How To Turn $100,000 Into
$48 Million

One of the things that I and many other people like to do
is read about the success of others. From their experiences we can all learn
ways that make the path to achievement a bit easier to travel.

This past week I re-read an interview we did with Michael Steinhardt. For those of you who don’t recognize the name, Mr. Steinhardt was
one of the top hedge fund managers in the world for nearly three decades. An
investment of $100,000 made with him at the
beginning of his career would have grown into $48 million when he retired 28
years later
. This type of performance is nothing short of amazing and the
knowledge he possesses is vast. In the following interview which we first
published in 2002, Michael was kind enough to share some of this knowledge with
us. I hope you enjoy our talk with him (for many of you, again). Next week, I’ll return our focus on the current market and
I’ll share with you some never-before-published research on short-term trading.

The Interview

weeks ago,
I had the honor of
speaking with hedge fund legend Michael Steinhardt. When I was preparing to
interview him, I was looking most for insight into his trading style and his
trading strategies. Turning each investor’s $100,000 into over $48 million
dollars in 28 years (after fees!) from trading is not something one sees on a
daily basis. Was Steinhardt’s edge some magical trading strategy or some
magical system? The answer is absolutely “No.” Is Steinhardt a financial
genius? In my opinion, he’s smart…very smart. But probably no smarter than
many of the members of

edge is a combination of his intensity to get an edge with knowledge, combined
with a mental intensity that few people could survive. It’s his ability to
measure himself and his performance hourly, every day, for 28 straight
years. Most individuals would self-destruct under such intense pressure.
But for the few, like Michael Steinhardt, who can do this, the results
are simply spectacular.

Here is my talk
with him. If you are looking for a “Holy Grail” trading system, you’ll be
disappointed. You won’t find it here. If you’re looking for some insight
into what it takes to mentally succeed at an extreme level, Michael Steinhardt
has the answer.

want to tell you, your book,
Bull: My Life In and Out of Markets

is terrific — it’s been a week and a half since I got it — and I’ve read
it twice.


Really? Thank you. I appreciate that.

OK, real
quickly on your trading style. It’s a top-down approach. Everything begins
with market direction? Is that correct?

Not everything, but a lot of things begin with markets. But the real
philosophy isn’t that so much: It’s to come in every day with the
idea that you are devoting that portion of your life, that you are devoting most
of your energy that day, to making money. And that day will be measured
— because the stock market has this wonderful thing where almost everything is
measured. A success will be when you do well, and a failure will be when you
don’t do well.

not a phenomenon that you measure irregularly or every year or even every month.
You really measure it every day. If you think about it that way, you think about
the opportunities that develop every day. Those could be the call from some guy
at an institutional desk who has a big block of something, or a sense that
there’s a change, or something you see in the newspaper, or something that
provokes you based on some past experience.

this doesn’t reflect the totality of your portfolio, it reflects some portion
of it and something that you might do that might add some increment to
your overall performance based on what you saw that day. Therefore, it’s not
only a matter of what you asked in your question in terms of top down or bottoms
up, or anything like that.

a matter of using every opportunity you can, of all sorts of types — from the
theoretical and cerebral to the “chasing down new issues,” (pardon the
expression) that I used to do because my measure of myself was my performance.
Period. And if that performance could be enhanced by spending time, getting in a
little early and listening to all the block indications, and seeing if I could
pick up some hint of something by doing that, that was part of my game.

In your book, you talk a lot about your intensity
— the aggressiveness of your management style. I came away from it saying,
“This is really a large part of this man’s edge. This is the reason for this
phenomenal performance. His edge is his intensity. It’s almost your willpower,
and it’s beyond 99.9% of what anyone else on Wall Street brings on a daily
basis. Is that an accurate assessment? Do you perceive it that way?

I do. I wish I could say it were otherwise, frankly. I wish I could say
that if I, in some dilettantish way, came in and said, “Copper! Copper! (laughs)
Copper is the metal of the early 21st century!” And I just made a
judgment and I went home, and in two years I came back and I made a fortune —
or supposedly what Buffett does. I mean, it doesn’t have the same intensity.
It doesn’t consume the same energy; it’s not as emotionally draining. The
way I did it is not an ideal way to do it, it seems to me, in terms of one’s
lifestyle. But I do answer your question in the affirmative, as a function of
intensity, as a function of the feeling that my own self — and my sense of self
— fluctuated with performance.

To me, another fascinating, eye-opening thing that I read in your book was when
you say, “A track record over the years was achieved through intense devotion
to the principles of long-term investing that was tempered by my compulsive need
to have monthly, weekly, and even daily profits.”

then about 10 pages later, you say, “Warren Buffett has said, ‘If you’re
not willing to own a stock for 10 years, do not even think about owning it for
10 minutes.’ The truth of the matter is I’ve never owned a stock for 10
years but have had the unique and profitable experience of owning some very good
companies for 10 minutes.”

How do you balance those two philosophies?

Well, the word “balance” is an interesting word there, and I’m not sure
you do “balance” those two philosophies — and often they’re in conflict
— but the technique that I used was based upon my history as an analyst.

I took the view that by doing analytic work and making the sorts of judgments
that are long-term in nature, I would come to certain conclusions — that I
would use those conclusions for both longer-term judgments, as well as trading.

there may be some question about how relevant longer-term judgments are
in trading, maybe that dubiousness is somehow tempered by the fact that there is
an element of timing in whatever you do. Particularly if one is focused
on a company or an industry and there’s a sense that things are changing, if
one can conclude quicker than the rest of the world what those changes are going
to be — even though they are of a long-term nature, they often have a
short-term impact.

that’s the sort of thing I try to do: To think about things that led to some
perception of truth. Truth is a funny word, but truth has a certain timeless
quality. But then, when you narrow it down, the truth that you think you’ve
found before the rest of the world that will result in a 30% or 40% gain in a
year (if it results in a 12% gain in two weeks) — the equation’s really

Is the timing of that “truth” instinctive and intuitive?

To some degree, yes, and
when I would ask myself a question, “Why was I able over a long period of time
to make better market calls than most people?” I had the feeling that there
was an issue of it being intuitive. Then the question is, “What does intuition
mean?” And I thought intuition meant the cumulative, non-conscious
experiential phenomenon that led one to make conclusions that on balance were
better than others’.

On specific areas
of timing, then it was sometimes not so much intuitive, but experiential. If an
analyst came in and said, “I think that Mr. X or Analyst Y is changing his
view on thus and so, and it’s not quite as good as it once was,” there is
an element of, you know, “He’s going to change his estimate for the next
year or two,” — but if you can be
there a little quicker than most, in terms of getting in the position to take
advantage of that, I mean, the results could be defined in a narrow time frame
(which was your question) — this isn’t intuitive, it’s really experiential.

There used to be
the phrase — maybe there still is — of “first
call” which is one of those marginal issues in our business. (Should there be
a first call and is it proper, and shouldn’t information be disseminated at
the same time?) And the sense I have, and it’s perhaps a bit of a distant
sense, is that in the last periods, the relative advantage of first calls has
been greatly diminished by a more homogeneous distribution of information, but
maybe not so.

If that’s true, obviously whatever edge you had is an enormous edge. Is that
edge balanced off a little bit now because of the dissemination of information,
or would you just be attacking this game a little bit differently because that
edge might have gone away.

I felt with perhaps one or two caveats, reasonably comfortable in going
into areas where I did not have so much of an experience edge and being able to
function well in those areas, because so much of the judgments I used started
out with a macro-orientation, so when I speculated in bonds (even though I
didn’t have nearly the experience in bonds that I had in stocks), I
felt relatively comfortable fairly quickly, although I must say on one level it
was a rather amateurish comfort, because I didn’t even know the phraseology of
the bonds — and I’m not sure I could totally understand analyses that related
to the yield curve and stuff like that.

I certainly could understand, you know, the sense of where people thought the
economy was going and what a disparate perception would be, in terms of broader
economic judgments and their likely implication in terms of Fed policy, stuff
like that, which was sufficient I thought, to allow me to function in a lot of
markets. It may be a cliché at this point, but the idea of “variant
perception” really works — and it works in most markets.

You talk about that in the book. Can you go in a little bit deeper? What does
variant perception mean and how does an individual apply it? If you were
teaching me to apply variant perception to my own trading, what would that mean?

Well, it seems to me, and this is going to sound a bit cavalier but I think we
should start that way: If you can have on one basis or another, 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
result in profits. Now that’s a strong statement.

other words, being a bit more specific: If you view that the year 2002 is going
to have an inflation rate of 6% — or 5% — and the world thinks it’s going to
be 3% and you turn out to be right, you can almost invariably make money
from that. If your view is that IBM is going to earn X (as opposed to Y, which
is the Street consensus) and you turn out to be right, you can almost invariably
make money from that. So I mean we can go into a range of areas: If you
think the dollar is going to collapse next year because the US economy is going
to get weaker, and Japan for the first time is going to pick up, you can almost
make money from that.

Connors: But why would I be
more right making that decision than anybody else who has, for argument’s
sake, a bell-curve upbringing and a bell-curve perception of the world?

OK, that question goes back to the first question you asked in terms of
longer-term perception, what we’ve tended to do here is think about those
broader issues. What we’ve further thought about — and this may be a stretch
for some people — that the application of energy, intellect and judgment to
broader areas could lead, on balance, to better conclusions. Now some people may
deny this. Some might say that your ability, my ability or anybody’s ability,
to predict some macro judgment about interest rates or currencies, or the level
of the stock market — it’s all random. If you believe that, then the idea of
variant perception, in a broad sense, diminishes a great deal.

if, on the other hand, you believe that if you were devote 100% of your energy
to the idea of studying Japan (for example) and that through that effort you
would have a better understanding of Japan, or a sense of change more quickly
than other people, then that creates the opportunity for you.

It’s a knowledge game

a knowledge game.

If I came to you and said, “Today is Day One. I want to get into the hedge
fund business. I want to achieve what you’ve achieved. What would you tell me
to do?

Well, I’d tell you to start early. I’d tell you to ask yourself
questions like: “What do I really care about?” “Does it make me feel
really good when I pick what I used to refer to as the moving parts?” You
know, a lot of people in the business really enjoy persuading people to do
things. A lot of people enjoy trading securities. A lot of people enjoy doing
research. There are different things one can do. I really enjoyed being
right. That’s what I cared about.

first you’ve got to really know yourself and know that’s the thing that
really makes you happy, that really is fulfilling. That to be right, to make the
right judgments is important to you — because without that, you don’t easily
have the intensity and without the intensity you’re not likely to give it the
necessary energy to be competitively superior.

think one should look at this game — as a professional in the stock market —
as a competitive enterprise and you have to think about the fact that there are
nameless, faceless legions of people trying to do the same thing you’re doing
and trying to outsmart the market. To do it, you’ve got to be better, smarter,
more intense, etc., etc., etc.

I would start as early in life as possible. I would not think that it could be
done by any cerebral process — that it’s a matter of energy and intellect,
and emotion and time. I’m not sure I’m saying something that you really
don’t know.

But it’s a philosophy that not only applies to being a hedge fund
manager, but applies to being at the top of any game. Jack Welch would probably
be saying the same thing, as would Vince Lombardi…

That’s probably true. The
differences, if any, are that with the hedge fund area, you have the great
virtue of being measured every day, or every hour, or any time you press a
button. And it’s that judgment that dominates. You can’t say, “You know, I
would have had a great year except for the fact of Sept. 11.” Or, “I was
doing terrifically — except that they ambushed me on the earnings.”

all in the numbers, and once you accept the fact that the numbers are the
overall measure and however justified or unjustified your performance is, based
upon whatever facts were involved, you have to live with that.

And the pressures that come from that — with that daily self-imposed
performance measurement you’ve set yourself. That’s phenomenal. Thanks for
sharing your thoughts.

You’re very welcome.


is your formula for turning $100,000 into $48 million, Michael Steinhardt style:

  1. You
    execute and gain a knowledge edge.

  2. And
    you do this at a 30% average annual rate every year for 28 years.

  3. Then
    you break this down to quarterly and monthly performance benchmarks for 28

  4. And
    then (and this is Steinhardt’s edge) you put unthinkable pressure on
    yourself to perform and execute at this level every hour, of every day, of
    every week, of every month, of every quarter, of every year, for 28 straight

people are willing to play at this extreme level.
But for those who are (like Michael Steinhardt), the results speak for

Have a great week trading (and if you have any questions
please send them to me at

Larry Connors

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