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Michael Steinhardt’s tips on how to achieve long-term investment success

When investors talk about the history of Wall Street, the name of Michael Steinhardt pops up on quite a few occasions. He is regarded as one of the most successful money managers of his generation.

Steinhardt, during his 35-year tenure as a hedge fund manager, far outshone his peers by achieving an average annual return of over 30 per cent — significantly greater than every market benchmark at that time.

Born on December 7, 1940, in New York City, Steinhardt amassed vast wealth in his career. One dollar invested in his flagship hedge fund, Steinhardt Partners L.P., at its inception in 1967 was worth $462 when he retired from active money management in 1995.

Steinhardt was an important figure in the evolution of the hedge fund industry and was among the 400 richest people in the world. His estimated worth was $300 million in 1993.

Steinhardt also authored a bestseller, “No Bull: My Life In and Out of Markets”, which investors often refer to while drawing up investment plans. The book gives an account of some of the investment strategies that drove Steinhardt’s historic success as a hedge fund manager, including a focus on his skills as an industry analyst and an exemplary stock picker. The book also reveals Steinhardt’s exceptional ability to spot when to trade against the prevailing market trend, a talent that resulted in many of his greatest successes.

Investment Strategy

Steinhardt was a versatile investor who wasn’t afraid of short- and long-term trading. He was well versed in stocks, bonds and currencies.

Steinhardt thought like a long-term trader, but used his insights to make short-term strategic trades. “I really shorted a lot. I liked to short. I felt far more gratification from making money on the short side than from the long side, which is a very dangerous thing, because the short side is so tough,” he said in his book.

By conducting exemplary research and analytical work, he made smart judgments that helped him achieve success for certain in the long term. He believed that good trading was a balance between the conviction to follow one’s ideas and the flexibility to recognise when mistakes were being made. “One must have a respect for the person on the other side of the trade by asking ‘Why does he want to sell? What does he know that I don’t?’,” he said.

Steinhardt investment philosophy can be summed up as “variant perception”, as he developed intellectually sound investment thesis that were at variance with the general market view. Basically, he developed a view that was opposite the prevailing market view. Steinhardt was of the view that being a contrarian was relatively easy but the trick was to be a contrarian and to be right in one’s judgement when the consensus was wrong. “It doesn’t happen much, but when it does, you make extraordinary amounts of money. If you can have a conviction about something that is meaningfully off consensus, and that conviction turns out to be correct, you can say that just those facts alone should almost always result in profits,” he said.

Steinhardt mentioned some tips in his book that could help investors achieve success in the investment world. Let’s have a look at these tips:

1. Make all mistakes early in life

Steinhardt believed that investors should make all big mistakes early in life so that they could learn from them and make fewer errors later on. “A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something. Anyone who thinks he can formulate a success in this market is deluding himself because it changes too quickly,” he said.

2. Always enjoy what you are doing

Investors should devote their full intensity for success over the long term and enjoy whatever they are doing. “You have to be intellectually honest with yourself and others. In my judgment, all great investors are seekers of truth,” he said.

3. Be intellectually competitive

The market guru was of the view that investors should do constant research on subjects that can make them money. “Plow through the data so as to be able to sense a major change coming in the macro situation,” he said.

4. Make good decisions even with incomplete information

Steinhardt said investors never have all the data they need before they put their money at risk, as investing is all about decision-making with imperfect information. “Make good decisions even with incomplete information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation,” he said.

5. Always trust your intuition

Intuition is more than just a hunch as it resembles a hidden supercomputer in the mind that investors are not even aware of, he said. Intuition can help investors do the right thing at the right time if they give it a chance. “Over time, your own trading experience will help develop your intuition so that major pitfalls can be avoided,” he said.

6. Don’t make small investments

The hedge fund manager said investors only have limited time and energy so when they risk their money by investing, they should make sure the reward is high enough to justify their investment. “Do not make small investments. If you are going to put money at risk, make sure the reward is high enough to justify the time and effort you put into the investment decision,” he said.

7. Traits of a good trader

According to Steinhardt, a good trader has to have three qualities-

  1. A chronic inability to accept things at face value
  2. Feel continuously unsettled
  3. Have humility

He said a good trader knew more and perceived the situation better than others.

8. Be contrarian

When investors’ views are truly contrarian, they are inevitably uncomfortable. Hence, investors need to have the courage and the ability to withstand the pain. “The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus, and bet on that view,” he added.

(Disclaimer: This article is based on Michael Steinhardt’s book “No Bull: My Life In and Out of Markets”.)

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