Embracing a Bit of Pain for Gain

Michael Steinhardt – Trading Strategies: Embracing a Bit of Pain for Gain

Michael Steinhardt is an American investor, philanthropist, and hedge fund manager. He founded the hedge fund, Steinhardt Partners in 1967. The hedge fund made an average annualized return of 24.5% for its client from 1967 to 1995. As a result of his stellar track record, he was interviewed in Jack Schwager’s Market Wizards. Surprisingly, after a fantastic year in 1995 with almost 25% returns, Steinhardt decided to retire and quit trading and investing, but only to return in 2004.

In this article, we look at Steinhardt’s life and trading career. We end the article by listing a few of the trading lessons and quotes from Micheal Steinhardt.

Micheal Steinhardt’s early life and career

Micheal Steinhardt was born in 1940.

He graduated with a BS at the Wharton School, the University of Pennsylvania, in 1960. His early days in finance started at Calvin Bullock (a mutual fund firm) and Loeb, Rhoades & Co. (a brokerage firm, which was the precursor to Shearson Loeb Rhoades).

His father became his first client, giving Steinhardt envelopes filled with dollar bills to buy stock; this was the beginning of his investment career.

In 1967, he used the earnings he made from investing and founded Steinhardt, Fine, and Berkowitz (later Steinhardt Partners) alongside co-investor William Salomon, the former managing partner at Salomon Brothers, and Jack Nash (founder of Odyssey Partners).

Steinhardt Partners made an annualized return of 24.5% for its investors, charging them a 1% management fee and a 15% performance fee (later 20%) of all annualized returns realized and unrealized – almost more than the annual performance return of the S&P 500 Index over the same period. The Securities and Exchange Commission (SEC) investigated Steinhardt Partners decades later because his firm had allegedly tried to manipulate the treasury note market (short term) in the early ’90s. Steinhardt paid 75% of a total fine of $70million as a consequence.

During the bond market crisis of ’94, Steinhardt Partners lost 1/3 of its value. And in 1995, Michael closed the hedge fund, stating, “I thought there must be something more virtuous, more ennobling to do with one’s life than make rich people richer”. Years later, Michael came back into the financial industry, in 2004, as head of WisdomTree Investments, a hedge fund with almost $64 billion in assets under management.

In a Bloomberg article posted in 2014, he was referred to as “Wall Street’s greatest trader.” Michael is worth about $1.1 billion as of October 2018 by Forbes Magazine.

Michael Steinhardt

Steinhardt Partners hedge fund

After decades of successfully managing the fund, Steinhardt and his firm were investigated in the early 1990s for allegedly trying to manipulate the short-term Treasury Note market after they made about $600 million on the short-term Treasury note positions. He personally paid 75% of a total fine of $70 million as part of a settlement with the U.S. Securities and Exchange Commission and Department of Justice. He, however, stated in his book, “No Bull” that he did nothing wrong but paid the settlement fee to put the matter behind him.

After that unfortunate event with the SEC, Steinhardt Partners had an outstanding 1995, recording a new high performance. Steinhardt Partners was closed in 1995, with all limited partners receiving their share of the money.

Michael came back from retirement in 2004 to work for Index Development Partners, Inc. (now WisdomTree Investments). Michael is the Chairman of WisdomTree, offering dividends and earnings-based index funds.

WisdomTree has about $41.2 billion in assets under management as of July 2018. The funds saw a slow growth during the fall of 2007 and 2008, as the financial sector where most WisdomTree dividends-based funds are concentrated dipped as did its stock. However, the fund was back in growth as its annualized return usually outperform the market.

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Trading strategy Quotes from Micheal Steinhardt

We end the article with some quotes from Micheal Steinhardt, mainly taken from his interview in Jack Schwager’s Market Wizards.

My particular style is a bit different from that of most people. Concept number one is variant perception. I try to develop perceptions that I believe are at a variance with the general market view. I will play those variant perceptions until I feel they are no longer so.

My attitude has always been that to make money in the markets, you have to be willing to get in the way of danger.

I don’t have any rules about stops or objectives. I simply don’t think in those terms.

You have to be intellectually honest with yourself and others. In my judgment, all great investors are seekers of truth.

Make good decisions even with incomplete information. You will never have all the information you need. What matters is what you do with the information you have.

I was happier when pursuing success than I was when savoring its fruits; the attraction, perhaps the addiction, was in the process, as much as in its end.

The balance between confidence and humility is best learned through extensive experience and mistakes.

A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility.

Anyone who thinks he can formulate a success in this market is deluding himself because it changes too quickly.

When your views are truly contrarian, they are inevitably uncomfortable. Courage and the ability to withstand pain are required.

What were the key milestones in the establishment of Steinhardt Partners, and how did it perform for its clients?

Steinhardt founded Steinhardt, Fine, and Berkowitz in 1967, later known as Steinhardt Partners. The hedge fund achieved an impressive annualized return of 24.5% for its clients.

What were the circumstances surrounding the SEC investigation into Steinhardt Partners in the early 1990s?

Steinhardt Partners faced an SEC investigation for allegedly attempting to manipulate the short-term Treasury Note market. Steinhardt paid a settlement fee to resolve the matter.

How does Michael Steinhardt describe his particular trading style and approach to market perception?

Steinhardt’s trading style revolves around variant perception—developing perceptions at odds with the general market view. He emphasizes the importance of getting in the way of danger to make money.

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