Monthly Archives: July 2011

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the sixth in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Michael Steinhardt?

Michael Steinhardt began his career on Wall Street as a research assistant and later found positions as a financial journalist and research analyst. After a successful career as an analyst, he founded one of the earliest hedge funds, Steinhardt, Fine and Berkowitz at the age of 26. He is considered a legend in the hedge fund industry not only because he was one of the earliest hedge fund managers, but also because of his remarkable investment performance. At the time Market Wizards was written, Steinhardt’s firm had achieved a compounded annual growth rate of over 30 percent in the 21-years since its inception. This far outperformed the S&P 500 which only achieved an 8.9 percent return over the same time period.

I thought that Steinhardt’s responses in highlight the importance of having a contrarian mindset (which he refers to as “variant perception”) and remaining flexible. This chapter is also one of the more interesting chapters in Market Wizards and another interview that I highly recommend.

How would you define your philosophy of trading?

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 variance with the general market view. I will play those variant perceptions until I feel they are no longer so.

Could you give me an example of variant perception in the current marketplace?

We have been short Genentech for a year and a half. There was a period of months and months when we lost a lot of money in that position. But I stayed short because I continued to have a variant perception about the future of their drug, TPA. [TPA can be injected intravenously to dissolve blood clots.] It is our perception that, in a year or two, TPA will be a minor drug that will be supplanted by more effective drugs that also cost substantially less. The thrust of the entire company has been based on this one drug. If our perception is correct, this company will be earning 20 or 30 cents per share and selling for under $10. The stock is currently at $27 [June 1988], down from a high of $65. [By late November, Genentech had fallen below $15 and Steinhardt was still short.] But I think the general perception is still that Genentech is a first class biotechnology company that will produce many products that are going to revolutionize the industry. As long as my view is a variant perception, I will stay short.

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 have always tended to short stocks that were favorites and backed by a great deal of institutional enthusiasm. Generally speaking, I have tended to short too early and, therefore, have usually started off with losses in my short positions. If I short a stock and it goes up a lot, it may skew my exposure a bit, but as long as my variant perception is unchanged, I’ll stay short. If I’m wrong, I’m wrong.

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