It is said that every investor inevitably has a rough patch, a period of weak to sub-optimal returns. Few demonstrate the consistency over long periods of time. But Stan Druckenmiller’s legend goes that he has NEVER had a ‘down’ year in his decades long career. The famed investor is most known for his ‘bet the house’ short on the British pound along with his mentor George Soros. Nicolai Tangen, the CEO of Norges Bank Investment Management, the world’s largest investment firm, recently interviewed the legend to help us get a peek into his mind. It is worth listening to the interview in its entirety but we feature excerpts that show reasons for his incredible success and ofcourse the episode around the British pound short.
Druckenmiller rants about his misgivings with the Fed and the importance of changing our mind when we are wrong and why the Fed’s forward guidance doesn’t allow it do that:
“…how much of a problem is the forward guidance? It’s a huge problem. My friend, Jim Grant, says they’re forward guidance dependent, not data dependent. It’s a problem because once you do forward guidance, you eliminate your optionality. And I think, Nikolai, you and I being in this business, we know we have to change our mind when we’re wrong.
This Fed has shown over and over again that they think if they change their mind, they’re losing credibility. So it makes them have their hands tied behind their back. I’m wrong all the time I think my record is mainly because when I’m wrong I changed my mind not that I’m always right I’m certainly not. Forward guidance seems to tie them into positions where and eliminate flexibility they need.
…“I’m told by my friends and other investors that I’m entirely unemotional and like, yes, I am told it’s rare. Is that the key to your success, you think? One of them, I think it’s a big part of it. I think again, being open-minded and having humility, the only reason you can change your mind is if you’re not arrogant about a position has mattered.””
On how he got lucky getting in early on the Nvidia trade:
“Honestly, I’ve got young, really good analysts here.…Who are on top of things and they started, we noticed about three or four years ago that the kids that go to Stanford and MIT, the engineers were shifting from crypto to AI. That was the first sign. Then my young partners started talking more and more about AI, I asked them how to play it They mentioned a company called Nvidia, which I thought was a gaming company. I hadn’t done work on a long time
I bought a pretty good chunk of it and then like a month later chat GPT happened. It was just total luck. I had no idea ChatGPT, but the AI drum around here was big enough and the stock was down, I think, from 400 to 150 or something. So that’s how I got started in it. And then once you get started, once we invest in something like that, then we really start to dig deeper and then there was a whole chain of things. We knew it would affect power, we knew it would affect uranium. We just went through the whole chain. It was a pretty easy trend to spot, not unlike the cloud was. These things come in waves.”
On the concept of buy first, analyze later:
“Soros used to call it invest and then investigate. I think I just gave a classic example. I didn’t know that much about Nvidia. I just knew that AI, and I had some people here tell me how to play it. So we bought Nvidia, and then we were in the process of doing a lot more work and then chat GPT happened, but I’ve always had the view that markets are smart, they’re fast, and they’re getting much more so with all the communication and the technology we have today. And that if I hear a concept and I like it, if I wait and spend two or three months analyzing it, I may miss a big part of the move and then psychologically be paralyzed. It’s hard to buy a stock you’re looking at at 100. It’s 160. Even if it’s going to 400, somehow your head is screwed up and you’re waiting for the pullback. So we will buy something, a meaningful position, but not earth-shaking, and then really do the work. If I think we made a mistake, I’ll sell it. If I don’t think we made a mistake, we’ll add to it if we have to. It really focuses in your work and your efforts and your thinking.”
On why it is important to invest looking ahead:
“If you’re dealing with a cyclical company and they’re losing money or they’re not profitable and everybody in their industry is shutting capacity down, it doesn’t take a rocket scientist to try and envision 18 to 24 months out. If nobody’s adding capacity, they may not be losing money anymore. They might be making a lot of money. I have found it’s very important never to invest in the present. Always try and envision the situation as you see it in 18 to 24 months, and then see if you feel things will be differently than they are now, with security prices reflect that. I think that’s probably the biggest mistake investors make is they invest in the present, rather than forward-looking and looking where the puck’s going instead of where the puck is.”
On concentration and the big short on the British pound:
“So what I learned from Soros is when you have conviction, you should bet really big….a partner of mine who mainly traded the European area, he’s in London and he tells me the London housing market is in big trouble and the British economy is in trouble because it’s like most Anglo-Saxon economies at the time,
When the Berlin Wall came down, it probably saved me my job because I probably would have been fired at Soros six months after he went to Eastern Europe had the Berlin Wall not come down. But the Deutschmark went down for two days dramatically because the theory in the market was the Ausmark, which was the East German currency, was going to pollute the Deutsche Mark. I knew German history and knew they were obsessed with inflation because of Weimar Republic, and then that led to Hitler and so forth and so on. So I knew the Germans were absolutely obsessed with inflation. I knew that bringing all these East Germans into the labor supply was going to cause a boom in the economy. So we were very bullish on the overall German economy, and we were very convinced that there is no way the Bundesbank would let inflation, so we were very convinced it would be accompanied by tight monetary policy. So we had shorted the Italian Lira successfully during that period. So when Scott called me, we were already sort of on this Deuschmark journey. We’ve been for a few years. And the British economy is going down and the two currencies are linked.…It was a peg. So I called and asked how much it would cost me to short the pound versus the Deuschmark for six months. It was a half a percent. I think the fund was around seven and a half billion at the time, quantum fund. And I decided to do an invest and then investigate position. So I did a billion and a half or like 20, 25% of the fund, short the pound, long the Deuschmark, figuring I’d probably lose a half percent because the peg and it won’t break within six months But I wanted the position on fast forward Probably about five or six weeks. The day I believe was September 15th….I read the Financial Times and the head of the Bundesbank has written an editorial in the Financial Times, basically saying that the Deustchmark and the pound should no longer be linked. So I decide to take Duquesne and the quantum fund to 100% along the Deustchmark, short the pound, because it’s still a half percent, unbelievably.
So now you’re going to hear vintage Soros. So he happens to be in New York at the time, which he wasn’t always. I go into his office and I explain to him why I’m going to 100 percent. He had a rather large personal account. He traded that and you know, it was 90 90 95 percent overlap told him why I was doing this and he had this unpleasant puzzled look on his face when I’m telling him my thesis that this one economy is booming and they need higher rates this other economy is falling apart they need lower rates that these two currencies shouldn’t be linked and I’m thinking what does he not understand about this because this guy pretty much understood everything and he says Look, this is this is a one-way bet, they come along very very rarely. It’s ridiculous doing 100%. We should put 200% of the fund in this trade.
I think the major thing I learned with him is, it’s not whether you’re right or wrong, it’s how much you make when you’re right, and how much you lose when you’re wrong.”
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