Michael Steinhardt: The Concept of Variant Perception
Michael Steinhardt graduated from college at the age of 19 and later found an investment firm named ‘Steinhardt Partners’. During the period of 1967 to 1988, Steinhardt Partners achieved a remarkable compounded annual growth rate of over 30%, especially considering that the S & P 500 market index only grew at about 9% per annum on the same timeline.
According to the author, the best trading advice that he gave in his interview is the concept of Variant Perception. Variant Perception is the fundamental view of what will happen in the market or to a specific security. It is a contrarian view or the opposite of the current market consensus.
Steinhardt prefers to stick with a position as long as his variant perception remains true. This sometimes helps him in long and profitable runs where fundamentals later prove to be right. But it's a double edged sword, which means he could also be too early in a position or sometimes just playing wrong and not too quick enough in cutting losses.
For example, he thinks, because of new evidence published regarding health issues and its relatedness to smoking, the tobacco industry will take an additional hit. At the same time, the general view of the market is that tobacco consumption will go slightly up in the coming years. In this situation, he might go short on a basket of tobacco companies as his perception of reality is a variant of what the market is currently expressing. He will also stay with this position for as long as he holds this view. But at times he has changed his perception, when new data is presented and the market has gone too far against it.
His advice to traders is that they should realise that trading is a very competitive business and there are people who have devoted a good portion of their lives to this same endeavour.