You Are Not Stanley Druckenmiller

“Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.” – Stanley Druckenmiller

Stanley Druckenmiller is arguably one of the greatest investors of all-time. It’s been said that the guy has earned something like 30% annual returns over his career, which stretches back to the 1980s. When Druckenmiller talks, people in the investment world take note.

For the past couple of years Druckenmiller has been a very vocal bear on the markets. He’s shared his worries about the Fed, stock market valuations and economic growth prospects. Here he is just this past summer, at the Ira Sohn conference:

“The conference wants a specific recommendation from me. I guess ‘Get out of the stock market’ isn’t clear enough,” said Druckenmiller from the conference stage in New York. Gold “remains our largest currency allocation.”

The billionaire investor expressed skepticism about the current investment environment due to Federal Reserve’s easy monetary policy and a slowing Chinese economy.

“The Fed has borrowed from future consumption more than ever before. It is the least data dependent Fed in history. This is is the longest deviation from historical norms in terms of Fed dovishness than I have ever seen in my career,” Druckenmiller said. “This kind of myopia causes reckless behavior.”

This was some pretty scary stuff. I’m sure plenty of people at the time thought to themselves, “This is one of the most brilliant investors ever. How could I ignore these warnings?”

Now take a look at what he told CNBC just this morning:

Billionaire investor Stanley Druckenmiller told CNBC on Thursday he’s “quite, quite optimistic” about the U.S. economy following the election of Donald Trump.

“I sold all my gold on the night of the election,” the founder and former chairman of Duquesne Capital said in a “Squawk Box” interview.

He said he’s betting on growth by shorting bonds globally and he likes stocks that respond to growth. He also likes prospects for the dollar, especially against the euro.

It’s been about six months since he told everyone to get out of stocks and into gold and now that position has completely reversed.

The point here is not to show that Druckenmiller was right or wrong on either of these calls. It’s too early to tell and he could change his mind yet again. The thing you have to understand is that Druckenmiller isn’t your typical long-term investor. This isn’t a buy and hold Warren Buffett approach to the markets. He’s a macro trader who makes huge bets, but also changes his mind on a dime.

In his book, The New Market WizardsJack Schwager tells the story about how Druckenmiller pulled a 180 the day before the 1987 Black Monday market crash, only to pull another 180 when it looked like he was initially wrong:

Druckenmiller made the incredible error of shifting from short to 130 percent long on the very day before the massive October 19, 1987 crash, yet he finished the month with a net gain. How? When he realized he was dead wrong, he liquidated his entire long position during the first hour of trading on October 19 and actually went short. Had he been less open-minded, defending his original position when confronted with contrary evidence, or had he procrastinated to see if the market would recover, he would have suffered a tremendous loss. Instead, he actually made a small profit. The ability to accept unpleasant truths (i.e., market action or events counter to one’s position) and respond decisively and without hesitation is the mark of a great trader.

There are very few traders who have the ability to pull something like this off once. I can probably count on one hand the number of traders who are able to pull something like this off consistently over time without completely blowing themselves up.

Druckenmiller and his former boss, George Soros, are one of a kind traders. They’re flexible. They go long and short. They invest beyond stocks and bonds in currencies and commodities. They employ leverage. And they can also make a ton of short-term moves by taking large positions when they see an opportunity.

I’m stating the obvious here, but you are not Stanley Druckenmiller. You are not George Soros. You don’t run a hedge fund that makes macro bets and you aren’t a billionaire. You likely don’t have the temperament or the skill set to pull this off. This is not how regular investors manage their money.

And while they Druckenmiller is brilliant and has an amazing track record, occasionally he is wildly wrong about the markets. It’s just that he can afford to be wrong because he has billions of dollars at his disposal.

Don’t try to emulate someone like Stanley Druckenmiller. When he makes these types of calls you have no idea what’s really going on in his head or when he’ll decide to change his mind again in the future.

Bold macro calls are exciting but the majority of investors are better off ignoring them.

Further Reading:
Why It’s So Hard to Change Your Mind About the Markets

Now here’s what I’ve been reading this week:

 

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  • Each of us have to create investment plans that reflect who we are rather than who we wish we were. That includes considerations of personality, emotions, analytical ability and how much time one has to manage one’s money; in addition to risk tolerance.

    Nick de Peyster
    http://undervaluedstocks.info/

  • The 21st Century has ushered in an era of computing that has helped in the innovation of objective, evidence based tactical asset allocation combined with the use of fund products that can concentrate on specific attributes and CAPM factors. The discretionary and subjective “shoot from the hip” style management of the 20th century may be a thing of the past. Even on a buy and hold basis, an investor has been able to invest in a systematically managed portfolio / index of 400 MidCap growth stocks ( MDY ) and outperform legendary managers over varying time frames. This without a 2 & 20 fee structure …. https://docs.google.com/document/d/1Kv2UtpBp7OIK56ZzrkthnV1PDRUA9AmGS6hAmr3Tl6A/edit?usp=sharing

    • disciplined systematic strategies tend to beat discretionary strategies over time.

  • James Yaworski, CFA

    Great points here Ben, here’s another one that goes along with this type of investing mindset. When I was in college and even in the first years after, I was watching shows like Cramer and Fast Money. My dad started watching with me. All these great calls, “Buy this”.. “Sell that”. Not a word was mentioned about the tax impact of such a move. Of course they weren’t going to talk about the ineffectiveness of active management over a long time period. People are slowly waking up to what it means to be an investor, and it’s not the advertised Wall Street broker, waking up early to get a jump on the markets and get an edge.

    The best investors are patient, can control their emotions, understand what it means to invest for long term goals and…most importantly…aren’t treating investing as a game to bring pleasure and entertainment. This last one I think is really the biggest hurdle for many investors. They want this to be a game. They want this to be competition that they win. They want to be entertained and sold stories. If that’s worth under-performing the broad indexes over a long period of time, then I guess these investors are getting what they want.

    • Ben

      Yup, not what you earn but what you keep.

    • The best traders get their thrills at theme parks, not in the markets. And yes, every investor gets what they want; a deep level issue that’s not fun to talk about but I believe it’s true.

  • Gregory

    You are right: I am Gregory:)

  • danieldan

    This article sums up my investing perfectly. I am not the Druck. I have at times deluded myself into thinking that I have that kind of talent only to be reminded of how ordinary I am at this game. The beauty of speculation is that the market swiftly lets you know your place on the battlefield.

    • Ben

      agreed. we all fall prey at some point. knowing yourself gets you most of he way there

    • Hence, the importance of being honest with yourself about your performance goals and what kind of volatility you can stomach. After that, you can design a strategy that both works (according to back-tests and real-time tests) and that works for you (so you can follow it through ups and downs).

  • FUH ЯION

    Not touching my stocks. Not selling my (physical) gold coins either.

  • FUH ЯION

    It is very irresponsible for these short term traders to hijack the language of long term macro and mislead mom and pop savers.

    • We’re all responsible for our money. I believe if a person gets swayed by the opinion of someone else and makes a big bet and loses, then that’s their fault. Sure, it’s not nice or respectful of the person swaying others into investments that may not suit them, but the responsibility falls on each person to make their own decision.

  • Excellent message.

    One thing I’ve learned from many years of trading/investing is that very often when we hear calls being made by high profiled trades/investors such as Gorge Soros, Drunkenmiller, etc, we rarely ask what time-frame are the calls. Similarly, rarely do they tell us what are their time-frames for these calls. Nor the media would ask them about this vital information.

    The time-horizon is the most important factor because timing is everything in trading/investing, and yet, this information is missing in these market calls.

  • Ha ha ha, apparently Druckenmiller is a liar and not Druckenmiller either….

    The headlines today are all about how Druckenmiller lost Soros a BILLION dollars after putting Soros into bearish positions based on Druckenmiller’s own assessment of a bear market.

    Want to know where the market is going, don’t be Druckenmiller, be what he isn’t.