Michael Steinhardt, one of Wall Street's leading portfolio managers, has not invested money for others for over 16 years, but he doesn't miss it. "I really don't," he told "Globes" in an exclusive interview. "I did it all my life, and I was always living in stress. When I succeeded, I was stressed, and when I failed, I was stressed. If you are serious about investing other people's money, you cannot stop yourself from feeling that you are dealing with people's lives."
"Globes": What is your advice to investment managers today?
Steinhardt: "The most important thing investment managers need to do is to preserve the capital. If an investment manager does not lose money, even if he doesn't always make much money, in the end he will be successful. The greatest investors have generally not lost money."
Michael Steinhardt's (71) story is a classic Cinderella story. He was the son of poor Jewish immigrants to Brooklyn. His mother barely supported the family, and his father, Sol Frank "Red" Steinhardt, who was known in the 1940s as the biggest jewel thief in the US, abandoned him and turned to the underworld of New York, and even sat in jail for ten years.
Despite his weak starting point, Steinhardt became a success story. He was a brilliant child, who, according to Wall Street legend, received $10,000 as a bar mitzvah present from his father with instructions to invest it in shares. Steinhardt did so, and made $200,000.
After finishing his studies, he went to work on Wall Street, with a modest amount of capital, and eventually became a billionaire and one of the best investment managers of all time.
Over the course of three decades, Steinhardt founded and managed one of the most successful hedge funds in the world: Steinhardt, Fine, Berkowitz & Co., which became Steinhardt Partners after his partners retired.
The fund was a dizzying success, and at its height, managed almost $5 billion. It produced annual returns for investors of 24% on average, and if someone had invested $1,000 when the fund was founded in 1967, he would have had $93,000 twenty years later. In contrast, someone who had invested the same amount in the S&P500 at the same time, would have had only $6,400.
Steinhardt was known as a creative, extremely confident investor, and as someone who was not afraid to go against the herd. In 1994, he made a critical error that clouded his record: Steinhardt gambled that US interest rates would not rise, and purchased futures contracts accordingly. But the opposite happened, and the rise in interest rates caused the fund to lose 29%.
A significant amount of his assets were lost, and Steinhardt was even forced to pay a fine of $70 million to the US Securities and Exchange Commission and the Department of Justice for allegedly trying to manipulate the short-term Treasury Note market.
A year later, he offset some of the losses and provided his investors with a 24% return, but for Steinhardt that was the final chord. At the end of 1995, he distributed all the monies to his investors and announced that he was retiring from fund management.
Steinhardt began a new chapter in his life at this point, turning to issues close to his heart, such as art and Jewish philanthropy.
"Hapoalim Bank's achievements have not been glowing"
Steinhardt has been well versed and involved in the Israeli capital market for many years, mainly through his investment in Bank Hapoalim (TASE: POLI). In 1997, together with Ted Arison and other investors, he acquired a controlling share of the bank. A few years later, Steinhardt asked to sell his shares, but the Bank of Israel opposed the change in the makeup of the controlling shareholders. In the end, in 2006, he sold his shares to Shari Arison, Ted's daughter and heir, who was becoming increasingly involved in Bank Hapoalim at the time.
Looking back, are you happy with your decision to sell your Bank Hapoalim shares?
"Definitely!" Steinhardt answers emphatically. "First of all, I sold them at a very good price, if you take into consideration how things have turned out at the bank since then. I try not to flaunt my feathers, but price matters, and if you sell something at a good price, and its price subsequently falls, you feel smart. And frankly, to my mind the bank's achievements in the last few years have not been glowing."
What is your opinion of the wave of debt settlements in Israel's corporate bond market?
"I am not familiar with all of the minute details, but at the level that I understand the subject, it sounds ugly. In the US, if you commit to something, then you stay committed. You can't give a haircut and run away. I get the feeling that some of Israel's wealthy are not behaving properly."
What do you think about the social protest that took place in Israel last summer. Do you think it was just?
"It was an achievement for Israeli democracy. There are too many rich people in Israel who have been blind to the needs of others, and this needs to be changed. There are many ways to bring about this change. If it occurs through taxation, in other words, if the rich pay more and the poor pay less, I think that this will be a great achievement. I hope this happens, it is a true test for Israel's future."
Steinhardt is a great supporter of the protest in Israel, but his sympathy vanishes when it comes to the Occupy Wall Street protests. "The protest in Israel was more authentic, and was carried out by real middle and lower-class citizens. Occupy Wall Street did not represent the average American as much, and therefore I am less empathetic towards it," he said.
Despite the criticism, Steinhardt believes that there is room for social change in the US.
"There is a belief in the US, that people who provide capital, and who in essence are taking a risk with their own capital, need to pay lower taxes and to receive more special privileges because they are providing capital. I think this is wrong. I think that the wealthy should pay more taxes, and I hope that we reach this decision peacefully and not the hard way."
"There is no feeling of optimism today"
Steinhardt is not optimistic about the global economy. He lists one risk after another that he sees today in the global economy, beginning with Europe, which he believes is already in a recession: "It has deep fiscal problems, which in many respects are unsolvable."
He follows up with the US market, which he speaks of cautiously, saying, "I do not foresee the US stock market becoming a real bull market. People there are not optimistic, and they find all sorts of reasons to be pessimistic. The average citizen almost never invests in shares."
But more than he is worried about Europe and the US, Steinhardt is worried about the geopolitical situation in Israel. "Maybe you don't hear about this in Israel, but in the last few months, there have been more articles in the US written about a possible Israeli attack on Iran than about any other international issue," he says.
Do the US media consider this to be a very likely scenario?
"Neither you, nor I, nor anyone else can know if this is just talk, or if it's serious, but the US administration is taking it very seriously. If this scenario really does materialize, it could be a changing point by any measure, not just in the sense of a violent conflict, but also in terms of the availability of oil and international relations."
How is this affecting Israel's image?
"You have no idea how many American Jews do not go to Israel because they feel that it is not a safe place. You wake up, go to sleep, do your daily activities without feeling this concern. But Jews in the US, or at least a large portion of them, truly feel that Israel is a dangerous country."
Where do you currently see opportunities?
"If you believe that profit forecasts are relatively accurate, then shares are currently trading at prices that are reasonable, or even low. Usually shares are considered cheap when people are not able to look ahead to the future, and refuse to give long-term forecasts. Today, people are not offering these long-term forecasts, since they do not have the confidence to do so."
Where are you investing your money today?
"Under my mattress (he chuckles). I have invested in an Israeli oil company called Genie Energy Ltd, and in several other companies without thinking too much. I have also invested in real estate in New York and in KCPS and Company."
KCPS is a global investment management company with headquarters in Tel Aviv. Steinhardt's son, David, founded the company and is currently president and the head of the New York branch. Michael is a member of the board.
How do you foresee KCPS in the future?
"The company operates in an extremely competitive market. Financial management in Israel and worldwide has turned into a very competitive and tough market, and in this competitive market, KCPS is succeeding nicely. Its performance is excellent, its management is top quality, and it is still a young company with a long road ahead of it. I would say that it is good company to take a risk on, as I have done in several ways. However, you have to understand that the world in which it operates is extremely competitive, and its progress is two steps forward and one step back."
The icing on the cake is Birthright Israel
In 1998, together with Charles Bronfman, Steinhardt founded Birthright Israel, through which tens of thousands of young people from around the world visit Israel with the goal of getting to know Israel better.
A year ago, alongside leading Israeli and American business people in high-tech and finance, Steinhardt initiated Birthright Israel Excel, an arm of Birthright aimed at fostering young Jewish leaders in the US business world. Steinhardt is the co-chairman of the project alongside Ernst & Young Israel managing partner Yoram Tietz. Steinhardt and Lynn Schusterman are the main funders of the program.
Participants in Birthright Excel are outstanding American college students who are interested in finance and technology, and who study at leading US universities such as Stanford and Yale. Participants go through a rigorous selection process, and out of thousands only 40 are chosen.
Each student has a mentor assigned to him or her from leading Israeli companies, including Israel Corporation (TASE: ILCO), Check Point Software Technologies Ltd. (Nasdaq: CHKP), Retalix Ltd. (Nasdaq: RTLX; TASE: RTLX), Sequoia Israel, and Tnuva Food Industries Ltd.. Upon their return to the US, each participant is assigned an American mentor, a senior business person who is also a philanthropist, and is active in the Jewish community and Israeli causes.
"I usually give a speech to these students and try to set them up on a date with someone, but I'm not usually successful because they are too serious," laughs Steinhardt, and adds that these young people are the cream of the crop. "This project warms my heart and is a wonderful Jewish experience. But you Israelis are so used to such exciting things."
Published by Globes [online], Israel business news - www.globes-online.com - on March 5, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012