Steven Cohen (Trades, Portfolio) is a legendary investor with a net worth of around $17.5 billion as of this year. He founded SAC Capital in 1992 before converting it to Point 72, an asset management-focused family office, in 2014. However, after an SEC settlement, Point72 converted back into a fund as Cohen wished to expand. By 2023, the firm had grown to around $27.2 billion in assets under management.
In this discussion, I will summarize a 2018 interview with Cohen on his investing strategy and philosophy. In addition, I will share updated details on his cryptocurrency-focused activities. Let’s dive in.
How did he get into investing?
Cohen said he has had a passion for investing since his youth. At just 12 years old, he used to watch the ticker tape “all day long” at the local stock brokerage in New York. He even went as far as getting a job next to the brokerage so he could go and watch the ticker tape on his breaks.
As the guru got older, he managed to get into the prestigious Wharton School of Business despite staying up all night playing poker prior to his examinations. While at college, Cohen was trading his tuition, which his middle-class father had put into his checking account. Luckily, he did not lose any money, but did not gain much either. According to him, the lessons he learned were more valuable than anything he could have learned in class.
Early career and founding of SAC
Upon graduation, Steven managed to get a job at trading firm 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 his first day as the “markets were less efficient” back then. From that point, Cohen scaled his process to making a staggering $100,000 per day, before expanding to managing a $75 million portfolio with six traders.
The growth enabled Cohen to transition easily to starting his own firm, SAC, in 1992 as he was used to hiring people and just needed more funds. He started with $20 million in assets and put up $10 million of his own money. Back then, Cohen had no idea that it would grow into a billion-dollar firm.
Despite having over 1,800 employees today, Cohen still trades himself, which is astonishing 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 has “morphed” into an investor. Today, he said Point72 is a “fundamentally driven firm,” which does long-short investing and focuses on big ideas.
Point72 integrates various types of data using a team of data scientists to first “clean the data” before “interrogating data” to identify trends. This can include credit card data from specific companies and you can see specific trends. Therefore ,you can see if a business has slowing revenue (from transaction data) and then use this to make earnings forecasts.
Another example Cohen gives is if McDonald's (MCD, Financial) is launching a new product in Houston, his firm can use alternative data to identify the zip codes to determine if it is successful and then extrapolate the information out.
Alternative data can be immensely valuable as the easily accessible data (revenue, earnings, etc.) are already factored in by all investors and hedge funds. Therefore, in order to gain an edge, one must have unique insight.
What skill set does a great investor need?
Cohen believes it is good to specialize in a specific vertical, whether it be 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 Buffett (Trades, Portfolio) calls this his circle of competence, meaning you identify what you know and do not know. It is pretty hard (if not impossible) to be an expert in everything and thus, this is why the vertical specialization strategy makes sense.
Cohen himself has flown out to China and met with the leaders of technology companies like Alibaba (BABA, Financial), Tencent (TCEHY, Financial) and JD.com (JD, Financial). However, he did acknowledge that the “government is a risk.”
Crypto and alternative investments
The stock market is incredibly competitive and thus, alternative investments such as private equity, real estate, art and even cryptocurrency have been seen as great ways to diversify.
Back in 2018, Cohen was intrigued by blockchain technology and owning a part of a “digital image.” He looks to have forecast the rise of the nonfungible token, which became immensely popular throughout 2020 and into 2023 with NFT exchange Open Sea being valued at around $13 billion.
According to a report by Coidesk, Cohen has been an avid cryptocurrency investor over the past couple of years and has continued despite the “crypto winter.” In the third quarter of 2022, he was rumored to be setting up his own crypto asset management fund, which would specialize in spot trading of cryptocurrencies and derivatives.
Investing 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 purchased the Picasso "La Rue" for $155 million from real estate mogul Steve Wynn. However, this transaction did not go smoothly as Wynn accidentally put his elbow through the painting after the sale, but before transport. Luckily, the painting underwent “minor surgery” and was able to be salvaged.
In my mind, this story highlights the danger of investing in collectibles or art. These items can be damaged or stolen and fakes can be produced, which is a risk. In addition, these type of items only have 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 thus, it does not always make sense financially. He also acquired the New York Mets in 2020 and is known for his prominence with that team.
Final thoughts
Cohen is an incredible investor and extremely humble in his style. He believes investing success is based upon specializing in a vertical and doing unique research to help drive insights.
He also said that “we will all have bad days” and not every investment will go up, especially given the challenges of the market. Therefore, it makes sense to be realistic about your investing strategy and diversify as needed.
