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January 1, 2002

No Bull: My Life In and Out of Markets

By Gregory Bresiger

Also in this article

by Michael Steinhardt

(John Wiley & Sons, New York, 289 pages) $29.95

reviewed by Gregory Bresiger

Who says one can't beat indexes? Or that frequent trading causes such

huge costs that one would never expect to generate healthy returns?

Or that there are no consistently great money managers?

Michael Steinhardt was a hell of a hedge fund manager and trader. His career appears to contradict these old saws of investing. The conventional investing wisdom is that most managers aren't worth the obscene fees that they are paid. (These poorly performing managers remind one of the much-ballyhooed experts who claim they can pick the winners on football spreads. One should generally pay attention to their picks, then go the other way).

Steinhardt is obviously an exception to the rule of managers who lag indexes. With only an occasional setback, he shot the lights out between 1967 and 1995. In the early days of block trading, for example, his strategy was flawless. He brags that he was "taking candy from a baby." (page 97)

Steinhardt writes: "In 1969, a trader needed to sell 700,000 shares of Penn Central, a large railroad company in the Northeast at that time. The stock was already in Chapter 11. I was shown a block in the third market. I then checked the New York Stock Exchange market, where it was trading for 77/8. The seller must not have bothered to sufficiently explore the market maker's book on the Big Board because I bought 700,000 shares at 7.

"In fact, the seller seemed relieved to have sold that amount of stock at less than a dollar under the last trade. Meanwhile, I turned around and sold the 700,000 shares at 73/4 to a buyer at another firm." (page 97)

Steinhardt, who became a millionaire by his late 20s, made a half million dollars on this riskless trade that took about eight minutes. Taking candy from a baby? Not exactly. The baby cried and screamed for Steinhardt and his crew to take the candy from him! He was also passing around a lot of candy to people who invested with him.

One dollar invested with his firm at the beginning of this remarkable 28-year run would have been worth $481 at the end of the period. That's versus $19 with a dollar invested in the S&P 500 in the same period.

Put another way, one of Steinhardt's well-heeled clients, Chicago businessman Richard Cooper, put $500,000 into Steinhardt's fund when it opened in the 1960s. Twenty-eight years later, the rich got much richer. Cooper's investment had grown to some $100 million. And those remarkable returns occurred even though Steinhardt had a lousy 1994 (he was down some 30 percent) and even though Steinhardt had failed to see the crash of 1987 coming, despite several obvious danger signs.

But the most impressive part of his performance is how his fund continued to make money during the bear market of 1973-74. Steinhardt says he developed the principle of variant perception, a kind of enlightened investing that led him to make big bets when the market appeared to be in terrible straights.