Variant Perception: Sears Holdings and Financials

Includes: SHLD, SKF
by: Tsachy Mishal

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 (NASDAQ: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 (NYSEARCA: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.