Cohen manages $11 billion out of his family office, Point72, and previously ran the hedge fund SAC Capital, which delivered average annual returns of 29% for more than two decades, before a record-setting insider trading scandal forced it to shut down. (For the full story on Cohen's rise, fall and rebirth, see my profile in Fortune's November issue, "Inside Billionaire Steve Cohen's Comeback.")
Part of Cohen's success has come from divining trading signals and economic sentiment indicators from nontraditional places, picking up on nuances that other investors might miss—including reading between the lines of Fed meeting statements, Cohen told Fortune in a recent interview. "You have to be aware," Cohen says. "A person on the Fed committee saying something that’s different than he said before—why’d he say that? Maybe he’s sending a signal. And so, it doesn’t have to be obvious, it could be very subtle."
If that sounds a little like relying on gut instinct, there's a bit of that (he also relies on gut when adding to his $1 billion art collection). Some of Cohen's former investors credit him with a "sixth sense." It helps that Cohen, who turned 60 this year, has lived and traded through multiple cycles of Fed rate hikes, which is more than younger generations of investors can say. "There’s certainly an element of his skill as an investor that’s just sheer base of knowledge of literally being involved in the equity markets every day for the last 40 years," says Michael Sullivan, Cohen's longtime chief of staff and managing director of Point72.
But while Cohen earned an early reputation on Wall Street for mastering a nebulous method known as "reading the tape"—basing trading decisions on movements in the ticker tape—it takes a lot more than that to beat the market these days.
When the time is right...
The aspect of Cohen's trading strategy that may be hardest to replicate is his use of a technique known as market timing, which is in the don't-try-this-at-home category for most investors. Cohen relies not only on his instincts but on advice from market timing experts such as Tom DeMark, whose company DeMark Analytics provides a proprietary set of market indicators used by many big-money investors, and who also consults with Cohen daily. Cohen aims to optimize the timing of his trades by considering imbalances between other investors' buy and sell orders, as well as investor psychology and behavior. "There's some technical aspects to it in terms of reading charts and discerning patterns," Sullivan says of Cohen's trading style.
It also helps to be ready—and fast. "He has an instinct for how different stocks and securities will respond to different types of catalysts," says a former SAC portfolio manager. "When those events occur, he's got his finger on the trigger to trade quicker than anyone. He just knows what to do."
When you're wrong, admit it and get out
Cohen is famously dispassionate when it comes to stock trading decisions, and is able to let go of positions when he is on the wrong side of the bet to promptly stanch the bleeding—a big reason, other investors think, that Cohen has accumulated so much wealth (his net worth is an estimated $13 billion). Though Cohen might lose money on 48% of the trades he makes, according to one former investor, he’ll cut those positions quickly, while letting his 52% winning trades run.
"I would describe it as flexibility," Cohen explains. "You could walk in one day and a policy change from a central bank changes the way the markets are and how people are thinking. Well, if you’re stubborn and refuse to acknowledge change, I’ve seen many an investor over the years get rolled over by markets. So I believe flexibility is key. Doesn’t mean you shouldn’t have conviction—you should. But when things change, you have to change with it."
Traders' Happy Hour
Because stocks move around so much during market hours, Cohen also thinks there's one time of the day when you really need to have your finger on the trigger. "The most important part of the day is the last hour of the day," between 3 p.m. and 4 p.m. Eastern time, he says. "That's where a lot of volume is," Cohen adds, noting that the final hour of activity can lead to new ideas as he sees how other investors are reacting to the news of the day, allowing him to set up positions for the following morning and beyond.
Collect hard (and big) data
Nowadays, Cohen relies more than he used to on the traditional method of valuing companies and stocks—with help from Point72's hundreds of analysts and portfolio managers. "There’s a very, very healthy component of fundamental analysis that he does," says Phil Villhauer, head of global trading for Point72 and formerly for SAC.
Cohen has also built a big data unit led by Point72's chief market intelligence officer, Matthew Granade, which hunts for and analyzes new and alternative forms of data, including satellite imagery, geolocation data from mobile devices and even intel from social media—all feeding the fundamental analysis process. For example, Point72 buys fast-food credit card data. "O ur data scientists analyze the data to figure out national and regional trends like how many people are patronizing that chain, what their sales trends are," Granade explains, "and use that to make forecasts about company directions and industry directions."
Stick to what you know
Cohen's bread and butter is U.S. stocks, so he doesn't stray very far from that focus. Indeed, he doesn't even specialize in a certain sector, relying instead on portfolio managers and advisors with expertise in various industries and regions while remaining a generalist himself. The night of the U.K.'s infamous Brexit decision, Cohen went to bed early before the votes were even counted, sleeping through a swoon in global stocks and S&P 500 futures. "Brexit really was more of a Europe trade," he says. "You really had to trade overnight. I don’t like to trade overnight."
Still, he'll glean macro insight where he can get it, recognizing that international trends can impact stocks in his domain. At an event in Hong Kong featuring Harvard economist and historian Niall Ferguson, Cohen stayed up with the guest speaker til 1 a.m., grilling Ferguson on everything from global political issues to the Chinese government to Argentina's economy, recalls Marc Desmidt, the Hong Kong-based CEO of Point72’s international businesses. "One of the strengths of Steve is that he knows what he doesn’t know," Desmidt says. "If I say to Steve, 'What do you think about this in China?' He’ll often fire back at me, 'You’re meant to be telling me!'"