Described as the “greatest moneymaking machine in history” by investor Scott Bessent (who is currently the Chief Investment Officer of Soros Fund Management), Stanley Druckenmiller (above) stands above and towering among the many legendary and colourful investors that Wall Street has ever produced.
For many in the investment community, Stanley Druckenmiller – George Soros’ partnership is akin to Charlie Munger and Warren Buffett’s partnership.
Inside Steven Drobny’s book Inside the House of Money, Scott Bessent has this to say about Stanley Druckenmiller:
“Stan may be the greatest moneymaking machine in history. He has Jim Roger’s analytical ability, George Soros’s trading ability, and the stomach of a riverboat gambler when it comes to placing his bets. His lack of volatility is unbelievable. I think he’s had something like five down quarters in 25 years and never a down year. The Quantum record from 1989 to 2000 is really his. The assets grew from $1 billion to $20 billion over that time and the performance never suffered. Soros’s record was made on a smaller amount of money at a time when there were fewer hedge funds to compete against.”
It is well known among the investment community that George Soros’s famous bet against the British Pound and the Bank of England in 1992 was originally Druckenmiller’s idea. As Bessent states: “What is most interesting to me about the breaking of the pound was the combination of Stan Druckenmiller’s gamesmanship – Stan really understand risk and reward – and George’s ability to size trades. Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros contribution was pushing him to take a gigantic position.”
Stanley Druckenmiller belongs to the swashbuckling school of discretionary global macro traders of Wall Street, with names like Bruce Kovner, Andrew Law, Paul Tudor Jones, Alan Howard, Louis Bacon all popping into mind when one hears that term.
So what are the key takeaways or lessons that Druckenmiller can offer us when it comes to investing?
(I) Approach the markets with a global, top-down perspective:
Understand that financial markets are intertwined – they are not a machine but a bio-system. Know the interconnections of asset classes and how market participants perceive their behaviours.
To Druckenmiller, a good investor must be willing to invest and trade across all asset classes for investment opportunities. As he mentioned in an interview (see video below); if he sees no opportunity in equities, he is perfectly comfortable in owning no equities at all. Not many investors and even professional money managers are willing to have 0% of their portfolios with no equities even when they see a lack of viable investment opportunities within equities.
(II) Be willing to accept mistakes and cut losses
Druckenmiller is well known for being quick to react when he realise that he is wrong on a position or when his portfolio is positioned wrongly. As a trader, his recovery skills are legendary, being able to recuperate losses quickly and never posting a year of negative returns. The ability to recognise that one is wrong and to react decisively and quickly to it is a hallmark of a great trader. Here is a paragraph from Bessent’s interview about Druckenmiller’s ability to accept his mistakes:
“Druckenmiller flipped the portfolio from short to long, a reversal that saved Quantum in 1999, but then hurt it a few months later in 2000. Druckenmiller finished 2000 up for the year. He went from down 12% in March to up 15% for the year in his own portfolio. If you remember, the Nasdaq dumped in March 2000 but then it almost made a marginal new high in September at which point he changed his mind again, went from net long to net short, and caught the whole move down from September to December 2000.”
(III) Concentrate your bets, go for the jugular
In the interview (see video below), Druckenmiller brings up a point about how in most investors’ portfolios, 70-80% of the returns in a certain year are from 2 or 3 ideas even if the portfolio has 30 – 40 different things or positions. His concept was to put and concentrate into those 2 or 3 ideas that he has the greatest conviction in. Druckenmiller’s main point is that money is made by having concentrated portfolios. This does not mean placing all of one’s eggs in one basket, but rather, to only take positions that one has great conviction about (based on one’s own research and analysis).
As Druckenmiller declares:
“I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.
Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”
Readers have to take note that the above pointers come with an obvious caveat: they are from the perspective of a trader with a discretionary macro investing style. Investors are reminded that they always have to do their own due diligence and proper research.
Here is a recent interview of Druckenmiller which covers his investment career and recent philanthropy efforts:
Readers can also find out more about this legendary macro trader in Jack Schwager’s ‘The New Market Wizards‘.
The graphic image above in this post is taken from Slim Beleggen