The Investment U E-Letter: Issue #381
Monday, October 25, 2004 Four Rules that Turned $10,000 Into $5 Million
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U $10,000 invested with Michael Steinhardt in 1967 would have been worth nearly $5 million dollars when he called it quits in 1995. He traded with conviction. As an example, he went short (to profit from the downside) in the best companies in America, right before the 1973-1974 crash. While many of the "star" fund managers of the day lost 80% or 90% over that time, Steinhardt increased his investors' money by nearly 60%. Then at the end of 1974, Steinhardt "picked the bottom nearly perfectly," in his own words. How did he do it? To me, the key is in this quote from his recent book, No Bull: My Life In and Out of Markets: "When the world wants to buy only [bonds], you can almost close your eyes and [buy] stocks." Today, we'll consider how Steinhardt made such a fortune for investors, including what might work now. Plus, I'll share Steinhardt's four pieces of homework to be done to have a successful stock pick. What the World Wants Now Based on Steinhardt's quote above, you'd probably be buying bonds and selling stocks right now. Here's why: Twice a year, Barron's asks the "Big Money" where it thinks stocks and bonds are going over the next 12 months. The latest Big Money Poll just came out. Of the fund managers interviewed, 56.3% count themselves as bullish on stocks, while only 4.7% of fund managers are bullish on bonds. Of course, everyone is uncomfortable buying bonds now. So nobody will do it. Everyone that is, except Steinhardt… "When your views are truly contrarian, they are inevitably uncomfortable. Courage and the ability to withstand pain are required," Steinhardt said in his book. It is truly contrarian to buy bonds now. If you buy bonds, you will be alone, except for the readers of my newsletter who followed my advice in the June Issue of True Wealth (titled "Three Major Investment Ideas So Obvious, Nobody Is Doing Them"). One of the recommendations in my newsletter that month was iShares GS $ InvesTop Corporate Bond fund (AMEX: LQD). Bonds have been soaring (yields have been falling) since, to the delight of True Wealth readers. Isn't It Dangerous to Go Against the Professionals? As it turns out, money managers in the Barron's poll have their money where their beliefs are: 73.3% in stocks
17.7% in bonds
7.7% in cash The pros don't have much in bonds, and individuals have even less. But isn't it dangerous to go against the pros? Here's what Steinhardt had to say: "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." Steinhardt obviously made investors a ridiculous amount of money. What exactly was he looking for when sizing up an investment? Steinhardt's Four Million-Dollar Rules to Making an Investment If an analyst was going to present an idea to Steinhardt, that analyst knew the rules… He needed to be able to tell him, in two minutes, four things: 1. The idea
2. The consensus view
3. The "variant perception"
4. A trigger event Steinhardt's definition of variant perception is "a well-founded view that is meaningfully different from the market consensus." Steinhardt said, "In those instances where there was no variant perception… I generally had no interest and would discourage investing." For me, I try to do what Steinhardt says he did. A good example of the above four rules for investing to me is my recommendation of rare coins. Nobody wants to hear about them… yet they are the cheapest they've been in decades. I love it… You may want to consider the stocks in your portfolio, and see if you have all four rules covered for each. Be honest with yourself… do you own Microsoft or Pfizer because your friends think they're good? Or do you truly have a "variant perception"? Think of new stocks you buy in Steinhardt's terms and maybe you'll find a few Steinhardt-type profits… Good investing, Steve Today's Investment U Cribsheet
- For more on Michael Steinhardt, you can read his book No Bull: My Life In and Out of Markets. Even better, if you haven't already done so, you should read Market Wizards: Interviews with Top Traders, by Jack Schwager, which includes an interview with Steinhardt.
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