A Value Tiger Speaks: Michael Steinhardt

Henry Scholder interviews the volatile former boss of Steinhardt Partners.
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Michael Steinhardt closed his hedge fund six years ago. His track record was spectacular: A dollar invested with Steinhardt at his fund's inception became $480 net of fees, a compound net return of 24% annually. I worked with Michael in the 1980s, and it was a privilege. I was, and am, unabashedly in awe of his intelligence, unbending discipline, ferocious will to win in the markets and unassuming ways. I have also witnessed his angry disdain for the intellectually slovenly, as well as his explosive temper at us when we disappointed him. I spoke with Michael in advance of the publication of his autobiography,

No Bull

, and two weeks after the World Trade Center tragedy.

In your autobiography, you explain how, at the age of 13, you first became interested in stocks. Will you retell the story here?

Steinhardt:

My father gave me a gift that was extraordinarily outsized relative to any magnitude of money I had known to that point: about $5,000 in shares of two companies, Penn Dixie Cement and Columbia Gas. My father was a gambler; he had been gambling with a stockbroker who had conned him into buying the shares. From that point on I took it upon myself to be as knowledgeable as I could.

Did this early start later prove to be an advantage?

Steinhardt:

When I was in my mid-20s I already had the typical experience of a 40- or 45-year-old. That was a very great advantage.

You used to tabulate the fund's performance twice daily, without benefit of calculator or computer, because it forced you to focus on what was working and what was not -- mostly on what was not!

Steinhardt:

Yes. I tend to focus more on the negatives. I like to think

that is a function of my intimate psychic involvement with my own performance, and the more regularly I checked on my performance and the closer I felt to it, the more comfortable I was. If I took a vacation ... I would be screaming into the phone ... from remote parts of Romania because I had to really be in control.

I have seen you go wild when people approached you with stock ideas that you thought smacked of insufficient thought or intellectual dishonesty.

Steinhardt:

Have you had that experience with me?

Fortunately, I managed to put a couple of winning trades together here and there, so you spared me.

Steinhardt:

What gained my respect was the feeling that the person I was speaking to knew as much as there was to know about the subject. ... I

feel there is a keen relationship between knowledge and subsequent results, so when I sensed that some good questions I asked were not answered appropriately, I would really get upset.

How would you describe your investment philosophy?

Steinhardt:

What I thought I did was try to find value at all times. Now, value is a funny word. It does not necessarily mean stocks with low multiples or price relationship to book. Value is very time-related. Value could mean the bond market at a point in time; value could mean a growth stock that had come down a great deal; value could mean an absurdly overpriced stock that one might think of shorting. I was eclectic. I was an investor who came in every day with the idea that I was there to make money that day and every day, and I had before me the full range of opportunities. I just had to be smart enough to figure out what they were. It was a very aggressive and almost predatory approach, an almost physical approach to investing.

Physical?

Steinhardt:

Yes. It was not a cerebral exercise. I was coming in every day and picking up phones hundreds and hundreds of times.

You mentioned short sales. I have seen you absorb tremendous losses on shorts that you stayed with, fought. Why? Wouldn't it have been better to take the loss and move on?

Steinhardt:

Even more important than knowledge is a variant perception reflecting that knowledge. You have to be prepared to suffer losses -- and sometimes substantial losses -- if you have the conviction that allows you to do that.

Let's turn our focus to today's hellish markets. Is their condition terminal or will buyers return anytime soon?

Steinhardt:

My feeling is that, by most standards, it does not feel near a bottom. Assuming the worst -- which I frankly do not believe -- one could see a real long-term problem for the market. I think the market has a good chance at a very substantial rally once we do whatever it is we are going to do militarily.

What would you own for this rally?

Steinhardt:

Stocks that have unassailable fundamentals.

How do you rate the nation's current financial and fiscal agenda?

Steinhardt:

I think it is more interesting to focus on the individuals and on the policies they believe in. It is not a central issue in my thinking.

You have been through a well-publicized run-in with the Securities and Exchange Commission. Would you have retired had this not been the case?

Steinhardt:

An attack on one's character -- which, invariably, one seems to think is occurring -- is impactful. That problem has a different nature

than bad performance.

Henry Scholder is an independent investor who manages his own account and describes his investment philosophy as "value-oriented with an edge." Previously, he was a trader and portfolio manager at Steinhardt Partners and a general partner and portfolio manager at Chen Capital. At the time of publication, he held no positions in any of the stocks mentioned in this article.

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