Wall Street's Psychologist Speaks

Recent history hasn't been the most sympathetic towards the one percent — let alone the point-one or point-zero-one percent.

With the rise of Bernie and his bots still fresh in our collective mind (despite his recent bow to Clinton the Sequel), it seems like the once all-American ambition of making a million (or a billion) and settling down to enjoy the fruits of your labor has become synonymous with criminal behavior.

Or if not criminal, then at the very least greedy and borderline sociopathic.

While popular opinion swings back and forth like a pendulum, the truth that creating and growing wealth is good for both the wealth creator and society as a whole will never go away.

Independent wealth creators are the same people who started all of this nation's major companies, initiated and expanded its industries, employed hundreds of millions, and helped push society along into a modern, science-oriented, infinitely-connected era.

They may have profited the most, but they've also contributed the most — which in many people's minds justifies their wealth.

The fact that the likes of Comrade Bernie managed to rise to national prominence will stand as a sign that there are, and will forever be, those who cannot or will not participate in the philosophy that drives the modern world.

But, like I said, the flash in the pan that was his run at the White House will hopefully not change the common perception that diligence, creativity, courage, and focus does result in personal gain.

Of all of the groups Bernie has targeted over the course of his mass-pandering march across this great nation, none have been struck at as often as the elite of the financial industry.

Know Your Enemy Before You Decide He's an Enemy

These men and women get paid seven-, eight-, even nine-figure fortunes for managing other people's money.

One of Bernie's criticisms — and one that I, admittedly, cannot completely disagree with — is that these people get paid whether their clients win or lose.

The standard 2 and 20 rule, which calls for a 2% annual maintenance fee and a 20% cut of any gains accrued, makes it all but impossible for money managers to personally lose out.

Though the 20% prong gives them all the incentive in the world to be right, that 2% (which is taken from the principal balance) guarantees that even in the worst-case scenario, they'll still draw a very comfortable commission.

It sounds completely unfair and even "rigged," but the fact is, no billionaire hedge funder would ever become a billionaire or a hedge funder of any wealth without being right more often than the average guy on the street.

Whether their czar-caliber paychecks are ethically justified can always be discussed, but their success rates, in most cases, do qualify them as investment professionals.

Perhaps the most prominent example of such an individual is Steve Cohen, founder of S.A.C. Capital Advisors.

With a net worth of $12 billion, this self-made mogul started trading with just $1,000 in his early teens.

A Wharton Business School degree helped him enter the ranks of the Wall Street elite, and by the time he was 28, he was running his own trading group.

He started S.A.C. with $20 million of his own money when he was 36, and in the next two and a half decades, despite major economic calamities like the dot-com bubble burst and the subprime mortgage crisis that led up to the biggest recession in 80 years, he rose to be the greatest hedge fund manager in the land.

What Makes Him Different?

He didn't kick off his career with $10 million in seed capital from his father.

He didn't inherit an NFL team.

He grew up in a house with seven brothers and sisters, a dress manufacturer father, and a piano teacher mother.

Clearly, there was something about Steve that wasn't quite normal.

Distilling what makes Steve what he is, and what makes everyone else everyone else, is a job for a talented psychologist.

And that's exactly who Steve hired earlier this year to train and counsel his traders.

Dr. Gio Valiante, who had gained fame as a psychologist to some of the world's top PGA Tour players, came on board with S.A.C. in March after about 18 months as a paid consultant.

Dr. Valiante's findings as to what makes a successful trader were recently touched upon in an interview with Yahoo Finance.

The answer to the question of what common psychological trait is shared by successful traders is as simple as it is broad.

Big Answers... Simple Answers

"Open-mindedness."

"Once you think you have all the answers," he said, "markets will just punish you. Arrogance gets punished and pummeled. Open-mindedness, again, is something that Steve [Cohen] actively promotes. When he’s talking to portfolio managers he says, ‘Look, I don’t make the world. I have to live in it just like you.’ You have to be open-minded. You have to be willing to pivot and adapt and grow as a human being. So open-mindedness is the universal.”

Dr. Valiante also noted the similarities between winning traders and champion golfers.

When you look at investment professionals there’s a scoreboard — it’s P&L. Golfers on the PGA have a scoreboard, the NBA has a scoreboard. Investment professionals have a P&L. Success and failure are public. The psychology is interesting. It’s OK to fail, but it’s a really different thing to fail publicly. And just similarly, hedge funds and portfolio managers, their performance is a public thing whether it’s internally or posted in publications.

There’s also variability of performance that plays a role in both investing and sports.

As a portfolio manager you can do everything right and if the market is in an unwind you’re going to lose money. As a golfer, you hit a perfect shot and the wind hits the ball and it’s going to go into the lake. And the psychology behind that is controllability — the things at which you can control and the things you cannot. And that brings stress into any job. When your livelihood partially rests on things you have no control that’s a stressful state of affairs — bull markets, bear markets, unwinds, sector implosions.

That open-mindedness, however, came with a secondary prong — the prong that separates decision-makers from wafflers who end up losing not because of inaccuracy but because of missed opportunity.

Don't Second Guess Yourself: It Worked in Multiple Choice Tests; it Works in Life

Confidence.

“On the PGA Tour," he continued, "the best golfers in the world miss more shots than they hit perfectly. You know the great portfolio managers are wrong 46% of the time. How do you protect conference in a game or a business where you’re wrong 46% of the time? Without confidence you start doubting yourself.”

It flies in the face of common perception that being wrong, or inaccurate, is a crucial part of the game of finance — not because we need failure, but because failure, like the lunar cycle or the tides it creates, is an inevitable aspect of the landscape.

You cannot bulldoze over risk and failure, so it's your attitude that must adapt.

Those who learn, adapt, and persist are those who will, in the end, come out on top.

Those who remain stubborn (closed-minded) and become discouraged (lose confidence) will lose by default.

It's amazing to me that even a world authority on human psychology, after two years of exposure to high-pressure finance and years of experience in the most competitive of athletic fields, can boil down the difference between winning and losing to such basic elements.

There were no findings that people who succeeded in either profession where somehow more lucky, more under-handed, or just plain better at cheating.

The answers were deceptively simple and, yes, just as universal.

We All Live in the Same World: Attitude Sets Us Apart

Moreover, I believe that these answers are ones all of us who find success in our respective fields come to on our own from day-to-day experience.

We learn to think broadly, and we learn to trust our instincts. We learn to never act like we know it all, but, at the same time, we recognize moments when we're right — even if those same instincts led to failure in the past.

Remember, you don't need to score on every shot or hit every pitch out of the park.

You just need to do it often enough and consistently enough to rise above the closed-minded, skittish majorities.

Stories of trading success aren't limited to those you find on Wall Street or those you read about on Yahoo Finance.

They exist all around us. Some of your best and closest friends may be investors — traders — who apply these same basic psychological predispositions without even knowing it.

As for those Bernie bots, well, I just read that their next big move is to load up on beans to stage a "fart-in" at the upcoming Democratic convention to show their disgust with Hillary's nomination.

Yes, you read that correctly... They're actually stockpiling baked beans in order to disrupt the proceedings with their own flatulence.

Google it if you must. I doubt I could make something like this up if I had to.

With that level of maturity and emotional discipline, I think the question of if they'll fade isn't a question of if at all.

It's a question of when, and the answer is soon.

If you want to be inspired, however, read this instead.

Fortune favors the bold,

Alex Koyfman

@AlexKoyfman on Twitter

Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.