Steinhardt was a fundamental stock picker, but he was short-term. He was also a top-down macro trader. He also shorted. He was so different. He didn’t fit in a box.
In 1967, at the age of 26, Michael Steinhardt co-founded his hedge fund. Initially named Steinhardt, Fine, Berkowitz & Co., the firm was established with prominent co-investors William Salomon, then-managing partner of Salomon Brothers, and Jack Nash, who later founded Odyssey Partners.
Launching with a modest $7.7 million in capital under management, the firm was one of perhaps only a dozen such hedge funds at the time with a “1 and 20” fee class. Around 1979, following the departure of partners Howard Fine and Jerrold Berkowitz, the firm's name changed to Steinhardt Partners.
From 1967 and 1995, Steinhardt Partners compounded capital at 24.5% CAGR (Net) compared to 10.96% for the S&P 500 Total Return Index. To put in further context, Warren Buffett took over Berkshire in 1965. Berkshire’s performance from 1965 to 1995 was a 23.6% CAGR.
Steinhardt was a fundamental stock picker, but he was short-term. He was also a top-down macro trader. He also shorted. He was so different. He didn’t fit in a box. He was a savage.
The older I get the more I appreciate those that invest differently that have crushed the market in their own unique way. Investors that don’t simply bow down to the popularized and evangelized “buy and hold forever” is the only way to get to heaven.
Michael Steinhardt started trading at the age of 13. By the time he was 20 years old, he would go to great lengths to try to predict quarterly earnings on a few companies by the penny and "I did it very well. I was really good at predicting earnings."
Is it a surprise that Steinhardt would put up one of the best investment track records in the business? Of course not. This is what I love about stock picking and markets. You can play this game and win in so many ways. There is no right or wrong way. Just your way.
I recently reread Michael Steinhardt’s autobiography, “No Bull”. I highlighted 2000 words and pieced them together below in an order that makes it feel like he’s simply talking about his strategy, evolution, wins, losses, mental game, variant perception, how to pitch him an idea, his ruthlessness, and more.
Enjoy Michael Steinhardt in his own words. As you read it, reflect on your own approach.
Our track record over the years was achieved through an intense devotion to the principles of long-term investing that was tempered by my compulsive need to have monthly, weekly, and even daily profits.
In some years, we did well on the strength of concentrated positions in a few well-chosen stocks. In later years, our equity performance was sometimes dwarfed by directional macro bets. Unlike most money managers, we were almost comfortable being short stocks as being long, and we usually played both sides aggressively.
We started off with a long and impressive track record in the stock market, both domestic and foreign. We irregularly speculated in currencies, and we employed modern derivative products (options, futures, swaps, and so on) usually as quickly as they were created. Above all, we were flexible, opportunistic, and unconstrained in where we could and could invest.
Ultimately, though, a great deal of our success came from getting the markets’ overall direction right. When we started off, we did virtually no trading, and almost all serious long positions were held for long-term appreciation.
That view did not last too long; I began to realize that adverse market movements could periodically dwarf the impact of even the best stock picking. We remained fundamental stock pickers, but the emphasis changed. More often than not, the net exposure of our capital (gross longs minus gross shorts) began to determine our success.
Generally, I tried to look first at the big picture of where the market was going. Then I would find stocks or other instruments to construct a portfolio that reflected my worldview. The great thrust of our effort was to obtain long-term understanding of what was happening in both a micro and macro sense. Sometimes this translated into longer-term holdings and concentration in various stocks an industry groups.
Often, however, the results of this work were used in making shorter-term transactions. For example, when a long-term development had an exaggerated short-term impact, or when, for market timing considerations, we adjusted the portfolio to reflect a changed view on market direction. Thus, there was continuous tension between short-term perceptions and long-term holdings.
Warren Buffett has said, “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.” The truth of the matter is, I have never owned a stock for 10 years, but I have had the unique and profitable experience of owning some very good companies for 10 minutes.
I liked to think of myself as a fundamental value investor, but more often than not, I ended up selling too soon. Sometimes I think I sell early because I get far more pleasure out of taking on the intellectual challenge and being right than I do out of making the maximum return. Once I am proved right in the market, the bottom line is of less interest to me. I am ready for the next idea.
A summer intern reminded me of some advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in two minutes, four things:
(1) the idea;
(2) the consensus view;
(3) his variant perception; and
(4) a trigger event.
No mean feat.
In those instances where there was no variant perception – that is, solid growth recommendations within consensus – I generally had no interest and would discourage investing.
Moreover, I would purposefully ask provocative, action-oriented questions. If an analyst bought a stock at 10 and it went up to 12, I would grill him or her: “Do you still want to own this stock? Are you willing to pay 12 for it?” If there was willingness to buy it at 12, then the stock should stay in the portfolio. If there was unwillingness to buy it at 12, then the stock might be sold.
We tried to coordinate our research and trading activities to take advantage of interim price movement. I liked to say that if we bought a stock at 20 having an objective of 30 through trading, we would hope to make profits equivalent to the stock going to 40.
I tried to view the portfolio fresh every day. Indeed, investing toward long-term capital gains treatment was of secondary consideration for me. One of my favorite expressions was “the quick and the dead,” meaning that if you did not respond fast enough to the newest change, even nuance, you might lose.
Several times I would make a decision to “start all over again.” I would decide I did not like the portfolio. I did not think we were in sync with the market, and while there were various degrees of conviction on individual securities, I concluded we would be better off with a clean slate.
I would call either Bob Mnuchin and Goldman Sachs or Stanley Shopkorn at Salomon Brothers and ask to have us take out of the entire portfolio. In one swift trade, one of these firms would buy our longs and cover our shorts, often after extensive negotiation.
In an instant, I would have a clean position sheet. Sometimes it felt refreshing to start over, all in cash, and to build a portfolio of names that represented our strongest convictions and cut us free from wishy-washy holdings.
In 1973, The Dow was flat and we were up about 15 percent. By fiscal 1974, when the market was down 38 percent, we were up 34%. Nothing gives a better feeling to a money manager when making money for his or her investors when almost everyone else is losing. That was, for me, the height of professional satisfaction.
By the time the Dow hit bottom in December 1974, it had lost almost 50 percent since January 1973. Yet, even the Dow averages did not reflect the carnage that was taking place within the overall market.
By then, bearishness was rampant and people were afraid to own stocks. However, because we had been so successful during this debacle, we had great confidence in our view that the market was sufficiently pessimistic to create a bottom.
Just as outright euphoria is often a sign of a market top, fear is, for sure, a sign of a market bottom. Time and time again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only Treasury bills, you can almost close your eyes and get long stocks.
Over the course of one month, we switched our net exposure from minus 55% to plus 35% - a huge reversal from short to long. We bought stocks right and we sold them early. That year (1975), we were up about 66%.
During this period, I began to consciously articulate the virtue of using variant perception as an analytic tool.
I defined variant perception as holding a well-founded view that was meaningfully different from market consensus. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Understanding market expectation was at least as important as, and often different from, fundamental knowledge. As a firm, we soon found that we excelled at this.
Having a variant perception can be seen benignly as simply being contrarian. The quintessential difference, that which separates disciplined, intensive analysis, from “bottom fishing,” is the degree of conviction one can develop in one’s views. Reaching a level of understanding that allows one to feel competitively informed well ahead of changes in the “street” views, even anticipating minor stock price changes, may justify at times making unpopular investments. They will, however, if proved right, result in return both from perception change as well as valuation adjustment. Nirvana.
I was tough and driven; sometimes, I said things that were too harsh and unfair. Each year was, in many ways, a war. I was the leader who led my troops past danger and on to victory. I kept going back to the fact that our investors were paying us “1 and 20” to perform for them. It was not my job to be nice, and I was never concerned about equanimity. It was not good enough to be a little better than the market because it was not our job to achieve a relatively good return. Our goal was to achieve THE BEST performance.
I ruled unconstrained and sometimes ruthlessly. A highlight of each day was the Profit and Loss (P&L) Statement, the scoreboard. Even if we were having a good day-say, up 2 percent while the market was up 1 percent, instead of being pleased about our gain, I would focus on the stocks in our portfolio that were losing money.
Every day, sometimes every hour, when I sensed a problem in the action of a stock, I brought that scrutiny and intensity to each position we held. I had an overriding need to win every day. If I was not winning, I suffered as though a major tragedy had occurred.
In 1986 I had hired a portfolio manager who specialized in convertibles. In the P&L statement in the days immediately following the crash of 1987, I was relieved to see that our convertible portfolio was up 10% for the month of October. Then I asked one of my traders to reconfirm that all the “marks” used by the portfolio manager on these mostly over-the-counter convertibles to see if they were in fact correct. The bonds had been mismarked.
My rage was uncontrollable. The shouting emanating from my office reached a new decibel level. When the portfolio manager finally had the courage to mutter a few words back to me, he said, “All I want to do is kill myself.” I replied coolly, “Can I watch?”.
Following one my “screaming tirades,” I got back to business in short order. Some of the analysts, however, could not set the episode aside as readily as I could. They might shake, cry, or occasionally get physically sick from the experience. Needless to say, this intense, combative environment was not for everyone.
Over the years, I have tried to forget the actual dollar amount I lost on Black Monday and the days afterword. But I do know that, in September 1987, Steinhard Partners was up by about 45%, and by the end of the calendar year, we were up only 4%. We lost nearly the entire year’s profit on the day of the crash and days that followed. I was so depressed that fall that I did not want to go on. I took the crash personally. Maybe I was losing my judgement. Maybe I just was not as good as I used to be. My confidence was shaken. I felt alone.
The world went to great lengths to create a rationale for the crash. Would a recession follow? A depression? Political turmoil? In retrospect the Crash of 1987 predicted nothing. A bear market did not follow.
During the early 1990’s, our capital base grew enormously. Everything that we invested in worked spectacularly. Our performance was superb, three consecutive 60 percent years, and with that came newfound recognition.
We were now running just under $5 billion, an enormous amount back then. We began to reach for larger, now global, markets to employ the capital. Having been successful in the markets that I had ventured into over time, I had confidence that the quality of my investment judgement was applicable worldwide. Perhaps rapid success had bred complacency.
Many of the new opportunities in international markets allowed the firm to employ significantly greater amounts of leverage. Moreover, Wall Street was flush with bull market success, and credit, at attractive terms was readily available.
We purchased and then repurchased (financed) our enormous bond portfolio for as little as a 1 percent “haircut” (collateral). This meant that for every $100 million of bonds, we sometimes had to utilize only $1 million of capital. By 1993 our bond portfolio totaled $30 billion.
With each basis point move in bond yields, we made or lost $10 million. In 1993 we were up 60%, primarily because of our significantly levered bet on European bonds, mostly, German bunds and French betans. Then, in the fourth quarter, US economic growth surged, prompting the Federal Reserve to begin raising short-term interest rates for the first time in five years.
I had misjudged the liquidity of the positions we held. Now, faced with a massive sell off, there was no painless way to get out. We finally finished liquidating the entire portfolio at the end of March, only three months into the year. At that point, we were down 30 percent. At year end we were down 31%.
I felt more depressed than I had ever been. This was worse than 1987. This was by far the only substantial loss the funds had ever suffered. Our only other loss years were 1969 and 1972, when we were down by 1.5% each year. I had failed in the most fundamental tenet of money management: capital preservation.
As any major league baseball player knows, there inevitably comes a time when even the best in the game must retire. Everybody tops out sometime. Even though I was only 54 years old, I now felt, more strongly than ever, that it was time for me quit the business. I had certainly had my run. I had to make the money back for my investors. I would not go out after the only bad year of my career. We had to make it back. We did.
By September 1995, our funds were up 22%. The performance was sufficiently good to create the window I was looking for. We had recouped most of the 1994 loss. My investors were happy. I could feel good about returning their money. I decided to pull the trigger.
Year after year, I posted some of the highest returns on Wall Street. Proud of what I had achieved, I was thrilled to have had a career that was being called “legendary.” But it was time to move on.
After we closed down, Judy and I took a two-week vacation. Upon my return, I had to deal with the reality that I had, in fact, retired.
In retirement, I would keep my office but with a much smaller staff. I had no traders working for me, but on the first day back, creature of habit that I was, I did what I always did. I sat at my desk, looked at my Bloomberg screen flashing stock quotes, and decided I wanted to trade. The problem was, I did not have a trader to place orders with the brokerage firms. I picked up our years-long direct line into the Goldman Sachs trading room.
“Hi, this is Mike Steinhardt,” I said to the broker who answered. “I want to buy a few S&P futures.” Then I dictated the orders to him. It was just like the old days, when I entered orders myself without going through the trading desk. I listened carefully as he read them back to me before I hung up.
Later, my chief administrator, Lisa Addeo, one of the firm’s stalwarts, told me I no longer had an account open with Goldman Sachs. All of the accounts the firm maintained were closed. The broker called back and talked to Lisa, “What do I do? He gave me all these orders but you do not have an account. They’ve all be closed.”
“Then open one up!” she said. “This is Michael Steinhardt, for God’s sake. He’s trading. That’s what he does. Anway, whatever orders he put in, you know he’s good for the money.”.
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