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
The financial markets are complex and dynamic, and actively managing money as an investor or a trader demands energy, tough work and a lot of discipline.
Portfolio Manager Bruce Bower understands this, and in an article last year from SMB Capital’s SMBU website, Bower shared his early years of experience when he first joined the investment industry as a trader.
Many of the lessons and interesting insights shared by Bower echoes throughout what has been shared thus far on BillionaireInvestor. Here are some of the key takeaways that we can learn:
(1) Find A Mentor
Trading and Investing is a skill, half art and half science. Like any other skills in life; whether its cooking or writing or martial arts, they all require huge amounts of discipline, time and effort to be able to acquire, much less master them. A surgeon becomes good at surgery through years of study and experience. A musician studies and practices for many hours everyday to become proficient at his instrument. Being a good trader or investor demands the same amount of discipline, practice and effort – making money is simply not as easy as what many think. But all forms of skills requires a mentor to impart and facilitate. Finding a good mentor for your investment journey will shorten your learning curve, and guide you along the way.
Bower got a job at Citibank’s currency and fixed income trading desk, and he found a mentor in one of Citibank’s best proprietary traders, and he utilized the opportunity well to learn as much as he could.
(2) Stick To Your Investment System: “It’s OK not to have a position”
Be sure to take positions that meet your investment criteria. Traders are often biased towards action and believing that they always must have a position. However, if one diligently read about the great traders of our time, one will undoubtedly realize that they spend most of the time researching and taking positions that only strictly meet their investment criteria. The size of their positions are usually directly proportionate to the amount of conviction they have with regards to their views of the market.
Another way to view this is to always monitor the risk/reward metrics of any investment idea that is being generated. If the upside potential / reward isn’t worth the downside risk then it simply doesn’t count as a good trade. Some traders like to go for 2:1 reward/risk ratio: meaning that they only take trades that have an asymmetric profile in terms of profit and loss.
(3) Sit With A Position If It Remains Valid
Traders are often impaired by emotional and psychological fears when faced with adverse price movements or when the market moves against their positions. A healthy and bullish price movement often contains corrections along the way, normally within a range of 20 – 30%. Traders who ride through the move normally feel anxious when corrections occur – with good reason, as traders would want to lock in their gains.
One way to ensure that one could stay in a position is to list out the reasons for the investment thesis or the reasons for taking a particular position. Markets are prone to adverse movements from a lot of ‘noise.’ When markets do move against positions or undergo corrections, Bower said that the Citibank trader that he understudied often goes through his investment thesis again to see if it still remains valid. If it is still valid, the trader holds on to his position. If there are market events that knocks out the reasons and hence makes the position invalid, it simply has to be cut. Going through the list of reasons for taking the trade will help you to remain disciplined and calm when your emotions might otherwise get the better of you.
There are other insights shared by Bower, and the above three points are major and familiar points that have been echoed time and time again by the investment industry and their professionals.
For more of what Bower has to say, here is the link to the full article: http://www.smbtraining.com/blog/what-i-learned-from-the-best-trader-at-citibank
For more information about Bruce Bower and his work, here is the link to his website: http://howoftrading.com/