Forget portfolio diversification.
Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, “bet the ranch on it.”
“I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere,” Druckenmiller said during a speech on January 18th at the Lone Tree Club in North Palm Beach, Florida.
In his speech, Druckenmiller described his investment philosophy as that of a “pig” instead of a stock market “bull” or “bear.”
“The first thing I heard when I got in the business… 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 61-year-old founder of Duquesne Capital Management has one of the best long-term track records in the hedge fund world. He retired in 2010 and now runs his firm as a family office.
He explained that if you find a trade that “excites you” tend to have better results.
“And if you look at what excites you and then you look down the road, your record on those particular transactions is far superior to everything else, but the mistake I’d say 98 per cent of money managers and individuals make is they feel like they have got to be playing with a bunch of of stuff. And if you really see it, put all your eggs in one basket and watch the basket very carefully.”
These sorts of trades don’t happen often though. They usually happen one or two times a year, Druckenmiller explained.
During Druckenmiller’s career, he had two mentors and one of them was famed fund manager George Soros.
Working for Soros cemented Druckenmiller’s investment philosophy of “if you see it, you got to go for it.”
Druckenmiller worked a portfolio manager for Soros’ Quantum Fund. He noted that Soros had been spending a majority of his time on philanthropy in addition to running his personal account.
According to Druckenmiller, about 90% of the trades Soros was making were actually his ideas. Soros was crushing Druckenmiller’s returns though.
“I’m a competitive person, frankly embarrassing, that in his personal account working about 10% of the time he continued to beat Duquesne and Quantum while I was managing the money,” Druckenmiller said. “And again it’s because he was taking my ideas and he just had more guts. He was betting more money with my ideas that I was.”
Druckenmiller shared the story of he and Soros’ famous British pound short bet that “Broke the Bank of England.” Druckenmiller said that he had pitched his short idea to Soros and suggested that they put 100% of the fund in the trade.
Soros told Druckenmiller that was “ridiculous” and that they should put more even more on it.
“That is the most ridiculous use of money management I ever heard,” Soros said to Druckenmiller. “What you described is an incredible one-way bet. We should have 200 per cent of our net worth in this trade, not 100 per cent. Do you know how often something like this comes around?”
That trade certainly paid off.