(3rd hand from Stanley Druckenmiller)
Career path and investment process. As you think back on career, are there turning points that you’d be willing to share that helped you or your process evolve?
- Incredibly good fortune – got hired by guy at Pittsburgh National Bank who turned out to be a great mentor. Can’t think of more important thing if you’re young 20s than great mentor. Wouldn’t even look at the salary
- Importantly, his Emotional IQ was below 0. In strange set of circumstances, promoted me at age 25 to 2nd most important person. Then at 26, he got fired and I was CIO running $6bn. So I got my 10k hours as CIO by age 30. I had energy of person in 30s but experience of most people in 40s or 50s when I was 8-9 years into Duquesne.
- Also b/c I was promoted too early, I never really finished my education in fundamental analysis and couldn’t do the job from bottom up
- By default became top down investor. Didn’t follow rules they teach
- Right after I left, Shah of Iran went under
o I said – that’s easy, put 70% of money in oil stocks and 30% in defense stocks and sell fixed income. How hard can this be?
o If I were 35 or 40, wouldn’t have done in 100 years. But the portfolio went up 100% so I was a genius
- Then started Duquesne, in Feb 81, Volker was really turning the screws. Again, I put 50% of money in 30 year treasuries yielding 14.5% and everything else in cash. And it worked out. Taught me that diversification is a bunch of nonsense
- 2-3x / yr money manager will really believe something; and your track record usually very good at those points. Trouble is the other stuff. I learned to just go for it and play with a lot of leverage. Also learned that when you don’t diversify, you pay a lot more attention. So I had a brutal loss tolerance policy. If I put on a position and reason for that position changed, I would be gone.
- So with this ridiculously unconventional and seemingly risky policy, I managed clients’ money for 30 years and never had a down year. But at least 3 times, had >200% of our assets in 1 security. So I like Mark Twain – put all your eggs in 1 basket and watch the basket
- Worst action and best actions as money manager happened in 18-24m
o Had short internet stocks in early 1999 – had waited them to go up 800-900%. Not aol / twc. Companies you never heard of. Within 3 weeks $200m short turned into $600m loss. Couldn’t get out. Illiquid. Real problem. I was down 15%. Very shaken. Realized, greenspan eased b/c of Asian financial crisis. We don’t live in asia. This is unnecessary easing. This stuff is all going to go bananas. So I hired some 20 something year olds b/c they seemed to understand something about new tech and I only understood old tech. so I loaded up on this stuff – went from down -15% to up +42% by end of 1999
o I went into Soros in Jan 2000 and I say “this is ridiculous – Nasdaq at 120x earnings. Selling everything. Going away for a couple weeks.” Come back and these kids and they’re up another 30%. I’m watching the market go up every day and I’m thinking about all this money I would have made. And I’m looking at the phone thinking “don’t do it. Don’t do it”. So I pick up the phone, put $6bn back into tech stocks. A week later, knew I was fricking dead. DEAD. Took me 1mo to clean them out. Lost $3-4bn in a couple weeks. Quit Soros. I was completely devastated. Down like 18%. Sent clients at Duquesne a letter – taking a break. Don’t know if coming back. I’m a mess. Blah blah. May of 2000
o So I go on sabbatical. Go to Africa. Great summer. Labor day – kids back in school. Nothing else to do. I come back. While gone I hadn’t touched any newspaper expect for sports. Didn’t know where the market was. Hadn’t made a trade. Read a bunch of books. I come back and USD is +10%, Nasdaq and S&P almost back to high. Oil prices rising. Dollar’s up. Everything you wouldn’t want is happening. So I call a bunch of clients up and business people and business is falling out of bed. And Greenspan – Fed have tightening directive on. Fed Funds at 6.5%. So I start buying these 2 years at 6.04%. The yield curve was inverted – that was the other problem. So I’m buying them and buying them and the fed just keeps getting more and more hawkish. And I’m not making any money and getting more and more angry. Within a month, every day, I can’t help myself, I know have 350% of this fund in 10 year equivalent, but most of it in 2-5 year treasuries. Long-story short, thing falls out of bed – the economy – I make 45% in the Q4. I keep my record alive. I throw in the towel and it was a happy ending to a horrible 2 years.
o What did I learn? Probably nothing – I knew I shouldn’t have made the phone call! But it reinforced to me that if you just wait, something is going to show up. And when it does, you have to really go for it. I was absolutely devastated and crushed, and when it did, it revived my whole career
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