Variant Perception: Sears Holdings and Financials

Michael Steinhardt was possibly the best hedge fund manager of all time, with an enviable track record. When analysts brought an idea to him, he required that the idea be different from the market consensus. Of course, the idea had to have solid logical backing as well. He called this variant perception.

I follow this tenet religiously. Every time I have an idea, I try to figure out what the consensus is. If my idea is in line with the consensus, I drop the idea. If everyone agrees with me, what am I bringing to the table? Even if I turn out to be correct, my idea is probably already priced into the stock.

The action this week reminded me of why I follow this tenet. Sears Holding (SHLD) missed earnings estimates by a mile. Many smart investors that figured out that Sears Holdings was going to miss were short the stock. However, the stock actually rose because so many people were short the stock. If those investors would have looked around they would have seen that everyone was bearish on Sears Holdings. They could have saved themselves the pain if they paid attention to Michael Steinhardt’s rule.

The same thing happened to Ultrashort Financials (SKF). We have had a drumbeat of bad news in the financials, yet the stocks are creeping higher. Who is not expecting more write downs? What do these hedge funds that are short the financials know that the market doesn't?

I am not suggesting just going against the crowd for the sake of it. The largest profits are in trades where you are both correct and against the crowd.

Comments

[investor88:]

Good insight. Sears may have risen because of the short squeeze arising from Sears buying some usd400m+ of its own stock [see related SeekingAlpha article dated today].

2008 Aug 31 10:35 AM

[Augustus:]

Isn't it great that SHLD is able to repurchase stock while having the credit lines reduced by Bank America. Sure seem odd to me that in a failing retail climate this company would be expending capital on shares.

2008 Aug 31 11:33 AM

[2houndz:]

Thinking of SHLD as a retail venture is probably not accurate. When Eddie lampert bought Kmart it was more of a real estate play. Considering where the operation stands today, if he gave a hoot about retail, he would be using this capital to bring those stores into the 21st century. I'm not claiming to understand it, but retail is not his game.

2008 Aug 31 06:19 PM

[sclarksons:]

Short Squeeze??? with only 35 million shares sold short out of a float of 35 million outside of the top five holders.

2008 Sep 01 04:52 AM

[mouth:]

dead cat bounce

2008 Sep 01 11:49 AM

[je:]

Anyone long SHLD isn't worth reading. Look at the charts. This isn't a buying opportunity this is a selling opportunity.

What a crappy company.

The stock went up because Lampert bought it up.

2008 Sep 01 01:56 PM

[kkin365:]

I thought SKF is supposed to go up when bad news hit financials. No?

2008 Sep 01 08:16 PM

[Rocknbob:]

to kkin365: yes . that the general idea. At these levels I think SKF is a steal. may go back to 190+. Problem is at what rate?

2008 Sep 02 10:14 AM