Short-Term Trade, Long-Term View

Foreword from ShareInvestor

This article “Short-Term Trade, Long-Term View” by Jason Low was first published in The Business Times on 06 Aug 2007 and is reproduced in this blog in its entirety.

In this ongoing series of the world’s greatest investors, Jason Low turns the spotlight on hedge fund manager Michael Steinhardt

If one were to seek inspiration from an investing legend who has made something out of nothing in Wall Street, then Michael Steinhardt would be the man. Born to a compulsive, high-risk gambler father but raised by a loving and selfless mother, Steinhardt worked his way up the ranks of Wall Street.

His rise was meteoric given that he was a cultural archetype, without much capital, connections or guidance from mentors. Yet by the time he retired from the hedge fund scene in 1995, he had forged his way to vast wealth and gained the reputation of being one of Wall Street’s most prominent and successful hedge fund managers.

As a teenager, Steinhardt could be seen hanging around brokerage offices and furiously trying to master the art of reading stock charts. Through sheer determination and his immense interest in stocks, he made it to Wharton School of Finance and breezed through the course in three short years, when others took four.

His first job out of school was at mutual fund company Calvin Bullock where he worked as a research analyst. Thereafter, he moved on to Loab Rhoades & Company, plying the same trade.

It was those seven years of experience in research analysis that lay the foundation for the rest of his career. Steinhardt deeply believed in having good research analysis so as to have a good grasp of both the macro and micro-economic conditions affecting the market.

“The key to research is to assimilate as much data as possible in order to be the first to sense a major change,” the legendary hedge fund manager once said. But he also realised that it is near impossible to have complete information and is thus equally comfortable working with incomplete information.

“Make good decisions even with incomplete information,” he said in a speech in 2004. “What matters is what you do with the information you have.”

Steinhardt started his Wall Street career with two other equally ambitious partners, Howard Berkowitz and Jerrold Fine, setting up a tiny office dealing with hedge funds in 1967. However, it was after both Berkowitz and Fine left the partnership that Steinhardt achieved his greatest success.

Steinhardt Partners, as the firm was known after the departure of the two partners, achieved the outstanding performance track record of 27 per cent in compounded average annual returns over 20 years – a record that stands out in Wall Street even today.

Such a performance record is even more amazing considering that it was achieved with various financial instruments – stocks, currencies, long and short options, bonds – and time horizons ranging from 30 minutes to 30 days.

Steinhardt has always been proud to proclaim that if one had invested US$1 in his fund in 1967, it would be worth US$481 on the day he closed his firm in 1995.

Demanding Boss

In his book, No Bull: My Life In and Out of Markets published in 2001, Steinhardt revealed that his obsessive focus on performance made him the boss from hell. He was always raging at subordinates and populating the Street with his firm’s shell-shocked alumni. Once, when an employee said he wanted to kill himself after mismanaging some bonds, Steinhardt was said to retort, “Can I watch?”

Trading Style

Although he was widely regarded as a trader, he argued that he had always used fundamentals, “only that the time frame of my investments was short-term”. Through his research, he will identify the macro view of the economy and select stocks that fit into this particular view.

Steinhardt reviews his firm’s positions six times a day and requires his traders to rigorously justify their position if it is not doing well. He would study an idea for five minutes and then act on it. But he reviews decisions intensively, focusing on problems, not success.

Contrary to popular beliefs, he has a long-term view of stocks and is a strong believer of fundamentals. He will not cut his position in stocks that he believes has solid fundamentals even in situations when it is going against him. Instead, he will tend to trade to counter that initial position that he has taken to make some money.

Another interesting thing about Steinhardt’s trading style is that he does not ever use stop losses in his trading and does not believe in buying on strengths or weaknesses despite being a trader. Breakouts and breakdowns do not concern Steinhardt as well. For Steinhardt, he makes choices on long-term basis even when he bets short term. An interesting character he already is, his even more interesting style of investing – being both a long term investor and a short term trader is food for thought for many investors out there.

Advice

He encourages all investors to start investing early and make all their mistakes early in life. He is of the view that if one faces tough lessons early on, the fewer errors one would make later.

He also recognises that wealth and achievement are not enough to give full value and meaning to life. He believes in living life to the fullest and giving back to the society.

Such beliefs led to his decision to close his hedge fund in 1995 to fully devote his time and fortune to philanthropy – especially to the cause of the Jewish world. Steinhardt has been very active since then. He founded the Jewish Life Network which seeks to revitalise Jewish identify and donated generously to New York University where the School of Culture, Education and Human Development is named after him.

Steinhardt’s most important piece of advice to the layman investors out there is probably this, taken from his book: “Recognize that this is a very competitive business, and when you decide to buy and sell, you are competing with people who have devoted much of their lives to this same endeavour. These professionals are on the opposite side of your trades and, on balance, they are going to beat you.”