Learning from a King of Wall Street – Michael Steinhardt’s autobiogaphy

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Investor Michael Steinhardt stands out heads and shoulders among all of the many numerous professional money managers that Wall Street has ever produced. He’s amazing track record of generating double-digit average annualised returns over a period of almost 3 decades (28 years to be exact) has made him and his clients a tremendous amount of money – a long time client of his, Richard Cooper, has seen his $500,000 investment at the start of Steinhardt’s career grown into over $100 million by the time Steinhardt officially retired!

Known for his bursts of anger and for being one of the toughest bosses on Wall Street, his methods employed in managing money has also been as varied as day trading equity index futures to holding quality stocks for long term investing as well as venturing into the global macro arena, often with varied time horizons.

Naturally, I wanted to find out more about the man and his story, so I read his autobiography: No Bull – My Life In and Out of Markets.

In No Bull, Steinhardt reminiscences about his life, from childhood to his foray into the markets and his career on Wall Street starting as a research analyst and his experience managing his hedge fund. Steinhardt also expresses his philanthropic endeavours and his political views in this autobiography, exposing a somewhat sentimental and introspective side of this legendary investor.

Below are some takeaways that I personally found useful for my investment journey:

(I) To make big money, a contrarian view is often required

Steinhardt coined the term ‘variant perception’ to describe what we all know as ‘contrarian investing’. He writes:

I defined variant perception as holding a well-founded view that was meaningfully different from market consensus. I often said that the only analytic tool that mattered was an intellectually advantaged disparate view. 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. Thus, the process by which a disparate perception, when correct, became consensus wold almost inevitably lead to meaningful profit. 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 “street” views, even anticipating minor stock price changes, may justify at times making unpopular investments. They will, however, if proved right, result in a return both from perception change as well as valuation adjustment. Nirvana.”

(II) Asking the right questions is essential in investing

The research and analytical process in investing can be arduous, especially when one does not know what to look out for. We require an analytical framework to guide us, and we also need to know the key variables that would help us solve the critical question of whether we should pull the trigger or not.

So the first step is to find out what we need to know, and then what we do not know about what we need to know. When running his hedge fund, Steinhardt wrote that:

“I spent much of my time listening to investment ideas that covered the full spectrum of the marketplace – a range of industries about which, in many cases, I knew little. I became a very careful listener. For me to be effective in understanding these ideas and monitoring them over time, I constructed a system that overcame the necessity of specific knowledge across a wide range of industries. In short, I asked the right questions by seeking the variant perception inherent in each idea.
A summer intern reminded me years later of the advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in 2 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…”

(III) Never take losses personally

While he had an stunning track record, Steinhardt had few periods of under-performance, and they happened in 1987 and in 1994. In both of these years, Steinhardt wrote that he was very affected by unexpected events that wiped out his profits (in 1987) or led to heavy losses (in 1994). In fact, he dedicated one whole chapter in his book to describe the events of 1994, and his subsequent experience in trying to recover from there.

As a trader/investor, it’s mentally difficult to be entirely detached from one’s investment results, particularly during periods where one’s going through a tough patch. However, only we ourselves could pick ourselves up from failure, and it is important to have your long term goal in mind when experiencing a rough time. Even legendary investors like Mike Steinhardt could experience such events, and knowing this helps us to put our own experiences into perspective.

Steinhardt came back after his horrible 1994 with fury, rebounding and clocking more than 20% in 1995 before officially closing down his firm!

If we take our losses personally, we cannot make a living in the markets. Stick to your investing game plan or principles and constantly review them, and concentrate on the next trade/investment. It’s the long haul that matters.

To find out more about the man himself, check out the book (No Bull) for yourself!

Rating: 3/5

*images from Goodreads and http://www.forbesmagazine.com/return-of-the-king*


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