In a previous Investor Profile, we covered the famous and controversial George Soros.
Less well-known by the general public are some of Soros’ associates. Stanley Druckenmiller is one of the most prominent among them.
Druckenmiller is as much an investing legend in investing as his former boss. His returns have been stellar, and he hasn’t had a single losing year for 30 years. He has learned a lot from Soros and distilled that knowledge into his own very successful method.
Druckenmillers investing style and philosophy are unique, and unlike Soros, he is still an active investor and is very vocal about his opinion on markets. So there is a lot that can be learned from him, both from his past and current positions.
Who Is Stanley Druckenmiller?
Druckenmiller started his career as an oil analyst before becoming head of equity research at Pittsburg National Bank. He would, later on, be the manager of various investment funds, including its own Duquesne Capital Management. In 1988, George Soros hired him to become the lead portfolio manager at Quantum Fund.
He was from an average middle-class family, and his parent divorced when he was in elementary school.
Druckenmiller Track Record
Something really exceptional about Druckenmiller is that he never had a full year down. He had some losses, of course, but he would always turn back to a profit before the year’s end. This put him in a class of his own.
He himself claims it is partly luck. And while another 12-month-long timeframe might have pointed to a loss, this is still exceptional.
The other remarkable metric is an average of 30% yearly return over three decades. This is more than almost ANY other famous investor, especially considering the size of the portfolio he manages and the duration of the outperformance.
To put things in perspective, 30% yearly for 30 years can turn $10,000 into $26,000,000.
So even if his method could be hard to replicate, there is for sure something to learn from him.
“Breaking” the Bank of England
Under the direction of George Soros, Druckenmiller would be instrumental in “breaking the Bank of England” on Black Wednesday.
This was a bet that the exchange rate of the Pound Sterling could not be maintained relative to other European currencies, especially the German Deutschmark. Soros and Druckenmiller were sure the government decided parity was too high and could not hold, considering the poor performance of the British economy.
Initially, Druckenmiller wanted to put a $1.5B bet on this idea. But when Soros saw that the downside risk was limited, he pushed him to be much more daring. Druckenmiller would end up with a $10B short bet against the Pound Sterling.
This was a considerable amount, using borrowed money to bet more than the entire value of the Fund at the time. The key factor was that the downside risk was limited to a small amount, but a successful bet would provide a gain 40x bigger than the potential loss.
The timing had to be perfect, and Soros waited for 15th September 1992, when the President of the German central bank, the Bundesbank, declared that the pound was too strong and had to devalue. With everything already in place and prepared, Soros and Druckenmiller would move into action, putting massive pressure on the Pound.
Together with the Bundesbank declaration, this shattered the market trust in the ability of the UK to defend the Pound.
When the UK government had to devalue the pound by the largest amount ever recorded, Soros’ fund registered a $1B gain in just one day. And this was in 1992, when $1B was a much more considerable amount of money than today.
Druckenmiller admits that he actually wasn’t completely sure that the British Pound would fall, but what he did understand was the risk/reward ratio. He knew that if he was wrong, it would cost 50 basis points, but if he was right, he would make 2,000 basis points. This was a 40:1 risk/reward bet. Druckenmiller says this is actually the opposite of the gamble the Federal Reserve did in 2020 with its huge stimulus injection.
Druckenmiller investment strategy is complex, often mixing short and long bets on stocks, as well as extensive usage of leverage, especially for futures and currency trading (as we saw on the “breaking” of the Bank of England).
His focus is on predicting future market conditions in an 18-24 months timeframe.
His approach is a top-down method, focusing on macroeconomic imbalance more than the individual results of specific companies. Despite bearish tendencies, he considers that 90% of his money came from long bets.
His method relies on a few key points, with exceptional results also coming from an excellent execution of these basic principles:
- Concentrated bets: a few quotes from Druckenmiller explain it best:
- Multiple asset classes: he would simultaneously handle 5-6 asset classes. This helps him find opportunities and provides good liquidity if he changes his mind. It also allows him to avoid a sector entirely if it is turning risky.
- Leverage & asymmetry: The idea is to win a LOT more when right than you lose when wrong. Adding leverage helps as well, supersizing the gains. The Bank of England bet was the perfect example of it. It is also remarkable that back then, Druckenmiller had to be encouraged by Soros to take an even larger bet. “The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.”.
- Mental flexibility: he claims he is often wrong and sells as soon as a stock situation proves to have changed unexpectedly “if I have a thesis and it doesn’t bear out — which often happens with me, I’m often wrong — just get out and move on.”
These method key points were partially picked from a longer 20-minute interview.
Druckenmiller’s Opinions on Current Markets
Druckenmiller is a veteran trader, and the past outperformance of the market and inflationary environment reminds him of previous similar periods. As a result, he thinks that “There’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ’66 to ’82 time period”.
As he started his career in 1977, this is a warning we should maybe listen to, as he saw the end of that period firsthand.
He also believed in 2021 that we were in a new tech bubble, something the subsequent crash in tech equity and more recent tech layoffs might confirm. In the same interview, he also worried about geopolitics, focusing on Taiwan.
Of course, the man he admitting a natural pessimism and bearish tendencies, so we should take this into account. What is important is that he was never a doomsayer, either. Until now?
I am open minded to something really bad. This is an analysis harder than you’ve ever faced in 45 years, so please be open minded, because this not a story we have seen before so the outcome is not predictable.
We might see inflation, we might see deflation, it could be no growth like 1966-1982 or something much worse like the 1930s.
Interestingly, he is rather positive about crypto as an asset class and admits he missed most of its spectacular rise.
The main reason behind his support of the crypto sector was because of the quasi-religious devotion of its supporters and the reckless money printing by the Fed under Jerome Powell. He is also not too sure how to play it, suspecting that Bitcoin and Ethereum are like Yahoo before the arrival of Google.
You can also see the top holdings of his family office, with the largest positions in Microsoft, Amazon, and Starbucks, but also the copper miner Freeport-McMoran.
Druckenmiller is a fascinating investor for me. He seems to have learned a lot from Soros, combining it with his own natural talent for investing. He describes himself as not so smart or an ace student and says that he had to pick the only university not requiring an SAT score.
What made Druckenmiller an exceptional investor is his mental discipline. He seems to have never made mistakes by getting emotional, except once, when in 2000, he “might have missed the top of the Dotcom Bubble by an hour.”
His mental flexibility allows him to avoid major disasters and got him this legendary result of 4 decades without a calendar year down. The combination of exceptional daring and ultra-cautious risk management is a rare and powerful one.
The scope of his analyses is equally impressive. He studies everything from economic cycles, industry structure, macro environment, and currencies to technological innovation and uses this knowledge across almost all possible asset classes.
By his own admission, the force driving it is more of a passion for investing than greed. I believe it, as his method shows that he clearly mostly drives pleasure from getting it right (or not) and then moving on to the next puzzle.
I think Druckenmiller is a great model to look up to. For most investors, it might never be possible to imitate him perfectly, as most of his results seem to stem from a natural talent as much as training and discipline.
But we are still very likely to grow our performances by learning from him. After all, just a few years down and 15-20% yearly returns would fall well short of this role model. It would still put any investor in the top 5% or maybe even 1%!