“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 Wizards, Jack 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:
- “Don’t kid yourself, it never gets easier.” (Irrelevant Investor)
- Trump win yields investing wisdom (Bloomberg)
- A tale of two investors (Bps and Pieces)
- Investment costs have never been cheaper (Fortune Financial)
- Overconfidence and the scout mindset (Abnormal Returns)
- Keep the faith (Jonathan Clements)
- Off the lows (Reformed Broker)
- Have your money goals changed in the last 24 hours? (NY Times)
- As an investor, the responsibility for self-control is in your hands (WSJ)
