market folly

Legendary investor Stanley Druckenmiller recently came out of the shadows and gave a rare interview on a myriad of topics.  Given the popularity of that post, we thought it'd be interesting to see what lessons we could learn from this great investor so we looked at Druckenmiller's interview in Jack Schwager's book The New Market Wizards to see what we could learn.

Druckenmiller formerly ran hedge fund Duquesne Capital as well as George Soros' Quantum Fund, and he saw annual average returns of 30% since 1986.  He managed around $12 billion before shutting down Duquesne.

A few years ago, he returned Duquesne outside capital and now runs a family office.  Many of his former employees founded PointState Capital with money from Druckenmiller and former Duquesne investors.


Lessons From Stanley Druckenmiller

In Jack Schwager's book The New Market Wizards, Stanley Druckenmiller provides the following bits of wisdom:


On achieving a superior track record:  "George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs ... The way to attain truly superior long-term returns is to grind it out until you're up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year."


On what he's learned from George Soros: "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 ... 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 ... As far as Soros is concerned, when you're right on something, you can't own enough."


On when to take more risks: "Many managers will book their profits when they're up a lot early in the year.  It's my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive."


On analyzing companies: "I particularly remember the time I gave (the research director) my paper on the banking industry.  I felt very proud of my work.  However, he read through it and said, 'This is useless. What makes the stock go up and down?' That comment acted as a spur.  Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock's price movement as opposed to looking at all the fundamentals.  Frankly, even today, many analysts still don't know what makes their particular stocks go up and down."


On using both valuation and technicals:  "I never use valuation to time the market.  I use liquidity considerations and technical analysis for timing.  Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.  The catalyst is liquidity, and hopefully my technical analysis will pick it up."


Learning from mistakes/Trading stories:  The book has too many great stories to list, but one of the main lessons Druckenmiller learned is that you can be right on a market/trade and then still lose your ass if excessive leverage is involved.

Druckenmiller tells numerous stories involving Soros and Paul Tudor Jones.  These tales are really remarkable, including one where he was 130% long the day before the 1987 stock market crash, yet he still was up for that month due to his ability to quickly recognize his error, minimize losses, and reverse his positioning.



Definitely pick up the classic book The New Market Wizards if you haven't read it, as it's full of wisdom from Druckenmiller as well as other traders/investors.