This is the final episode of this miniseries! In part 7 out of 7 we will review Michael
Steinhardt, who famously (perhaps infamously?) was funded by his father in the beginning
of his trading career. His father frequently gave him envelopes stuffed with $10,000 in
cash made from stolen jewelry. But, I wouldn't want to take anything
away from Steinhardt and his success though. He graduated college at the age of 19 (yes,
1-9), and later founded the investment firm Steinhardt Partners. During the period of
1967-1988 Steinhardt Partners achieved a compounded annual growth rate of over 30%. This is truly
remarkable, especially considering that the S&P 500 market index was only able to grow
at a pace of 8.9% per year during the same period.
He is also famous (or once again, perhaps infamous) for how he plays practical jokes
to his colleagues and especially his brokers. He tells a story about one time when he was
pulling the leg of a broker that he hadn't spoken to for a while. It goes something like this:
"Greetings mr. Steinhardt, what can I help
you with today?" "Mark. I want you to buy 30,000 shares of
ZCU" (*mumbling*) "Sorry I didn't quite catch what you said ..." (*click!*)
"Hi, you are speaking to Michael Steinhardt's
secretary, miss Jones. What can I help you with?"
"Hi miss Jones, it's Mark. Can I get mr. Steinhardt on the line please? It's urgent,
the market is closing in 5 minutes!" "Sorry, mr. Steinhardt is in the bathroom
at the moment. I will tell him to get back to you as soon as possible."
"Mark, haven't you done that order yet?? What's the problem? Just do the damn thing!"
"Sorry Mr. Steinhardt, I, I didn't quite catch the name of the stock."
"Oh, okey. It's (*mumbling*)" "Sorry I didn't quite ..." (*click!*)
"Oh crap!!" But Michael Steinhardt also has a serious
side to him. The best trading advice that he gives during the interview together with
Jack D Schwager for the Market Wizards book, is probably when he talks about a concept
that he calls "variant perception".
Basically, variant perception is a fundamental view of
what will happen in the markets, or to a specific security. This perception is typically a contrarian
view, or in other words, it's the opposite of the current market consensus. Michael Steinhardt
will stay with the position as long as his variant perception remains true. This can
sometimes do so that he has very long and profitable runs in situations where the fundamentals
later prove to be right, but it's a double-edged sword in that it also means that he could
be too early in a position, or sometimes just plain wrong, and not quick enough to cut losses.
Here's an example so that it makes sense: Let's say that Michael Steinhardt thinks
that, because of new evidence published regarding health issues and its relatedness to smoking,
the tobacco industry will take an additional hit. At the same time, he thinks that the
general market consensus is that the tobacco consumption will be up slightly in the coming
years. In this situation, he might go short a basket of tobacco companies, as his perception
of reality is a variant of what the market is currently expressing. He will also stay
with this position for as long as he holds this view, but at times he has changed his
perception when new data has presented itself or when markets have gone too far against him.
That's it for this miniseries! What did
you think about the concept compared to the normal top 5 takeaways? Any feedback from
you guys is greatly appreciated, and it will hopefully help me in making the content on
this channel more educating, more profitable and more enjoyable to you guys in the future.
Cheers!