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Sunday, March 25, 2007

Investment Nuggets


As one of Wall Street's successful hedge-fund managers, Michael Steinhardt has few peers. One dollar invested in his fund, Steinhardt Partners in 1967, would have been worth $480 when it closed in 1995, a year in which the fund suffered heavy losses. Post his retirement from active stock investing, he wrote an engaging autobiography titled No Bull: My Life In and Out of Markets.

In his book, he reveals that his father, who was a convicted felon, gave him envelopes stuffed with money that helped him build up a net worth of $2,00,000 at an early age. After his retirement, he also become a philanthropist, giving away millions that he earned in his investing career.

"I constructed a system that overcame the necessity of specific knowledge across a wide range of industries. In short, I asked the right questions by seeking the `variant perception' inherent in each idea. A summer intern reminded me years later of the advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in two minutes, four things: the idea; the consensus view; his variant perception, and a trigger event.

No mean feat. In those instances where there was no variant perception — that is, solid growth recommendations within consensus — I generally had no interest and would discourage investing."

"I defined variant perception as holding a well-founded view that was meaningfully different than the market consensus. Understanding market expectation was at least as important as, and often different from, the fundamental knowledge."

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

"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."

"Time and again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only (bonds), you can almost close your eyes and (buy) stocks."

"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 that view. The hard part is that an investor must measure himself not by his own perceptions of his performance but by the objective measure of the market. The market has its own reality. In an immediate, emotional sense, the market is always right. So if you take a variant point of view, you will always be bombarded for some period of time by the conventional wisdom as expressed by the market."