Last November, Stanley Druckenmiller appeared in a lengthy interview on Bloomberg (here). In that interview, he discussed his experience during the tech bubble:
“I bought the top of the tech market in March of 2000 [after quickly making money in the same space in mid-late 1999] in an emotional fit I had because I couldn’t stand the fact that it was going up so much and it violated every rule I learned in 25 years. … I bought the tech market very well in mid-1999 and sold everything out in January and was sitting pretty; and I had two internal managers who were making about 5% a day and I just couldn’t stand it. And I put billions of dollars in within hours of the top. And, boy, did I get killed the next couple months.”
A Wall Street Journal article (here) from that time covers just what “killed” means:
“When the sell-off finally did begin in mid-March, Soros Fund Management wasn't ready for it. Still loaded with high-tech and biotechnology stocks and still betting against the so-called Old Economy, Soros traders watched in horror when the tech-heavy NASDAQ Composite Index plunged 124 points on March 15 while the once-quiescent Dow Jones Industrial Average leapt 320 points. In just five subsequent days, the Soros firm's flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss… By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%.”
The most shocking part of the story is that they weren’t blindsided by this development: internally, managers at Soros Fund Management (including Mr. Druckenmiller) had been predicting the “inevitable sell-off of technology stocks” – one that “could be near and could be brutal.” And yet, their final conclusion was to bet billions and billions of dollars on technology stocks; the allure of making “easy” money outweighed how illogical they all knew it really was.
Mr. Druckenmiller’s actions in the late 1990s/early 2000s are reminiscent of Isaac Newton during the South Sea Bubble (from a 2009 article by MIT professor Thomas Levinson – here):
Starting at £128 in January, the price for South Sea securities rose to £175 in February and then £330 in March. Newton kept his head – at first. He sold in April, content with his (quite spectacular) gains to date. But then, between April and June, share prices tripled, reaching over £1,000 ... which is precisely when he could stand it no longer. Having "lost" two-thirds of his potential gain, Newton bought again at the very top, and bought more after a slight decline in July… The bubble burst, and South Sea share prices collapsed to roughly their pre-bubble level. Newton's losses totaled as much as £20,000, between $4 million and $5 million in 21st-century terms. … After the disaster, he could not bear to hear the phrase "South Sea" mentioned in his presence. But just once he admitted that while he knew how to predict the motions of the cosmos, “he could not calculate the madness of the people.”
I’m simply astounded to see such brilliant people act in a way that is so wonderfully illogical. Both investors couldn’t stand to watch as others made money – and they went back in with full knowledge that they were purely speculating (we know from Druckenmiller’s words that he didn’t think these companies were cheap; we can presume the same with Newton considering he had sold the same securities a few months earlier at roughly one-third of their current price).
If you’re like me, you’ve been a net seller of stocks as valuations have become more optimistic; as equity markets have continued higher, that means cash has been a pretty significant drag on returns. In these scenarios, it seems like the “opportunity cost” is consistently on the rise; as I noted in an article a few months back, I think the opposite is true:
Although it appears that cash becomes an increasingly expensive alternative to equities as markets roar higher, the reality is the exact opposite; future rates of return are being sacrificed for current gains, a trade-off that acts like a rubber band as its stretched further and further from equilibrium (only to come shooting past balance to the other extreme at some point down the road). Those who fail to recognize this undeniable truth are most susceptible to becoming its ultimate victim.
I have no interest in betting on equity movements in the near term; I think I have the skills and temperament to find a handful of winners every few years, along with a time horizon that’s different than most market participants (presenting opportunities that others, even if they see them and agree with the conclusion, will still pass on). If I can stay squarely in that arena, I think I can do well over time (and the few times I’ve drifted have usually been costly mistakes).
That likely means underperforming – possibly by a wide margin – in periods like the late 1990s; if I was back in 1720, I would’ve missed out on The South Sea Company’s historic run as well. I don’t think we’re currently on par with those periods, but we’re heading in the right direction; if that happens, it’s seems probable that investors like myself will underperform this time as well.
The time to decide whether you’re okay with that is before the frenzy begins.
If you conclude that watching other people get rich due to a vertical climb in market prices is a temptation that you simply can’t ignore, it’s best to know sooner than later; if that's the case, here’s to hoping that you’re better at timing the market than Stanley Druckenmiller (Trades, Portfolio) and Isaac Newton were.
