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No Bull offers an account of some of the investment strategies that drove Michael Steinhardt's historic success as a hedge fund manager including a focus on his skills as an industry analyst and consummate stock picker. He also reveals how his uncanny talent for knowing when to trade against the prevailing market trend-a talent that was not always appreciated by several erstwhile high-profile clients-resulted in many of his greatest successes. Here he provides detailed accounts of some of his most sensational coups-including his momentous decision, in 1981, to stake everything on bonds-and his equally sensational failures, such as his disastrous foray into global macro-trading in the mid-1990s.
At the same time, No Bull is the rags-to-riches story of a boy from Bensonhurst and his rise from the streets of Brooklyn to the heights of Wall Street. In a thoroughly engaging narrative, Steinhardt relates the early influences that shaped his attitudes toward life and success, as well as the beginning of his love affair with stock investing. Further, he chronicles his dawning awareness of the need for a purpose in life beyond the acquisition of wealth and how it led to his decision to retire and redirect his energies. We learn about his experiences as the chairman of the Democratic Leadership Council for nearly a decade, as well as his innovative thinking and ambitious projects to strengthen the Jewish community.
The inspiring true story of a Wall Street genius and world-class philanthropist, No Bull is an unforgettable read for finance professionals and students of human nature alike.
Michael Steinhardt is one of the most successful money managers in the history of Wall Street. He is also widely known for his philanthropic activities, particularly in the Jewish community-most notably as cofounder with Charles Bronfman of birthright israel, a program whose mission is to provide a free educational opportunity for every young Jewish person of the Diaspora to visit Israel.
3. The Wise Guy of Forty-Seventh Street.
4. The Ivy League, the Army, and the Street.
5. The Hottest Analysts on Wall Street.
6. Steinhardt, Fine, Berkowitz & Company.
8. Variant Perception.
9. There and Back.
10. Menageries and Movies.
11. The Crash of 1987.
12. The Steinhardt Style.
13. Dabbing in Politics.
14. The Worst Year of My Life.
15. "Steinhardt Quits!
16. The Death of My Father.
17. Two Rivers.
For some time, during my early forties, I could not figure out why I often became depressed in the fall. Then I realized that this season was both the beginning and the end of a year for me. The school year started, and Rosh Hashanah, the Jewish New Year, followed, creating a feeling of hope, of new beginnings. But, before the Internal Revenue Service changed the rules for money managers and made the fiscal year coincide with the calendar year, my firm's fiscal year ended in September. Much of my life's focus has been on my performance as a hedge fund manager, and this focus took on a particular intensity as the close of the trading year approached. When my fiscal year ended each September 30, I felt a sense of closure and finality--the end of the play. Any good theatrical play has its beginning, middle, and end, or finale. My finale was September 30.
Fortunately, because I enjoyed success as a hedge fund manager throughout my career, September 30 was usually a good time. Congratulations, excitement, and joy filled the day. My investors, partners, and employees were happy. We often had superior performance--in some years, the best performance on Wall Street--and everyone usually made too much money.
But in October it all started again: the uncertainties, the insecurities, the worry about good performance. At the beginning of each new fiscal year, I had to start from scratch. What I, or any other money manager, had done in the past was soon "ancient history" because at the core of the competitive hedge fund world lurked a perennial question: "How much have you made for me this year?" or sometimes: "How much have you made for me this month? This week?" Each October, I felt a particular angst about having to start the performance all over again.
Traditionally, the window between the old and the new also provided an opportunity to take a short vacation. Things were no different in the fall of 1981.
After a brief visit to Israel, my wife Judy and I flew to the South of France, where we planned on staying at one of my favorite hotels, La Reserve de Beaulieu. The hotel appealed to me largely because of its cuisine. For me, dining is one of life's unmitigated pleasures. For days before arriving on the Côte d'Azure, I would fantasize about past meals: scampi Provençale with wonderful garlic aroma, the delicate foie gras, or the loupe de mer with fennel, which seemed to lift fish into an ethereal realm. This part of the world drew other people because of its scenic beauty (including the garb, or lack thereof, of the women), but the most exciting element for me was the menus. As Judy would remind me in her rare angry moments, I often had problems remembering details in more important areas of life, but when it came to menus, my facility for recall was outstanding.
We arrived in Beaulieu-sur-Mer late in the afternoon--happily, in time for the dinner hour. The flight had exhausted us so we decided to rest before our much anticipated culinary adventure. Just as we stretched out on the bed and began to enjoy the balmy October afternoon, the telephone rang. The hotel operator informed me that my assistant, Samantha, was calling from New York.
When I picked up the receiver, Sam, as I called her, told me she had received a call from an FBI agent. She gave me his number. He had told her to have me call him as soon as possible; she did not know why he was calling. It sounded urgent, so I said I would call him the minute we hung up. Before I got off the line, however, I asked to speak to one of my senior partners, John Levin. His first words to me, without even a hello, were: "Congratulations! The bonds have made a huge move. We're up 60 percent for the year." And the fiscal year had just started!
I knew the bond market had turned, but the magnitude of the move and its impact on our portfolio stunned me. Sitting on the side of the bed, I felt tremendous satisfaction in having been right, and having done so in an investment arena that was entirely new to me--the bond market. Since the age of 13, stocks had held a magical fascination for me. From amateur investor to professional, from analyst to trader to chief portfolio manager, my expertise had been in the stock market and my career had focused exclusively on stocks. The investment climate of the early 1980s, however, had created an extraordinary opportunity--better than any alternative, including stocks--in the bond market.
At the start of the 1980s, spiraling inflation, and the need to control it, plagued the U.S. economy. The federal government was running a huge deficit--enough to consume 2.5 percent of the nation's economic output. Long-term Treasury rates rose from about 10 percent in 1980 to almost 16 percent by September 1981. Short-term interest rates rose to 17 percent. Using "monetary policy"--mostly interest rate pressure--the chairman of the Federal Reserve, Paul Volcker, attempted to curb inflation but had had little success to date.
During the same period, Henry Kaufman, chief economist at Salomon Brothers (a man affectionately referred to as "Dr. Doom"), accentuated fixed-income fears with his dire predictions of record-high interest rates and runaway inflation. Most other economists on Wall Street were equally bearish on bonds--they referred to them as "certificates of confiscation"--and felt that inflation would continue to increase on both cyclical and secular bases. Oil prices were high and were predicted to continue rising.
I viewed things differently.
So, in the late spring, in the face of rapidly rising interest rates, I had begun a foray into the bond market. I started buying bonds on the premise that the economy would weaken faster than expected and would eventually cause a healthy drop in interest rates. Not only did I buy them; I bought them using leverage, or borrowed funds, thereby amplifying my risk. I was able to borrow extensively because, in contrast to equities, for which Federal Reserve margin requirements limited borrowing, only what a brokerage firm or bank would lend constrained the purchase of these government securities. Typically, one could get 95 to 99 percent of a bond's value. I saw an opportunity to earn compelling returns by borrowing most of the money to do so, albeit with a degree of leverage I had not used before.
In the early 1980s, I managed about $75 million in my two hedge funds--the flagship Steinhardt Partners, LP, and an off-shore fund, SP International. Following my instincts, we invested $50 million of the funds' cash and borrowed another $200 million to buy a quarter of a billion dollars' worth of intermediate 10-year Treasury bonds. For a neophyte bond investor--indeed, by any measure--I had made a bold bet. But, given my history of superior performance investment, I felt confident that my judgment would be right.
Eventually, my bond position grew to such a magnitude that, when I listed our major holdings in our monthly report to investors, the largest long position was U. S. Treasury bonds. I remained confident, even when the market moved against me, but I naively underestimated how my investors would react.
It was soon clear that my bet made many of my investors uncomfortable, especially since my entire history on Wall Street, until then, had been in the stock market. "What do you know about bonds?" investors queried. "I invested with you to be in stocks, not bonds." I heard that complaint over and over again.
Some clients grew so worried that they sent in redemption notices to withdraw their capital at the next available period. McKinsey & Company, the management consulting firm, was one such client. As soon as my monthly letter arrived, detailing my move into bonds, I was asked to meet with McKinsey's investment committee. Chosen from among the senior management of the firm, the committee was impressive and articulate, reflecting the fact that they had achieved their success by impressing other business leaders with their acumen.
When I explained why I thought bonds were attractive, they blasted me. "But you're an equity investor," the committee members kept saying. "We have you allocated as an equity manager. You cannot buy bonds." They redeemed their investment immediately following the meeting.
One Canadian investor went so far as to threaten to sue me over my bond position. "What do you know about bonds?" were the first words he yelled at me when he called one day. "You're an equity investor. You're supposed to be focused on the stock market. That's why I pay you these outrageous fees!" He did have a point. I had no experience in the bond market, hardly knew its mechanics or language, yet I had bet big against the consensus view that interest rates would rise, and bond prices would fall. The pressure of trying to pick a major turn, combined with this newfound investor dissatisfaction in an area where my own confidence was somewhat vulnerable, made for an emotionally wrought period. For a while, it looked as if my Canadian investor might be right.
Would my previous success in stocks translate into the same success in the fixed-income market? That's what my investors kept asking. My initial bond position was significant and, to make matters worse, I substantially increased that position as the months passed and the trade moved against me. There were some tough times. At one point, the fund suffered a $10 million paper loss.
Given my history of outperforming the market and my intensely competitive personality, chaos ruled my life during the spring of 1981 as my financial fate went up and down (down more often than up) and I continued to accumulate bonds. A multiple of my capital, the bond position began to dominate the portfolio. If we had a bad month, our investors immediately brought up the bond exposure. I continually explained the rationale for taking such a huge position, but the interrogations were nonetheless unnerving. Moreover, the mechanics of dealing with leverage and timing a turn in interest rates were new to me and resulted in many sleepless nights.
Each week, I anxiously waited for the Federal Reserve to announce the money supply numbers, particularly M1 and M2, on Friday afternoon. Bonds bulls--investors like myself--hoped that the money supply would stop growing. This would indicate that the economy was slowing down and possibly heading into recession, good news for bondholders. I used my resources both within the firm and throughout the financial community to determine even a slight change in business. We gathered masses of anecdotal evidence, seeking signs of weakness. I even constructed my own New York City taxi index relating the percentage with "available" lights to those occupied, hoping for more to be "available," thereby signaling a slow-down in demand.
Bonds overwhelmingly influenced our results in the fiscal year that ended September 30, 1981. We posted a 10 percent gain compared to a decline of 3.5 percent for the Standard & Poor's (S&P) 500, but the volatility on a day-to-day, week-to-week, and month-to-month basis had been terribly high. I was relieved when the year ended. I could not wait to get away for a few days with Judy.
The phone call that afternoon, when John Levin informed me of the bond market's turn and our instant 60 percent gain, gave me a deep sense of satisfaction. I had been waiting for this turn all year, and now it had happened, almost overnight. As interest rates began to crack, the bond market shot up in price and our performance skyrocketed. It was one of the most gratifying moments in my financial life. I had put my money on what my instincts told me, and it had happened. My entire year had been made and we were not even past October. Our bond investment of $250 million, on $50 million of equity capital and the rest borrowed, made a profit of $40 million. We would eventually finish out the year up 97 percent, but my deepest feeling of gratification came at this particular moment, when I was proved right. I had found a new investment vehicle, losing some valued clients along the way, and I had felt the thrill of betting against the consensus and being lavishly rewarded.
I was elated when the call from the office ended, but I was still concerned because of Sam's message about the FBI agent. Who was Agent Bob Smith and why was he calling me? I called the number she had given me and got Agent Smith on the line. He told me there had been an armored-car robbery in Nanuet, New York, and several guards had been killed. The Black Panthers were responsible for the robbery, and the FBI, in its search for the perpetrators, had raided an apartment in Newark, New Jersey. There they found, in addition to an arsenal of weapons, a cache of Panther literature that included a list of people the Black Panthers intended to assassinate. My name, Agent Smith told me, was on that list.
"We do not want to frighten you, Mr. Steinhardt," Agent Smith said, "but we felt it was our obligation to tell everyone whose name was on the list that they may be a target of this group."
"Who else is on the list?" I asked.
"It's a list of successful capitalists like yourself," the agent said. Since the Black Panthers were an anticapitalist, antiestablishment organization and its members had a history of espousing violence to achieve their goals, it made sense for the Panthers to have a hit list.
"There's really nothing you or the FBI can do about this," Smith said. "You should just know about it."
"I appreciate your telling me," I said, and I hung up the phone.
When I told Judy, she immediately wanted to go home to be with our children. It took me some time to persuade her that there was no reason to believe our kids were in danger. If anyone was going to be harmed, it would be me, and even that struck me as a remote possibility. After some anxious dialogue, we chose to finish our vacation.
Nothing ever came of the Black Panthers' hit list. Not long after Agent Smith's call, a number of Panthers were arrested, which may have squelched any real threat. But my getting those two pieces of information within minutes of each other--word from John Levin that my gamble on the bond market had paid off dramatically, and news from the FBI that, because of my visibility, I had become a target for assassination--stayed with me.
The confluence of those two phone conversations struck me as more than a coincidence. The first call validated my life as a hedge fund manager. I lived for the markets, and my investment expertise was now broadening to include areas beyond stocks. The second call made me realize how fragile life can be. No matter how successful I had become or would become, that success would never be permanent nor could I escape life's fortuities. In fact, my good fortune could bring problems of its own.
Here was a moment of unmitigated professional fulfillment--yet, as usual, I did not allow myself to bathe in reflective glory. The challenges of achieving the best performance constantly dominated my conscious being, but even when I realized a goal, as I had for most of my career, the joy was often fleeting and constrained. I was happier when pursuing success than I was when savoring its fruits; the attraction, perhaps the addiction, was in the process, as much as in its end. I reminded myself of Goethe's Faust, who always strove toward new goals rather than enjoying past achievements, and I wondered what might someday be more fulfilling than winning in the markets.
In recent years, I have found a new purpose for my life. This is not to say that I have relinquished my fascination with markets. I still relish the risk taking and the rewards of a successful gamble, but I now know that such interests have limited psychic rewards, at least during this stage of my life. Unlike some other affluent people for whom the term "challenge" is associated with little more than a better golf score, I have sought an ennobled pursuit that would be, for me, compelling.
I am fortunate to have found a goal that seems to offer almost religious profundity. I do not believe in God, and the idea of a single "Absolute" holds no meaning for me, but creating a renaissance within the next generation of my people, the Jews, now dominates my conscious intensity as much as the markets once did. The objective is not just to "give something back," however commendable that may be. I have persuaded myself that even I, one individual, can have a positive impact on the future of one of the world's great peoples at a time when that future is, on many levels, clouded. For me, that goal holds tremendous meaning.
The value of the story in this book does not lie in my achievement of the American dream--at least the wealthy version of it. Many others have also achieved that and some more successfully than I. If anything, it lies in having found, in the middle of my life, a new passion that I, perhaps with a bit of delusion, can consider far more significant than making rich people richer. What I achieved in the markets was immensely valuable, but its true worth comes from my ability to pursue a particular philanthropic principle with the passion that I once dedicated to personal accumulation and the markets.
In most ways, I am no different from many others. I am the product of my Jewish immigrant heritage. I am the product of my parents: a mother who selflessly devoted herself to me, and a father who made an impression as an overpowering phantom figure throughout my life.
I cannot easily say how these modest beginnings impacted my perspective or my life. I am just one of thousands of Brooklyn Jews compelled to achieve, and that compulsion played out in the stock market, an institution that has transfixed me since childhood. By 1995, when I retired from active money management, I had achieved one of the most successful records on Wall Street. But my life could not have started out in a more unassuming fashion.
Posted October 29, 2001
Michael Steinhardt came of age in Bensonhurst, Brooklyn during the mid-1950¿s, the glory days of the Brooklyn Dodgers. Yet he was a Giants fan, meaning that this graduate of Brooklyn¿s Lafayette High School, the alma mater of the immortal Sandy Koufax, cheered when Bobby Thomson hit ¿the shot heard `round the world¿ in the final game of the National League 1951 playoffs. Fortunately for Mr. Steinhardt, and for those who buy his wonderful book, his Brooklyn neighbors, Dodger fans all, didn't hear him. Otherwise, Steinhardt would likely be supporting the columns holding up the Verranzano Bridge. This anecdote is revealing, for it shows the makeup of a financial (and otherwise) heavyweight who defied the conventional investment wisdom for the almost 30-year life of his investment firm, Steinhardt Partners, making a ton of money for himself and his clients in the process. Definitely not one who went with the herd, as most portfolio managers did then and do now. Ten thousand dollars invested with Steinhardt, Fine & Berkowitz (the original company) at its inception in July, 1967 would be worth $4,810,000 when Steinhardt finally closed shop at the end of 1995. Not exactly chump change, even after considering inflation. What this book won¿t tell you is how to run a hedge fund. For that, there exist many shelves¿ worth of tomes on derivatives, portfolio hedging, and similar esoterica. None make as enjoyable reading as ¿No Bull.¿ Moreover, Steinhardt¿s investment style is best described as eclectic, using a mix of approaches depending upon underlying economic factors, issues affecting particular industries, and those influencing individual companies. Which is all to the good. If an individual investor, even one highly sophisticated, tried to trade like Steinhardt, he¿d go broke in a hurry, even if he traded on the Internet paying minimal commissions. Steinhardt, and firms like his, have access to market information individual investors only dream of, including high-powered analytics, and immediate access to Wall Street¿s finest analysts and investment bankers. Nevertheless, there are numerous pearls of wisdom individual investors (as well as investment pros) can take advantage of. Foremost would be what Steinhardt calls ¿variant perception.¿ In plain English, this means taking positions in companies (both on the long and short side) if your opinion differs from the market consensus, AND if you feel very strongly about that opinion. Secondly, what ¿Steinhardt¿ refers to as the Judy Steinhardt (his wife¿s) investment philosophy, which is selecting companies on the basis of the reception you believe their products would have in the marketplace. The optimal advice, however, is to diversify, and the best way to do that is to find a good money manager, one who outperforms the averages in bull, bear, and flat markets, and stick with him. This is also a key part of the Judy Steinhardt investment philosophy; they¿ve been married 33 years. Steinhardt, like any great investment analyst, is a master at telling a story, and this is why you should buy the book. You will learn about his wiseguy father, the late Sol Steinhardt (AKA ¿Red McGee¿), who hobnobbed with many real-life characters straight out of ¿The Godfather.¿ These included Meyer Lansky, Jimmy (¿Jimmy Blue Eyes¿) Aiello, and New York crime boss Albert Anastasia, who bought it in a barber¿s chair in 1957 (the elder Steinhardt was questioned by the cops in that matter, for he and Anastasia reportedly were out gambling the night before). You will learn about the real benefits of carpooling, which have nothing to do with conserving gas or saving the planet. Finally, you¿ll learn how Steinhardt, a conservative (by New York City standards) Democrat, tried to turn the Clinton Administration from a Kameradenland of the liberal Left to something more to his liking (Steinhardt¿s efforts were unsuccessful, although it turned out that Clinton did bend towards the right after all).Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.