Hedge Fund Masters: The Dr. Ari Kiev Interview

Editor’s Note:The following is an interview done by Dave Goodboy in conjunction with RealWorldTrading.com. After you read the interview, talk about it here. Brice

This is Dave Goodboy, executive producer of www.realworldtrading.com. This week I had the distinct pleasure of interviewing, Dr. Ari Kiev. Dr. Kiev is a world renowned trading psychiatrist, high performance consultant, and author. His latest book, “Hedge Fund Masters” served as the impetus of our talk. He has consulted with many Olympic athletes and top money managers guiding them to achieve their ultimate potential. On the money management side, Dr. Kiev works directly with Steven Cohen of SAC Capital Management. Mr. Cohen wrote the preface of Dr. Kiev’s first book, “Trading To Win” stating that the program Dr.Kiev developed for SAC helped the firm go from 25 million to $500 million. Dr. Kiev still works with Mr Cohen, helping him grow the hugely successful fund to it’s current size of over $6.5 billion. Many of the principles he developed over the past 13 years working with SAC are further expanded upon in “Hedge Fund Masters, as well as his first three books, “Trading To Win”, “Trading in the Zone”, and “The Psychology of Risk” all published by Wiley.

This interview will dig deep into Dr. Kiev’s core concepts and provide an overview of what his years of hands on experience can teach us as traders. Let’s get started!

Dave: Welcome to Real World Trading Dr. Kiev. Thank you for joining me today.

Dr. Kiev: Thank you for having me.

Dave: I know you have quite a reputation for working with athletes and top financial traders. What first got you working with traders?

Dr. Kiev: Well, I have been working with Olympic athletes since the early ’80s, and I had written a few articles about visualization, goal setting, performance enhancement, injuries, and those sort of things. In about 1984, Steve Cohen, a trader, got in touch with me stating he thought what I was doing with athletes probably had relevance to traders. We started talking and we continued talking for the next few years about the application of some of these ideas to trading. In 1992, he invited me to start working with his traders and I have been doing that ever since, with an increasing amount of time, because his firm has been consistently expanding. I have also worked with other hedge fund managers during this time as well.

Dave: I have the utmost respect for Mr. Cohen, was he correct? Did you find similarities between Olympic athletes and top performing traders?

Dr. Kiev: Absolutely!

Dave: What were these similarities?

Dr. Kiev: The biggest similarity is that they tended to be very focused, goal oriented individuals with a competitive edge. They are very driven to get outstanding results rather than settle for mediocre or average results. The similarities were a willingness to self examine, review performance, to look at what needed to be done to upgrade the full overall performance.

Dave: Are these factors innate in top performers or can they be developed?

Dr. Kiev: People can definitely learn this. Some people may have a little more ability, be it athletic ability or intellectual ability, or they may have interest in a specific sport or a certain trading activity from something they learned early on. But clearly, to reach higher levels of performance requires training, focusing on skill sets that are needed, and then a lot of practice, a lot of review, understanding what worked, what didn’t work, and a willingness to perceive. The markets are continually changing, so it becomes critical for the individual to keep adapting and keep examining how they can maximize their results.

Dave: Out of all the traits you mentioned for top performing traders and athletes, is there one that you can put your finger on as being the most critical?

Dr. Kiev: That is a hard question. I think it is a willingness to be able to believe in the target, and to be able to set the target. That needs to be coupled with the allowance of setting the target, which is a forward looking concept, as in something that is going to happen. This will guide you in terms of helping you decide what needs to be done in the present, what more you need to do to correct for errors. You need to be guided by the result, by focusing on what you need to do to stay on target, and to stay on pace, to finally produce the results and achieve milestones along the way to get to the result. This means a willingness to ride out errors, failure, and an ability to recover from failure or draw downs, and to refocus.

Dave: How about the opposite side of the coin, losing traders? You have worked with so many traders; have you found an overriding theme or personality trait that distinguishes losing traders?

Dr. Kiev: I think if you take a look at my book Hedge Fund Masters, I am focusing largely on what the skill sets are that people need to work on to become masters. The people who fail to become masters or fail and give up are probably lacking in the willingness to set goals, which is really committing to a target with no certainty of result. With no certainty about how the market is going to move, but with certainty that you are going to live in that realm of certainty and do what it takes to move closer and closer to the target. People who fail are not that focused, they get overwhelmed, get easily anxious, may become successful but soon become euphoric, and become complacent, and take foolish risks. Their decision making ability is somewhat impaired by their emotional response. Either it’s a great success, or their emotion responds to a great failure. Those who are most successful have somehow learn to master their own emotions and ride through their emotional swings so they can focus on the work they need to do to produce the results.

Dave: I see, it’s not the elimination of these emotions, but it is the control of the emotions that is key?

Dr. Kiev: Well, maybe not even control, but more embracing them and noticing them enough to develop an objective ego, so you can stand back from your own activity and allow your intellect and intuition guide you, and not be influenced by an exaggerated view of your own ability. It may happen when you have become successful and are a bit euphoric or over confident, or where you tend to become overcautious or fearful because of failed performance. They are somehow or another able to, in Kipling’s words, ‘to treat triumph and disaster, those two imposters, just the same.’ They are able to keep going and stay on target and not be influenced by their own reactivity secondary to the event. It is what makes Olympic champions, NBA champions, and champions in all sports. It is that perseverance and belief that they will overcome. It is almost like an emotional-intellectual muscle that has to be built up, so when you fall off the horse you get right back on the horse.

Dave: You mentioned your latest book Hedge Fund Masters, in that book you delve into some of the psychological principals that allow traders to reach their ultimate potential. Lets talk about several of these principals. I find this concept of having a vision in life to be intriguing. What do you mean by having a vision in life?

Dr. Kiev: Well, the vision is the concept you have of where you want to get to. The goal is a specific manifestation of the vision, but it’s not just a number, but it is also all the things that are entailed in setting a target that is beyond what might ordinarily happen. It is that kind of challenging stretch target that you hope for, and wish for. Then, as you begin to formulate it and develop a strategy for reaching it and figuring out what you need to do to get to it, it becomes an embracing objective that taps more and more of your potential. It is not just a casual statement like ‘Id like to make $5 million.’ It is full commitment to that, where you allow yourself to begin to see it, practice it, and visualize it so it becomes a real reality that provides a motivation for you to do the things you have to do in order to reach it. May it be to work harder, to examine how you and your anxiety, fear, greed, jealousy, envy, and all your emotional reactivity that occurs gets in the way of reaching that vision. It is what it takes to overcome what I call the life principal. You need to start digging in deep into yourself not just saying ‘I am a nice guy’ or ‘I like to be liked by people.’ You need to learn how to talk to them more forcefully, and how to empower them so they can get past their own self doubts so then they too can produce the results that you need.

Dave: Are you able to provide a real life example about what you just talked about?

Dr. Kiev: Well there are a number in the book, like setting goals and what people needed to do to get to those goals. Overcoming the tendency to want to be a peer, wanting to be a nice guy, not wanting to make too many demands of other people and beginning to overcome their own hesitancy in becoming real leaders on their team.

Dave: Let’s move onto another one of your ideas. The concept of variant perception, What exactly is do you mean?

Dr. Kiev: Variant perception is a concept first introduced by Michael Steinhardt.

Dave: The hedge fund manager?

Dr. Kiev: Yes, a very successful hedge fund manager maybe 10 years ago. He had written a book about variant perception. I was interested in his idea which was the idea that in order to make money in the markets you need to know something that other people don’t know, and you need to be thinking ahead of the curve to anticipate when something is going to happen. To do that you have to understand something about the company and how it is functioning, how the particular industry is doing, what is going on in the economy, and a variety of other things. The more you know the more you can make a calculation about the likely target, or trajectory the stock is going to follow because you have done the work. The more work you do, the more you are ahead of others you are and the earlier you get into your position, and the more confidence you can have about your position, hence the more successful you will be.

Dave: Interesting. The key seems to be the ability to perceive opportunities before others. To think outside the box, so to speak?

Dr. Kiev: Exactly. Most of us are driven more by consensus than by thinking outside the box. Most original and creative ideas are innovative because no one has ever thought about them before, because they are thinking in a different way than the rest of the people. Just how Copernicus said the earth travels around the sun rather then the sun travels around the earth, or Einstein’s Theory of Relativity. These things took a while to be able to think this way because the way people thought about quantum mechanics was very different. To begin to think about something new, and that this industry is about to take off, or even that this industry is not going to take off. Everyone is getting into the dot-coms, and the real successful guy is able to get in before everyone else does, before it gets too crowded. To be able to be in that position you have to be able to do more work. You have to he able to understand the implications of all the data points. You hear about McDonalds coming out with a new salad. Well how is that going to affect the bottom line. That means you are going to have to have someone on your team calling McDonalds to get a sense of how that new salads are doing, and this has to be built into your model. Then it becomes a question of whether you are willing to do the work to support an original idea.

Dave: I really like this concept. Hedge funds and traders are always looking to increase Alpha. Having a variant perception and putting the work behind it is the key to success.

Dr. Kiev: Yes, it is a very important factor to success for a trader.

Dave: Moving on, you have also touched about the concept of centering one’s self. I have heard of getting centered before you undertake a task. What do you mean when you say centered?

Dr. Kiev: To me, being centered means being at peace within yourself, being relaxed, calm, being in an ideal Alpha state where you are able to process information much more rapidly so you can multitask and grasp a whole variety of things going on simultaneously. You want to be calm and not be thrown by your emotional reactions and your own intellectual actions going on around you. Therefore, the more centered you are the calmer you are, the more effective your decision making is going to be.

Dave: Can you share with us a simple method a trader can use to get centered?

Dr. Kiev: There are a number of them, I talk about in my book, but things like Yoga, muscle relaxation, deep breathing, tensing your muscles and relaxing them, focusing on your breathing gradually gets you into that relaxed state. If you practice Yoga or some such discipline, the more you will notice your thoughts and let them pass so you aren’t reacting to the world through the lens of your ever constant conversation of your mind. We are always thinking, and somehow that is interfering with our ability to see how things really are. A master trader is really in a centered state and is able to see the movement of the market, the movement of stocks, without becoming reactive to it. Therefore he has better capacity to see what is really going on and he is not letting his own wishes influence the way he is perceiving things.

Dave: You talked about something called the source of all fears. What is the source of all fears for the trader?

Dr. Kiev: Well, the source of fear is our own thinking and reactivity of how we are doing, how we look, what people think about us. That leads us to not go with the flow, and not deal with events, but actually dealing with our own interpretation of events. In other words, you buy a stock and the stock goes down and you begin to wonder why the stock is going down, so you keep holding, you add to it and lose more money and get panicky and finally get out after losing 6 points instead of losing maybe 1 point. Your own thinking has interfered, because you were panicking about getting out. You are allowing your emotional responses to react to what you think it means, and all the interpretation that you impose on the trade to cover what you do, rather than call around to get more information to find out who else is in the trade, or find out if news came out, and making sure to stay cool, calm and collective. As you can see, the source of all fears is the concept that we interpret things and over react to things.

Dave: One of the largest obstacles in actively trading is dealing with one’s emotions. I know conquering one’s emotional responses is a key factor in successful trading. Can you recommend a way, for our members, to control anxiety and fear, while dealing with the uncertain nature of the market?

Dr. Kiev: I think one needs to get more comfortable in noticing their emotional responses, not try to control them so much as notice them, to separate emotional responses from decisions that are made. You might want to keep a separate log with your trades. A long enables you to look and say you bought the stock at 20, you planned to do a little more work to take a larger position, and it starts to move against you; what are you experiencing? You look at your own reaction and collect that as additional data, and then ultimately make the decision to get in, get out or so forth. Is the decision an emotional decision, or is it based on data. If you keep track of this while you are trading and later on review your trades, you begin to see how many of the decisions you made on your emotional response. There is importance in being able to create more awareness in your emotional activity and how it influences your trading. To an extent you become conscious of that, and generally people tend to follow repetitive patterns within themselves. You may be different than the next guy, but your pattern is likely to have 4-5 components. The more you understand this, the more you are able to observe it while it is happening, and not have that lead you to act impulsively.

Dave: The idea of having to always win or be perfect seems to be a large issue for many traders. How can we overcome the overwhelming need to win in the face of an uncertain market?

Dr. Kiev: I think the people who are winners, and one of the reasons why I wrote this book on mastery, was because it seems that most people that are successful did a lot of preparation, did a lot of work, had a formula to do the work in line with what their objectives were. But while they were involved in the process they let go of the perfectionism. The perfectionism and the need to win was involved in the preparing, the planning, the organizing, and analyzing their thoughts and work, but not when they were involved in the process. When the process is active they allowed themselves to let go and they allow themselves to play in the game.

Dave: Ok, I think I follow you, perfectionism is a good thing in preparation, but a bad thing once the trade is executed?

Dr. Kiev: Yes, you have to be able to let go. You prepare for a concert by practicing over and over. Then when the concert arrives you are allowed a certain amount of spontaneity.

Dave: As. Traders, we spend hours preparing then enter the trade and often the trade immediately goes against us causing a drawdown in the account. I, for one, often find it difficult to jump right back in, to get back on the horse, as you said earlier. What’s the solution to this hesitation?

Dr. Kiev: I think the answer is to get back in slowly and in smaller size, rather than in big size. You don’t want to try to win everything back one full swoop. Review what went wrong and then get back into it with a certain systematic and step by step approach. Start building back slowly to reach the point where you were before the loss.

Dave: This has been a great conversation, Dr. Kiev, but we are almost out of time. Do you have any last word to share with our members?

Dr. Kiev: I think it is important to understand that each person has his or her own style of trading and preparing. What I am attempting to address in this book and the others I have written, is a psychological overlay on the methodology you are already using. So I am not telling one how to trade, but I am trying to teach people how in understanding their own psychology, they can enhance their own performance using their own trading methodology.

Dave: Thank you for joining me today. I would like to have you back soon to dig even deeper into these concepts.

Dr. Kiev: Thank you. It’s been my pleasure, I would be happy to come back for another conversation.

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