Winning It Back

Ian Cassel Blog, Educational 4 Comments

It’s human nature when you lose money quickly you want to make it back twice as quick. During these times it’s important to slow down, keep focused, and stick to your strategy.

Stanley Druckenmiller is one of the best investors ever. A GOAT [Greatest of All Time]. 30 years never having a down year. 120 quarters, only 5 were down; 30% compounded over 30 years.

Druckenmiller rarely gives interviews. But recently, he sat down with Kiril Sokoloff of Real Vision to discuss trading, investing, philanthropy and life. I’m a Real Vision subscriber. You can subscribe [HERE].

Real Vision has given me permission to republish this one Q/A below from this interview. I’ve underlined certain portions for emphasis.

Sokoloff: One of the great things I understand you do is when you’ve had a down year, normally a fund manager would want to get aggressive to win it back. And what you’ve told me you do, you take a lot of little bets that won’t hurt you until you get back to breakeven. It makes a tremendous amount of sense. Maybe you could just explore that a little bit with me.

Druckenmiller: Yeah, one of the lucky things was the way my industry prices is you price– at the end of the year, you take a percentage of whatever profit you made for that year. So at the end of the year, psychologically and financially, you reset to zero. Last year’s profits are yesterday’s news.

So I would always be a crazy person when I was down end of the year, but I know, because I like to gamble, that in Las Vegas, 90% of the people that go there lose. And the odds are only 33 to 32 against you in most of the big games, so how can 90% lose? It’s because they want to go home and brag that they won money. So when they’re winning and they’re hot, they’re very, very cautious. And when they’re cold and losing money, they’re betting big because they want to go home and tell their wife or their friends they made money, which is completely irrational.

And this is important, because I don’t think anyone has ever said it before. One of my most important jobs as a money manager was to understand whether I was hot or cold. Life goes in streaks. And like a hitter in baseball, sometimes a money manager is seeing the ball, and sometimes they’re not.

And if you’re managing money, you must know whether you’re cold or hot. And in my opinion, when you’re cold, you should be trying for bunts. You shouldn’t be swinging for the fences. You’ve got to get back into a rhythm.

So that’s pretty much how I operated. If I was down, I had not earned the right to play big.And the little bets you’re talking about were simply on to tell me, had I re-established the rhythm and was I starting to make hits again? The example I gave you of the Treasury bet in 2000 is a total violation of that, which shows you how much conviction I had. So this dominates my thinking, but if a once-in-a-lifetime opportunity comes along, you can’t sit there and go, oh well, I have not earned the right.

Now, I will also say that was after a four-month break. My mind was fresh. My mind was clean. And I will go to my grave believing if I hadn’t taken that sabbatical, I would have never seen that in September, and I would have never made that bet. It’s because I had been freed up and I didn’t need to be hitting singles because I came back, and it was clear, and I was fresh, and so it was like the beginning of the season. So I wasn’t hitting bad yet. I had flushed that all out.

But it is really, really important if you’re a money manager to know when you’re seeing the ball. It’s a huge function of success or failure. Huge.

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Comments 4

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  1. I have a vague memory of reading a book by Kiril Sokoloff thirty years or so ago in which the phrase “three step and stumble” featured prominently, the theory being when the Fed raised interest rates three times in a row, or engaged in other tightening, statistically speaking the market was due for a major fall.

    The Fed just raised interest rates three times in a row.

  2. Thanks for the post, great analogy seeing the ball, and the importance of not trying to make up for losses. Reminds me of Livermore’s military analogy of doing trades to test the market in a stock, just like an army sends out patrols.

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