Steve Cohen: 3 Rules To Avoid Losing Money

In his latest interview with Stray Reflections, Steve Cohen discusses the three rules to avoid losing money. Here’s an excerpt from the interview:

Cohen: Listen, you’re going to lose money. Your going to take risks your going to lose money. I think the three things are liquidity, leverage, and concentration. Those are the three rules. If you’re in illiquid stuff, that’s a problem. If you’re using too much leverage, that’s a problem. And if you’re too concentrated, that’s a problem.

Doesn’t mean that… if you have one of them maybe it works. If you have two of them, oh oh! If you got three of them you’re whistling past the graveyard. You’ve seen one hundred examples. You saw it with the guy from Asia. It works until it doesn’t. What was the exit strategy? I want to know what it was. How is that person going to get out?

I’ve seen it over and over again. You just have to be careful.

I don’t look at my winners, I look at my losers. As I’m losing money, why am I losing money? I’m focused on my losers. If I’m making money on something, I’m good. I’m focused on why something’s not working, and try to figure out why. It may be that it’s part of some factor move or sector move that I actually think is wrong and I’m going to hold on. But I’m focused on my losers. Am I missing something? Is there something changed? And that’s where I focus on. And If I feel like something’s changing and I don’t know why, I will reduce.

I get a lot of work from my people, analytical work. They’re only right 55% of the time, 52% of the time. They’re not right 80% of the time. I’ve got to sit there and use my judgment. See what the markets are telling me. I can always come back to that name if I feel like things have changed, or the timing’s better.

I use my eyes. See what the markets are telling me across asset classes. Perhaps there are better uses for my capital. So I’m always focused on where the portfolio is not working.

You can watch the entire interview here: