We dusted off our copy of the personally influential collection of interviews in Jack Schwager's The New Market Wizards to glean some insights from Stanley Drukenmiller following the legendary hedge fund manager's retirement yesterday.
Drukenmiller sought his MBA at the University of Michigan, but found it overly quantitative of little practical use. He took a position as an equity analyst at Pittsburgh National Bank, working from 6am and left at 8pm by choice, enjoying the work. Drukenmiller was then recruited by Dreyfus to become a portfolio manager, gaining fame and establishing a relationship with George Soros, eventually leaving to work for the legendary hedge fund manager where he developed his macro trading skills, learning to trade foreign markets, fixed income, and currencies. After managing Soros' flagship fund, he left to start Duquesne Capital Management.
But it was as an analyst where he honed his stock picking skills, which involved a very thorough written analysis that was then challenged by a stock committee. Drukenmiller learned that it's more important to identify the business factors that correlate and lead to stock movement, as opposed to a simple fundamental analysis. Frankly "even today many analysts still don't know what makes their particular stocks go up and down." In one sector it could be earnings, another comp sales, or such as in chemicals, it could be capacity.
For example, "the ideal time to buy chemical stocks is after a lot of capacity has left the industry and there's a catalyst that you believe will trigger an increase in demand. Conversely the ideal time to sell is when there are lots of announcements for new plants, not when earnings turn down. The reason for this behavioral pattern is that expansion plans mean that earnings will go down in two to three years and the stock market tends to anticipate such developments."
Traditional technical analysis and chart reading helped in timing his macro bets along with overall market valuations for context and size of potential moves. This led Drukenmiller to begin shorting in June 1987, citing a dividend yield 2.6% and a record high price to book value. But he cautions,
I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture and changes the direction.
The catalyst is often liquidity, such as central bank tightening. Further aiding his trading during 1987, was the work done by Paul Tudor Jones, whose study demonstrated the historical tendency for the stock market to accelerate on the downside whenever an upward sloping parabolic curve had been broken. "Paul Tudor Jones, a legend in his own right, also built an analogue model showing the strong correlation of period leading up to Black Monday to the 1929 stock market crash."
Some other of his more notable trades were his long dollar trade in the 1981-1984 period, for which he cited a verse in George Soros' book Alchemy of Finance. Soros' "theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tighten monetary policy, the country's currency would actually rise." Drukenmiller shorted the Japanese stock market on valuation, break of the parabolic up move in the Nikkei, accompanied by the BOJ tightening liquidity catalyst.
One of several lessons he learned from George Soros was the need to press when ahead and go for outsized gains.
Many money managers will book their profits when they're up a lot early in the year. 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 the large gain are the time that you should go for it.
He learned 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," shunning popular lore about pigs getting slaughtered, with "It takes courage to be a pig."
Drukenmiller also learned from Soros to put on large bets when he had conviction, citing an instance where he felt proud of a very large position, which Soros chided was too small and needed to be doubled. Soros was right and the trade paid off. He went on to say that Soros is the
best loss taker I've ever seen. He doesn't care whether he wins or loss on a trade. If a trade doesn't work, he's confident enough about his ability to win or other trades that he can easily walk away from the position.
Below are some of the Duquesne Capital Management current positions for some ideas:
Quarter 1 | Quarter 2 | ||||
12,300,000 | $314,880,005 | 12,300,000 (New) | |||
2,686,400 | $29,550,400 | 2,686,400 (New) | |||
1,674,500 | $41,778,776 | 1,674,500 (New) | |||
1,600,000 | $64,912,000 | 1,600,000 (New) | |||
1,429,314 | $8,332,901 | 1,429,314 (New) | |||
1,210,000 | 1,210,000 (New) | ||||
1,201,800 | $37,147,638 | 1,201,800 (New) | |||
845,097 | $17,417,450 | 845,097 (New) | |||
800,000 | $16,448,000 | 800,000 (New) | |||
800,000 | $6,072,000 | 800,000 (New) | |||
953,540 | $224,081,900 | 1,504,640 | $378,462,097 | 551,100 | |
2,819,900 | $11,420,596 | 3,341,900 | $12,565,544 | 522,000 | |
690,600 | $35,945,729 | 1,139,700 | $55,685,743 | 449,100 | |
440,900 | $14,739,287 | 440,900 (New) | |||
433,600 | $16,901,728 | 433,600 (New) | |||
425,000 | $8,755,000 | 425,000 (New) | |||
404,300 | $34,038,018 | 404,300 (New) | |||
400,000 | $20,784,000 | 400,000 (New) | |||
350,000 | $1,039,500 | 350,000 (New) | |||
350,000 | $15,893,500 | 350,000 (New) | |||
300,000 | $18,522,001 | 300,000 (New) | |||
300,000 | $10,431,000 | 300,000 (New) | |||
293,400 | $5,812,254 | 293,400 (New) | |||
264,500 | $12,375,955 | 264,500 (New) | |||
250,000 | 250,000 (New) | ||||
247,300 | $9,412,238 | 247,300 (New) | |||
240,400 | $10,113,628 | 240,400 (New) | |||
211,647 | $8,282 | 211,647 (New) | |||
185,200 | $6,987,596 | 385,300 | $14,009,508 | 200,100 | |
200,000 | $6,504,000 | 200,000 (New) | |||
200,000 | $10,532,000 | 200,000 (New) | |||
200,000 | $14,316,000 | 200,000 (New) | |||
200,000 | $8,656,000 | 200,000 (New) | |||
165,000 | $1,054,350 | 165,000 (New) | |||
150,000 | $1,974,000 | 150,000 (New) | |||
150,000 | $5,080,500 | 150,000 (New) | |||
55,500 | $5,376,285 | 189,100 | $4,859,870 | 133,600 | |
120,000 | 120,000 (New) | ||||
120,000 | $3,879,600 | 120,000 (New) | |||
105,798 | $1,117,227 | 105,798 (New) | |||
100,500 | $3,670,260 | 100,500 (New) | |||
100,000 | $9,319,000 | 100,000 (New) | |||
88,100 | $1,184,064 | 88,100 (New) | |||
85,000 | $799,000 | 85,000 (New) | |||
75,000 | $897,000 | 75,000 (New) | |||
75,000 | $1,251,750 | 75,000 (New) | |||
139,900 | $10,188,917 | 200,000 | $7,218,000 | 60,100 | |
60,000 | $2,955,600 | 60,000 (New) | |||
56,600 | $236,588 | 56,600 (New) | |||
50,000 | $893,500 | 50,000 (New) |
Disclosure: No positions
