Michael Steinhardt of Steinhardt Partners
Market Wizards Index: +27%
Compound annual over 20 years
Fund or affiliation
Strategic trader betting on directional moves using an eclectic mix of securities and using a team of traders and analysts. Emphasized on macro asset allocation type of moves.
Research Techniques Employed
Paid $35M a year to Wall Street in Commissions. He gets first calls from brokers; he will be the first to be shown merchandise.
He comes up with a macro view and then hell find stocks to fit into the view.
Make choice on long-term basis even when you bet short-term. He is both a long-term investor and a short-term trader.
He is comfortable dealing with incomplete and inaccurate data.
Trading Techniques Employed
He reviews the firms positions 6 times a day; requires his traders to rigorously justify his position if its not going well. He is a negative monitor of the portfolio.
He plays on "variant perception" (perceptions that he developed which are at variance with the concensus market view) until he feels they are no longer valid.
He will study an idea for 5 minutes and then do it. But he reviews decisions intensively, focusing on problems, not success.
As long as he thinks the fundamentals are still valid, he will stick to his position even if it is going against him. He might, however, trade counter (in smaller amounts, 20-40%) that position to make some money.
"I do an enormous amount of trading," says Steinhardt, "not necessarily just for profit, but also because it opens up other opportunities. I get a chance to smell a lot of things. Trading is a catalyst... Im always just making small moves. But still, most of the money I make is in holdings that I keep for more than a year." i.e. his directional plays that is longer term than the bulk of his trading.
He doesnt believe in hedging using another stock (in the same sector) because its like creating a 2nd problem. He doesnt use stop-loss. Doesnt use any rule to buy on weakness or strength. Doesnt look at breakouts or breakdowns. No charts either.
Philosophy and beliefs
Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. This balance of confidence and humility is best learned through extensive experience and mistakes.
There should be a respect for the person on the other side of the trade. You have to be intellectually honest with yourself and others. In his judgement, all great traders are seekers of truth.
In the past 21 years, there is no set pattern; in some years, it was a few well-chosen stocks, in others, just being on the right side of the market, or in the right asset class. Anyone who thinks he can formulate success in investment is deluding himself, because things change so quickly.
The traditional buy-and-hold mutual fund industry (employing an incomplete strategy) is so restrictive they leave so much on the table for hedge funds which are a lot more flexible.
There is a very important difference between being a theoretical contrarian and dealing with it in practical terms. In order to win as a contrarian, you need the right timing and an appropriate position size. This requires courage, commitment, and an understanding of your own psychology.
The advantage of trading as he did- being a L-T investor, S-T trader, individual stock picker, market timer, sector analyst- is that he made so many mistakes it makes him wise beyond his years as an investor.
To make money in the markets, you have to be willing to get in the way of danger.
A major advice to any layman: Recognize that this is a very competitive business, and when you decide to buy and sell, you are competing with people who have devoted much of their lives to this same endeavor. These professionals are on the opposite side of your trades and, on balance, they are going to beat you.
History and other facts
In 21 years, his fund had been average 40% net long. The range was 15-20% net short to >100% net long. The flexibility to shift market exposure provided him with an important money management tool.
George Keane of Common Fund views Steinhardt as a low-risk manager.
Graduated from Wharton in 1960 at the age of 19.
Founded Steinhardt, Fine & Berkowitz. Fine left and started Charter Oak Partners. Berkowitz left and started HPB Associates.
1983 went long 800,000 shares IBM at $117, sold at $132 then reverse and shorted 250,000 shares back down to $120 before covering.
In 1981, with rates at 14%, went long $250M 5 yr T-bond (with $50M equity), at one point he was down by $10M, and eventually made a profit of $40M. Enabled it to post 97% return for 1982.
In 1985, bought Montedison, an Italian co., for $0.50 and sold for $3.00. Accounted for half of the years profit for the fund.
27% over 20 years: "... Steinhardt Partners, at its inception in July 1967, twenty years later... net of his own fees, of 27%", J.Train, NMM pp.31