“The idea of caring that someone is making money faster [than you] is one of the deadly sins. Envy is a really stupid sin because it's the only one you could never possibly have any fun at. There's a lot of pain and no fun. Why would you want to get on that trolley?” -Charlie Munger (Trades, Portfolio)
Envy is well known throughout society; it can also be a problem for investors who can’t bear the thought someone else is beating them.
In chapter 10 of “Big Mistakes: The Best Investors and Their Worst Investments,” Michael Batnick told the story of Stanley Druckenmiller (Trades, Portfolio), one of the most successful investors ever and a human being who could not resist the tech stock bubble even though he knew better.
Batnick began the chapter by discussing the 1998 book, “Winning the Loser’s Game,” by Charlie Ellis. The central theme was that professionals win by doing the right things, while amateurs win by not making mistakes: “In a winner's game the outcome is determined by the correct actions of the winner. In a loser's game, the outcome is determined by mistakes made by the loser.”
Applying that idea to investing, Batnick argued amateurs buy after stocks advance and then get rid of them once they go down. He quoted Cullen Roche, “The stock market is the only market where things go on sale and all the customers run out of the store.”
Batnick went on to posit that amateurs make, in baseball lingo, “unforced errors” at the tops and bottoms of markets because of the optimism and pessimism they stir up in popular culture. On the other hand, “Great investors do things differently than the rest of us. They buy what others don't want and sell what others crave.”
One of those “great investors” was the professional Druckenmiller, who is said to have generated 30% a year for 30 years. He reflected on his beginnings this way:
“The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long”term returns in our business that are superior is by being a pig.”
The guru began his career at a Pittsburgh bank at the age of 23. Within two years, in 1978, he was promoted to director of equity research. A couple of years later, after giving a presentation at a conference, an audience member asked what he was doing at a bank when he could be consulting for $10,000 a month.
In 1981 he made the jump, starting his own firm, Duquesne Capital Management, with $1 million worth of assets under management. Batnick wrote, “Druckenmiller has one of the most interesting investing stories I’ve ever come across.” For example, he was bullish in the first half of 1987 while the market was rising, up 45% by August. At that point, Druckenmiller became bearish and not long after, the market reversed by 17%.
He believed the market would head up again once it reached 2,200, so he went from net short to 130% net long—just in time for Black Friday on Oct. 16. He reacted quickly: The market began falling on a Friday morning and by lunchtime, he had reversed himself again into a net short position. As a result, he was properly positioned when the market plunged again the following Thursday. Batnick wrote, “Druckenmiller was 130% net long going into the worst day in the history of the U.S. stock market, and still made money in October 1987.”
Dreyfus hired him in 1987, but he left in 1989 for what was described as his dream job, working for George Soros (Trades, Portfolio); there he managed the Quantum Fund. In 1992, he discovered the opportunity to make what would become a famous trade, shorting the British pound and “breaking the Bank of England.”
Druckenmiller planned to invest almost all the $7 billion in Quantum into Deutsche marks, to set up the short position. Soros thought the deal was so good that they should up the ante and commit 200% of their assets, which they did. When the pound crashed, the two enjoyed a billion-dollar payday.
Of course, Druckenmiller also had losing positions, including $2 billion lost in Russia in 1998. Still, Quantum returned 12.4% for that year and, as Batnick noted, it avoided the fate of Long-Term Capital Management.
But his biggest mistake was with the tech bubble. In 1999, he shorted expensive internet stocks, but the price of those stocks kept rising and cost him $600 million. He felt he was out of touch with the market and so hired one, and then two, young traders. With the extra capital he allotted to them, they got the fund back in shape and finished the year up 35%.
Still, he was getting cold feet, so he took the gains from 1999 and invested in the new euro currency. That proved to be a bad call and as he was getting burned on it, his two new employees were making a great deal of money in tech stocks. Batnick noted, “Druckenmiller's pride got in the way of his fear of the tech bubble. He didn't want to be upstaged by these young new traders, so he plowed his money back into tech.”
For example, he doubled his bet on one tech stock, VeriSign (VRSN, Financial), to $600 million, confident it would hold up if the bubble burst. It did not, so the Quantum Fund lost 21% in 2000 while Soros Fund Management lost $7.6 billion. Batnick reported that Druckenmiller remained humble and lighthearted; at a 2017 conference, the guru told the audience, “Last year, I thought you should get out of equities and buy gold. That's why I'm introducing today and not presenting.”
Batnick wrote:
“Druckenmiller knew exactly what he was doing – he just couldn't stop himself. 'I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basketcase and couldn't help myself. So maybe I learned not to do it again, but I already knew that.'”
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
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