How SAC Thrives on The Genius of Clutch | MartinKronicle - Michael Martin
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How SAC Thrives on The Genius of Clutch

Sullivan

Sullivan

It immediately occurred to me while reading Paul Sullivan’s brilliant new book Clutch: Why Some People Excel Under Pressure and Other Don’t that great traders are clutch players who are “on call.” They must always deliver results while pressure is just one or two losing trades away.

We know that nurture beat nature. Yet at the same time, how is it that some folks just seem born for destiny. What do they do? How is it that for some people, something happens somewhere between being born and that moment when they are called to deliver the goods in a clutch moment and make history while the rest of us watch?

Clutch happens a lot in everyday life. It happens in sports and it happens right under our noses and we might not know it’s clutch that we’re observing.

Legendary trader Steve Cohen is very well aware being clutch. He sits among all his traders during the day. His focus is so intense that he mandates the phones don’t ring – instead lights blink when someone’s calling. Unlike Commodities Corporation, where traders such as Michael Marcus and Bruce Kovner could be generalists, SAC traders are specialists in a sector.

This is not by accident. Part of the ethos at SAC is to have traders focus on one sector, this way they’re not trading everything from Yahoo to Exxon to Big Cap Pharma. If they trade tech, they stick with tech. If they trade energies, they stick with energies. Their knowledge is narrowly focused but it runs extremely deep.

This serves two purposes: the traders are less likely to be caught off-guard because they are experts in the sector. Two, they’re not running around chasing their tails trying to figure out what’s happening with many companies within many sectors.

arikiev

Kiev

More importantly, Cohen had the late great Ari Kiev at the helm of his firm in order to help his traders with psychological baggage. “Kiev wanted to show people that baggage they carry from their pasts could hold them back in their futures. He argued that it distracted them and hurt their ability to make key decisions in the present.”

In order to help traders with the stress he would remind them that the best traders are correct only 60% of the time at best. “So if you lose on four trades out of 10, you are still performing with the best of the best.”

Part of their training with Kiev was to get them to become informed risk takers. These are not traders who exist by trading on gut instinct. What Kiev found out was that these traders didn’t like to fail, which Sullivan says is very different from “the dislike of losing.”

All traders lose at some point, but it doesn’t mean they failed. The best traders figure out how to avoid losing strategies, and at SAC this is part of their training. The best traders don’t fear failure: they hate it.

Kiev said “as stress increases the ability to think rationally declines.” I bet that is an exponentially inverse relationship. As stress increases, your ability to act under pressure, if untrained, drops precipitously. You are actually done long before you know it.

In order to persist during losing periods, Kiev would help the traders learn to relax when performing under duress. You can’t remove the stress from trading entirely, but you can help the trader recognize when they are under stress, and help them avoid stressful situations by recognizing them before they occur.

The keys to becoming a clutch trader a la SAC is to first create performance goals, get out at your pre-determined loss level when you’re wrong, and liquidating your winners at predetermined levels also. Through rigorous practice and simulation, this simple model works wonders on your performance – and your equity.

As I stress to my own students, “there are no external solutions to your internal problems.” If you don’t learn to LOVE taking consistent small losses, you’ll never be around long enough to ENJOY the big gains. If you’re losing money, you cannot think about the losing position. You must get out so that you can regroup and think clearly.

In Clutch, Sullivan tells a story about “shooting first and figuring it out later,” so to speak. Secret Service Agent Christopher Falkenberg was called on to protect Governor Bill Clinton during a campaign stop at USC in the spring of 1992. The Secret Service had their hands full trying to secure the outdoor event. “People are genuinely excited when they meet someone famous. What you’re looking for is the person who was distant, who was completely inside of himself. That’s the person who was planning something.”

Falkenberg

Falkenberg

Everything was normal until it wasn’t. Then clutch happened again. President Clinton drifted off the line to shake more hands during the event and he came upon one guy who was shaking his hand for more than a few seconds and Falkenberg heard Clinton say “he won’t let go.”

In that moment Falkenberg sprung into action and the overzealous supporter was writhing on the ground. Clinton was shunted into a waiting SUV and it was all over in roughly 10 seconds. During the interview for his book, Sullivan asked Falkenberg what happened to the “fan.” Falkenberg paused and looked a Sullivan for what he described as a near-eternity: “I don’t know. I didn’t care. My job was to get the protectee out of there.”

Sullivan later found out that in one motion, Falkenberg grabbed the man’s forearm and pulled his thumb back with such force that the man collapsed, his thumb dislocated, and his radius bone had been fractured. All in 4 seconds…

Clutch is a function of training and preparation. Even if you are a perennial choker, with training your can become clutch. What happened with Agent Falkenberg was not random. Even The Art of War has something on Clutch; it states that “a victorious warrior first wins, and then seeks battle.” Are you a choker, or do you go home and TK the prom queen?

What took place with agent Falkenberg had been rehearsed for months upon months, hours and hours and hours. Falkenberg had practiced so long that in the event of hearing President Clinton saying “he won’t let go,” his actions were summoned instinctively. Through vigorous training and practice they had become second nature to him. There was nothing to think about. There was nothing to decide. Falkenberg just followed his model – a discretionary model mind you.

I think it’s because such an Agent can act so definitively with “shock and awe” that we’re bewildered on some level because of the precision and speed. Agent Falkenberg was only a second-year agent back in 1992 while protecting so-to-be President-elect Clinton. He was 25 at the time. He was clutch.

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  • Manuelbravochico

    I agree with the SAC model, specialize in one sector and know it better than most. I do think that’s been part of the success combined with hiring good traders.

    Also being one of the largest single commission gernerating clients probably on the planet, especially per capita, they usually if not always get the 1st call from trading desks on news events. That’s why they pay .10/share or more compared to most funds that size paying less than .01/share.

    I’m not stating that’s the only reason for their good results, only that they’ve leveraged the “1st call” to the absolute hilt.

    ps. Yes, I do know a few former employees as well as investors.

  • Adam

    Very nice!

    Here is a related link you may find interesting by Jonah Lehrer(contributing editor at Wired) on choking and thinking too much.
    http://scienceblogs.com/cortex/2009/07/choking.php

  • Anonymous

    Mauboussin and I speak about Jonah all the time…he is money. His book “How
    We Decide” is one of the best books I’ve ever read.