 million in assets and invested $10 million of his own money. At the time, Cohen had no idea it would become a billion-dollar company.
Although he has over 1,800 employees today, Cohen continues to trade which is amazing and shows his love for the game.
From trader to investor
Despite his origins as a trader specializing in arbitrage and options, over time he “metamorphosed” into an investor. Today, he said Point72 is a "fundamentals-driven company" that invests long-short and focuses on big ideas.
Point72 integrates different types of data using a team of data scientists to first "clean the data" before "interrogating the data" to identify trends. This may include credit card data from specific companies and you may see specific trends. Therefore, you can see if a business is experiencing a revenue slowdown (from transaction data) and then use that to make revenue forecasts.
Another example given by Cohen is if McDonald's (MCD, Financial) is launching a new product in Houston, his company can use alternative data to identify ZIP codes to determine if he's successful, then extrapolate the information.
Alternative data can be extremely valuable because easily accessible data (income, earnings, etc.) is already considered by all investors and hedge funds. Therefore, to gain an advantage, one must have a single vision.
What skills does a great investor need?
Cohen thinks it's good to specialize in a specific vertical, whether it's semiconductors, pharmaceuticals, general retail or restaurants. The idea of this strategy is to give you an edge since you can go deep into a specific vertical and stock.
warren buffet (Professions, Portfolio) calls this his circle of competence, which means that you identify what you know and don't know. It is quite difficult (if not impossible) to be an expert in everything and that is why the strategy of vertical specialization makes sense.
Cohen himself flew to China and met with the heads of tech companies like Alibaba (BABA, financial), Tencent (TCEHY, financial) and JD.com (J.D., Financial). However, he acknowledged that “the government is a risk”.
Crypto and Alternative Investments
The stock market is incredibly competitive, and as a result, alternative investments such as private equity, real estate, art, and even cryptocurrency have been seen as great ways to diversify.
In 2018, Cohen was intrigued by blockchain technology and owned part of a "digital picture". He seems to have foreseen the rise of the non-fungible token, which has become extremely popular throughout 2020 and into 2023, with the NFT Open Sea exchange valued at around $13 billion.
According to a report by Coidesk, Cohen has been an avid cryptocurrency investor for the past two years and has continued despite “crypto winter.” In the third quarter of 2022, he would have created his own crypto asset management fund, which would specialize in spot trading of cryptocurrencies and derivatives.
Invest in art and other collectibles
In terms of the guru's personal investments, he is a big fan of investing in art. For example, Cohen bought the Picasso "La Rue" for $155 million from real estate magnate Steve Wynn. However, this transaction did not go smoothly as Wynn accidentally put his elbow through the board after the sale, but before the transport. Fortunately, the painting underwent "minor surgery" and was salvaged.
In my mind, this story highlights the danger of investing in collectibles or art. These items may be damaged or stolen and counterfeits may be produced, which poses a risk. Also, these types of items are only of relative value in that they are only worth what someone else is willing to pay for it.
Cohen also warned that collecting can be "addictive" if you really want an item and therefore doesn't always make sense financially. He also acquired the New York Mets in 2020 and is known for his notoriety on that team.
Cohen is an incredible investor and extremely humble in his style. He believes successful investing hinges on specializing in a vertical industry and performing unique research to help generate insights.
He also said that "we will all have bad days" and that not all investments will grow, especially given the challenges in the market. Therefore, it makes sense to be realistic about your investment strategy and diversify as needed.