What's going on with Wall Street's superstars? Could be that the erratic behavior of the unpredictable and often roller-coasterlike stock market is finally getting to them.
Last April, fifty-one-year-old Robert Wilson, a worldly private investor with a spectacular record, said good-bye to the Street for a while and took off on a six-month trip around the globe to get his battery recharged. Well, another remarkable market performer is about to take the sabbatical route as well. He's thirty-seven-year-old Michael Steinhardt, the chief architect of Steinhardt, Berkowitz & Company, the nation's largest hedge fund (assets: $110 million).
Starting in October, Steinhardt, one of Wall Street's top trading talents, will take a year's leave of absence from the money-management firm he helped found only eleven years ago with relatively modest assets of about $7 million.
The reason for the sabbatical, as Steinhardt explained it to me: "I want to broaden my alternatives, to find a purpose in life . . . because purpose for me is no longer acquiring additional assets."
Obviously, the pressures, frustrations, and the time demands of the often chaotic investment business have caught up with Steinhardt, whose firm - presently made up of $65-million hedge fund, a $25-million option-arbitrage fund, and a $20-million offshore fund - is one of the stock market's outstanding success stories. Its oldest business - the $65-million hedge fund - is a prime example of what Wall Street dreams are all about.
In its eleven years, the fund has turned in a dazzling compounded annual growth rate (in its investments) of about 30 percent a year. The fund has had only one down year: a slight 1 percent decline in the early 1970s.
Thanks to this super record, Steinhardt, has built a personal net worth of about $6 million.
During a lengthy dinner interview - the first he's granted in the past ten years - Steinhardt elaborated on the reasons for his sabbatical. "I've exhausted what I can get out of this business, except financially . . . and money just doesn't have the same meaning to me anymore." Added Steinhardt: "I'm smoking too much; I'm getting fat (he's about 210 pounds), and I'm too tense. I've done nothing in my adult life but work in this area . . . and I've made very few new friends over the past five years. I don't know what I'll do, but I know I want to experience other areas of life. Who knows? Maybe I could do something meaningful for Israel, giving of myself, not just another check to the UJA (United Jewish Appeal) . . . where I'd get deep inner satisfaction."
Initially Steinhardt will begin his sabbatical by growing golden raspberries on a sixteen-acre estate in Bedford, New York. He also wants "to get to know my three kids in a different way." In the past Steinhardt, who lives in a Fifth Avenue duplex overlooking Central Park, has seen his children mainly in the evenings and on the weekends.
Steinhardt's departure is a hot topic of conversation on Wall Street. He's regarded as the backbone - the man who makes it all work. His sabbatical - which comes about two years after the departure of another of the firm's founders, Jerry Fine, a topflight money manager who left to start his own hedge fund - is raising questions about the viability of the Steinhardt, Berkowitz operation.
Some Wall Streeters believe it's the second step (after Fine's departure) in the eventual disintegration of the firm. And contrary to Steinhardt's comments as to why he's leaving, some Wall Streeters believe it largely reflects frustration over the firm's inability in recent years to match the lofty growth rates of earlier years.
For example, in the fiscal year that ended September 31, 1975, the firm's big hedge fund rolled up an exceptional 68. per cent increase. But that was the last super showing. Fiscal 1976 showed a modest 7-percent rise - less than a quarter of the fund's compounded growth rate of 30 per cent. True, the fund outperformed the market in fiscal 1977 with a 20-percent advance, and it did it again (with about 18-per cent gain) in the first ten months of fiscal 1978. But thus far, it's trailing the market in calendar 1978 with a modest rise of about 5 percent.
Said one source very close to the firm: "The place has changed, and so have the results. It has a great trader in Tony Cilluffo, some fine analysts in Dave Rocker and Oscar Schaefer . . and they've brought in some pretty good new people. But it's not like the old days. you sense indecision, uncertainty . . . and the fund's performance has to suffer without Mike there. In fact, I'm not sure Mike is ever coming back or even wants to . . ."
Steinhardt concedes that his frustrations have increased since January, that "we haven't made money this year like we used to . . . ." but he insists this did not lead to his sabbatical and, further he will definitely return after a year. He also points out that he's demonstrating his confidence in the existing management by leaving the bulk of his estate - more than $4 million - in the firm's hands.
A Wharton School of Finance graduate who started in Wall Street in 1960 as an $80-a-week statistician. Steinhardt was one of the hot breed who made it big early. In 1966 - at the age of just twenty-five - he earned over $200,000 as an analyst-broker at Loeb, Rhoades, chiefly by recommendating the big conglomerate stocks before their big runs. But that year was, also a euphoric period when stocks skyrocketed on little more than dreams. To Steinhardt's credit, he not only survived the bloodbath of the hedge funds when reality returned to the market but went on to achieve even greater success.
That, in large measure, reflects the merging of a team of talented buys who were adept at trading and stock picking, who had the ability to make investment decisions quickly, and who were flexible enough to shift investment gears in a hurry if they thought the market was about to change course. Another important growth ingredient: big commissions - currently $5.5 million annually - that the firms doles out to brokers.
And then there's Steinhardt's personal investment philosophy namely that "you can't make big money without getting in the way of harm" - in other words, risk taking. The results, of course, aren't always pleasant, Steinhardt, for example, recalls a drubbing the firm took in 1972, when it sold short the big-name growth stocks at 30-35 times earnings and then watched with dismay as the stocks shot up to 45-45 times earnings. And then there was an extremely bitter month, January of 1976, when the firm had one of its biggest short positions ever and the market that month boomed. "It was painful as hell," says Steinhardt, "but you're not going to win . . . unless you can lose."
However, that philosophy has also paid off very big. For example, in the early 1970s, Kaufman & Broad, the nation's largest home builder, was the darling of the institutional fraternity. In the midst of this enthusiasm, in 1973 the Steinhardt group sold short over 100,000 Kaufman & Broad shares, starting in the high 40s. It reasoned the company would be quite vulnerable to rising interest rates and higher inflation - both of which were becoming increasingly apparent. The hedge fund also distrusted the quality of the company's earnings. It turned out to be a terrific short. The Steinhardt group made a bundle as the stock collapsed.
At present, there's a split within the firm about where the market is headed. But Steinhardt's bullish view is prevailing.
Spelling out his bullish philosophy, Steinhardt believes there's a widespread perception that stocks clearly offer the best values around, compared to the alternatives (such as art and real estate). He also points to strong corporate earnings and the untold billions in foreign hands that are likely to come into the U.S. market. Further, he thinks that most of the bearish developments (such as the prospects of a 1979 recession, inflation, and a declining dollar) are already reflected in current stock prices. He also points to the generally low level of confidence in the stock market - a good reason in itself to go the other way. Put it all together, and it's Steinhardt's conclusion that stocks will move meaningfully higher.
But, then, bad news, folks. He thinks the stock market will peak into a 1979 recession that could be far worse than anticipated - leading to a key test of our economic system. "We have accumulated such enormous debt, the world is so leveraged (in terms of borrowings), and we're so dependent on so many unpredictables (like oil prices) that the way out of past recessions - primarily excessive government spending and a revival of world economics - may not be possible next time," says Steinhardt.