WB019: Invest, Invest, Investigate

I really enjoyed a recent interview between Stan Druckenmiller and Nicolai Tangen on the latter's In Good Company podcast, which I wrote about in a previous article. Within 6 days of its release, the interview has become In Good Company's most watched video on YouTube.

Stan Druckenmiller is a legendary American money manager best known as the brains behind the trade that forced the Bank of England to devalue the British Pound in 1992, in an event known as "Black Wednesday".

Druckenmiller's trade netted George Soros' Quantum Fund - which Druckenmiller managed at the time - a reported GBP1 billion (~US$1.3 billion) in profits.

Druckenmiller's investing record is astounding. In his decades of investing he has never had a losing year and has made money at an annualised 30% per annum. The latter means you roughly double your investment every 2.4 years.

Invest first, research later

My big takeaway from the interview was Druckenmiller's "invest, invest, investigate" strategy, which he learned from George Soros.

The premise is to first invest a material, but not concentrated, position in a potential investment, then follow up with deep research. Based on your final research findings, you make a call whether to hold, add or cut your losses.

Druckenmiller's strategy relies on humans being highly incentivised to get hands-on with things we have a vested interest in. To me, having money on the line is one example. Another example is having a leaking apartment you need to urgently resolve.

That said, this strategy goes counter to the textbook approach of value investing, which encourages deep research before making an investment. This is what Warren Buffett is famous for.

In theory, value investing is a great strategy and an essential skill every investor must hone. But the reality of the markets is, that by the time your research is done, your potential investment may have risen substantially in value. This makes it unlikely you will invest after all.

To be clear, Druckenmiller's strategy is not for amateurs.

Firstly, you need incredible discipline to cut losses when the "investigate" part of the strategy tells you the investment was a bad idea.

Secondly, you need to have a good feel for the markets to know where and when to make your initial bet.

And finally, you must be objective enough not to fall into the confirmation bias trap, where you cherry pick your research to justify a poor investment.

Successful money managers are also human

Another aspect of the interview I liked is how Druckenmiller comes of as being very human, despite being such an accomplished money manager.

He candidly shares that big portfolio drawdowns, i.e. falls in portfolio value, still making him incredibly anxious. He gives a simple example to explain why big drawdowns are dangerous: when a stock falls 50%, it needs to rise 100% just for you to break even. That's how big a hole you need to get out of.

What I also learned was how Druckenmiller's poor performance during the 2000 dotcom bubble affected him so much that he liquidated all his positions and took a sabbatical. He is human, after all.

These are refreshing insights that I seldom get to hear from money managers who frequently appear in the media (Bloomberg, CNBC etc.) for their expert views. And mind you, many of them are less accomplished than Stan Druckenmiller.

I guess many money managers need to project strength and positivity for the sake of the investors who are backing them. Doing otherwise is bad for their fund management business.

Whatever it is, it takes a lot of humility to be frank about ones losses and weaknesses. I guess it also helps that Druckenmiller doesn't manage outside money anymore, and is therefore more at ease to speak his mind.

To do the 52-minute interview full justice, finance geeks should watch it in its entirety. For aspiring finance geeks, you should watch it now and rewatch it when you finally become a finance geek.

And for non-finance geeks, the interview may give you some food for thought on the world of investing, even though it won't resonate with you now.

--Ends