Value Investing

Michael Steinhardt – Being Contrarian Is Not Enough. You Have To Be Right!

Michael Steinhardt is an investing legend. His fund, Steinhardt Partners had an impressive track record that amassed 24% compound average annual returns for a 28-year period. He focused on a macro asset allocation strategy that included stocks, bonds, options, and currencies. His investing strategy was best summarized by his six golden rules of investing and publicized by Charles Kirk of The Kirk Report from a Steinhardt speech in 2004. They are:

1. Make all your mistakes early in life.

2. Always make your living doing something you enjoy.

3. Be intellectually competitive.

4. Make good decisions even with incomplete information.

5. Always trust your intuition.

6. Don’t make small investments.

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One of the best Steinhardt interviews was one he did with Charlie Rose which provides some great insights into his investing strategy. Here’s and excerpt from that interview:

CHARLIE ROSE: Let’s get to that point, though. Hedge funds was perfect for you. The opportunity to move fast and to leverage.

MICHAEL STEINHARDT: Well, it wasn’t so much the opportunity to move fast and leverage, it was more than that. It was the opportunity in my mid-20’s to have my own business, to have a business that mirrored more than perhaps any other business the capitalist vision; the vision of if you do well you are well compensated and if you don’t, you don’t. And the business was structured in such a way that the incentive to focus on but one thing — the return on one’s investor’s capital — was all there was. And in that sense it was very, very rewarding. There were no ambiguities. There were no excuses. It was simply achieving the best quantitative return. And that I found very appealing.

CHARLIE ROSE: How much of the money that you had under management was your own?

MICHAEL STEINHARDT: I was consistently the largest investor.

CHARLIE ROSE: And so you were parlaying a lot of your own capital?

MICHAEL STEINHARDT: Absolutely. I thought it was really vital as part of the same capitalist principle that my money should be at risk as long– in the same way my investors’ were. And the overwhelming bulk of my own personal money was always invested in the funds.

CHARLIE ROSE: Without being– I’m asking the question, so I want you to give me the candid answer — why were you good? There was you. There was George Soros. There was Julian Robertson. There were others who worked with each of you who were very good. Why you? What was it?

MICHAEL STEINHARDT: Well, I think it was that I was intensely interested from a very early age. I was highly experienced by the time I actually started in the business. And I was very much competitive. I really wanted to be the best. I don’t think, in a way of answering your question negatively, that those people who are– who have very special records in the stock market are necessarily brighter or have more cerebral abilities than the next person. I think it’s a matter of competitive intensities, understanding one’s role, understanding that really it wasn’t a matter of building a business and having an organization, but achieving the best return on your investors’ capital.

CHARLIE ROSE: OK, but based on what you just said, it is– what is it about– what you had was, no matter how smart you might have been, no matter how smart Julian or George might have been, and others, what made a difference was something else — the will to win and how passionate you were to know as much as you could that would impact on what would happen.

MICHAEL STEINHARDT: Right. I mean, other people have tried to articulate why some investors are good and some aren’t by saying they have a certain technique or they’ve always followed this style or they’re a value investor or a growth investor or this investor. I don’t think that has anything to do with it. I don’t think that has anything to do with it. I think it’s an internalized drive that’s both competitive and, to some degree, intellectual that combines all that with an ability to take risk and be comforted by risk. I used to kiddingly say that I liked to watch the moving parts. And the moving parts were the stocks that went up and down, not so much all the other accoutrements of the business — and there are many accoutrements of the business. To me, it was always being right.

CHARLIE ROSE: OK, you mean the stocks go up. But did you find the same thing about trading in currency or trading bonds?

MICHAEL STEINHARDT: Yes.

CHARLIE ROSE: It didn’t matter?

MICHAEL STEINHARDT: It didn’t matter.

CHARLIE ROSE: As long as it had a sliding value.

MICHAEL STEINHARDT: As long as I thought I could apply judgment to it in a way that gave me some competitive advantage.

CHARLIE ROSE: What is variant perception?

MICHAEL STEINHARDT: Variant perception is the effort to become sufficiently knowledgeable about whatever the subject is, and at times be at variance from consensus. Because one of the sure ways, one of the few sure ways to make money in the market is to have a view that is off consensus and have that view turn out to be right.

CHARLIE ROSE: Now is that contrarian?

MICHAEL STEINHARDT: Well, contrarian–

CHARLIE ROSE: As everybody else is going here, you come here.

MICHAEL STEINHARDT: Right. But that’s not enough.

CHARLIE ROSE: Right.

MICHAEL STEINHARDT: You have to be right.

CHARLIE ROSE: Right.

MICHAEL STEINHARDT: A contrarian is a plus but it’s not enough. To be contrarian is easy, but be contrarian and to be right in your judgment, to be right when the consensus is wrong is where you get the golden ring. And it doesn’t happen that much, but when it does happen you make extraordinary amounts of money. And in order to do that you have to be intellectually advantaged. You have to go through that same routine in terms of intensity and focus and commitment and the sorts of things that make anybody in any area, I think, superior.

CHARLIE ROSE: Ninety-four, what happened?

MICHAEL STEINHARDT: Ninety-four. I use the word hubris because–

CHARLIE ROSE: Yes, that would be good.

MICHAEL STEINHARDT: –because I made so much money in an area that had still been relatively new to me — the area of macro investing; in investing in foreign currencies and foreign markets. And investing in areas where I didn’t have the same fundamental flow of information that I did in the domestic markets. But I’d done so well from ’90 to ’93, I really felt pretty good about things.

 

You can find the complete interview with Charlie Rose here.

Article by Johnny Hopkins, The Acquirer's Multiple