I found Jack Schwagers interview with Stanley Druckenmiller in The New Market Wizards to be interesting right off the bat, because Druckenmiller is from my hometown of Pittsburgh, Pennsylvania. Having that going for him, Druckenmiller’s interview wasn’t littered with general market quotes like some of the previous interviews, but he did share quite a few stories about specific trades.
I thought this look at his first hand experience was fascinating. It was also interesting to read about the things he learned from his mentor, George Soros.
Top Five Quotes From Market Wizard Stanley Druckenmiller:
“Right then and there, we changed our investment philosophy so that if we ever felt bearish about the market again we would go to a 100 percent cash position.”
The ability to go to cash is one of the greatest assets available to the individual investor. It is also one of the least likely advantages for new investors to capitalize on. The idea that you don’t have to be fully invested at all times is a very difficult concept for some investors to grasp. It is also difficult to develop the discipline to be able to sit on the sidelines for an extended period of time.
Druckenmiller came to this realization after a situation where he was absolutely correct about his assessment of the market, but still lost money. After realizing that the market was heading lower, Druckenmiller cut his portfolio back to being only 50% invested. Despite being cautious here, had he been more cautious and moved his entire portfolio to cash, he would have saved himself from losses.
“It’s my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive. The years that you start off with a large gain are the times that you should go for it.”
Here we see Druckenmiller’s aggressive side. He discusses how when most fund managers show a large profit on a year, they attempt to simply tread water until the end of the year so that they can book those profits. Much like Bill Belichick and the New England Patriots, Druckenmiller sees no reason to ever let up on the throttle. He is out to score as many points as possible.
A comparison here can be drawn to pretty much any sport. When you get out to a big lead you don’t want to go all defense and change the style that got you that lead. The same is true for investing. It is also important to remember that you should take advantage of any opportunities you find because they may not be available in the lean years.
“The way to build long-term returns is through preservation of capital and home runs.”
Jack Schwager pointed out in the post interview writeup that we have seen almost every interview so far in the Market Wizards books discuss preservation of capital or cutting losses, but this is one of the first interviews to explicitly state the goal of HUGE winners. This idea fits in very nicely with my style of trading. One big winner can pay for many small losers.
“I’ve learned many things from him, but 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. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.”
We have seen this line of thinking quite a bit in the Market Wizards series. The general concept that most of these traders adhere to is that you have to get out fast when you are proven to be wrong and stay on for the ride when you are proven to be right. In my experience, this is easier said than done. It is also easier to see in hindsight.
“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. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”
This is the kind of comment that you don’t usually see from a fund manager. Normally we hear people regurgitating the phrase “pigs get slaughtered.” Here, we have Druckenmiller saying the exact opposite. He is advocating being a pig, so long as it is at precisely the right time.
The mentality of “going for the jugular” is something that has always been missing from my trading. I generally trade with a scared approach and go in hoping merely to come out alive. I look at Druckenmiller’s approach as being more like a Gladiator looking to conquer everything in his path. Perhaps this killer instinct is what I have been missing in my trading.