To a financier of a certain generation, Michael Steinhardt was a legend; Forbes called him ‘Wall Street’s Greatest Trader’. This is the story of his rise, his fall, and the edge he stumbled upon during his 30 years on Wall Street.
Michael Steinhardt was born in a rough Brooklyn neighbourhood in December of 1940. His father, Sol, was a short-tempered felon and a compulsive gambler, who regularly patronised the city’s night clubs. Like his father, Steinhardt would later be famous for his temper. But he inherited more than that. Sol presented his teenage son with stock certificates representing 200 shares at Michael’s bar mitzvah. He also periodically gave Steinhardt envelopes stuffed with $100 bills to invest in stocks. This sparked the beginning of Steinhardt’s life-long passion for the markets. After graduating from Wharton at just 19, it came as no surprise when Steinhardt made a beeline for Wall Street. He spent over half a decade working as an analyst (and becoming increasingly infamous for his terrifying outbursts of rage) before starting his own fund in 1967.
Steinhardt, Fine, Berkowitz opened for business in July of 1967. Their fund was one of the many A.W. Jones copycats that sprung up in the bull market — a market where investors loved everything new, shiny, and fast. Steinhardt’s young fund was no different. After buying up the story stocks of the time (everything with the words “Data” and “-onics” in them), Steinhardt, Fine, Berkowitz was up 84% at the end of their first full year.
This was a time of growth, abundance, and positivity. The markets were soaring, and most hedge funds netted eye-watering returns. At the time, it would’ve been impossible to say that Steinhardt, Fine, Berkowitz was any different; everyone was doing well.
In 1969, the bull market crashed. The lean year that followed put many of the go-go funds out of business. But unlike the other funds, Steinhardt, Fine, Berkowitz had anticipated the end of growth investing. At the beginning of 1969, they shorted enough story stocks to balance their long positions. They were actually hedging. Surprisingly, most other funds (including A.W. Jones, the inventor of this approach) had abandoned this fundamental strategy during the bull market. Steinhardt’s caution paid off — when the S&P fell by 9% in 1969, the fund only lost a little capital; when the S&P fell by another 9% in 1970, the fund actually turned a profit. To put their performance into context, between the end of 1968 and September 1970, 28 of the largest hedge funds in the world lost two-thirds of their capital.
Come 1972, Steinhardt, Fine, Berkowitz sensed another crash coming. This time, their beliefs were built around two factors: the first, a sense that America’s ...
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