In his enjoyable book, The New Market Wizards, Jack Schwager interviewed Stanley Druckenmiller, who formerly managed money for George Soros and later went on to found Duquesne Capital.
One part of the interview that stood out to me is Druckenmiller's recipe for long term success. In his words:
George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs.
You can be far more aggressive when you're making good profits. Many managers, once they're up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you're up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year.
If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.
A few things interest me here. First is an outright recommendation to bow to the short term and manage performance so that it fits within the calendar year. I guess that's driven by the way money managers are paid and evaluated by others.
The idea of forcing the long term average up not through consistent annual performance but through sporadic "home run" years was not the advice I expected. I've never heard a leading investor propose the idea so forcefully before.
I'm not sure what Druckenmiller means by "grind it out until you're up 30 or 40 percent" as that in my mind is a terrific accomplishment on its own. But if you are lucky enough to get there early in the year and are managing returns based on your reporting period, you've got to have tons of courage to push from there to 100%.
I'll be thinking about whether and how to apply this advice to my own investing strategy.
But one last point I want to throw out. In Market Wizards, another Schwager book, Jim Rogers, another former Soros manager, mentioned, "Until we ran out of money, we were always leveraged to the hilt." (After they ran out of money, they'd sell the weakest positions to fund the purchase of new ideas). I wonder if Soros's philosophy applies in the same way to unlevered portfolios such as my own.