Stanley Druckenmiller: The Investor Who Beat Warren Buffett

But is he the best ever?

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I am trying to write more for our Substack/newsletter. I have put down a note on my whiteboard to “write 30 minutes uninterrupted for the newsletter” every day. We’ll see how it goes.

Writing is much more enjoyable than making YouTube Shorts and comes with the benefit of growing the podcast audience. As much as I care about quality podcast episodes, we would also like to grow our audience in order to grow advertising revenue.

This week, we have published a podcast episode on Stan Druckenmiller. It is the fourth episode in our series covering famous investors (links to previous ones on Ray Dalio, Norbert Lou, and Terry Smith). At the end of this post, you’ll find our full show notes with all the quotes and snippets we took for the episode.

Druckenmiller is someone I have followed for many years, so it cleared up my thinking to sum up his philosophy/strategy for this episode.

I have three takeaways from studying Druckenmiller. These are broad lessons that can be taken in a variety of different ways depending on what type of investor/trader you are.

First up…

Don’t invest in the present. Invest in the future

When speaking publicly, Druckenmiller repeatedly talks about investors needing to focus on the future, not the past. Not what a company is earning today or has earned in the past. The future is the only thing that matters.

“It doesn't matter what a company's earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today”

Forget the sentiment today. Forget what people are saying on CNBC about yesterday’s earnings. Analyze what the situation for the asset could be in 18 months. If it looks cheap relative to that future scenario, it could be an investment that performs well.

I believe this is how he was able to make a lot of money on Nvidia riding the AI boom.

Think in probabilities

No investment has 100% certainty of success. No investment has 100% certainty of failure. Each asset that we can buy has various potential outcomes. Some are more likely than others.

Druckenmiller has a lot of skill not just in visualizing the future, but assigning different probabilities to various future scenarios and having that inform his portfolio allocation.

The inputs may be complex, but the process to making an investment is simple. If he believes the probabilities are high for future scenarios that lead to good returns, he puts his money into it. There is not much else to it.

Again, I think this is how he viewed the recent successful bet on Nvidia. Did he have 100% certainty that Nvidia would go up 4x due to the AI boom? No. But he thought it was somewhat likely and understood that if an AI boom occurred over multiple years, Nvidia was well positioned to put up phenomenal numbers.

If you see a fantastic risk/reward opportunity, bet BIG

Like Buffett, Druckenmiller opposes the consensus opinions on diversification. He invested like this from the beginning (putting 50% of his portfolio in treasuries in 1981, for example) but learned to get even more aggressive from his mentor George Soros.

“The first thing I heard when I got in the business, not from my mentor, 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. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere.”

“the mistake I'd say 98 percent of money managers and individuals make is they feel like they got to be playing in a bunch of stuff”

I think a lot of investors could benefit from at least considering these anti-diversification thoughts. Of course, we don’t have to go put 100% of our portfolio in one trade like Druckenmiller. It just irks me when I see someone put out a great thesis and then see the position is 3% of their portfolio.

If you find a great idea, your best idea that you believe has fantastic upside and minimal downside. Perhaps the best idea you’ve found in 10 years. Do you really want to make it a 3% position? I think that is a waste of capital.

When looking at the process of other investors — something I have been doing for a while as I waste my time on Twitter/X, read Value Investors Club, and interview people on the podcast — I think most understand that they need to think in probabilities. Some might be very bad at it, but they understand it is useful for them to know there are various future outcomes for a stock.

However, I think most investors are HORRENDOUS at the other two qualities Druckenmiller espouses. Time and time again I see people say “well, this company grew revenue by 30% and has 30% margins and looks cheap, it’s a buy.”

It doesn’t matter what revenue growth was in the past. It has zero meaning. What matters is what revenue growth will be over the next few years, what margins will look like, how much cash will be returned to you vs. the price you pay, etc.

The past is meaningless. Returns will be dictated by what happens when you own the stock, not before it. So many individuals look at past financials and think that is what stock analysis is because it is comfortable. But you need to get a little uncomfortable and start thinking about what the future might hold.

This is what we can learn from the legends like Druckenmiller.

I would put myself in this camp. I want to get better at visualizing the future as opposed to looking at historical financials and the trailing earnings ratio. Everyone can look at these numbers and come to the same conclusion. But the returns won’t come from what happened over the past three quarters. It is about what will happen over the next three quarters, three years, and three decades.

Practically everyone you meet is terrible at portfolio management and position sizing. I fell prey to this as well when starting out. Luckily, once you start reading Buffett/Druckenmiller it is an easy fix to make. Just listen to them.

Almost all the problems come from too much diversification. We all own way too many stocks. You don’t need to own more than 20 companies, and probably no more than 10.

Afraid to put 10% of your portfolio into a stock? Ok. Well, you probably shouldn’t own it then.

Does the volatility of a concentrated portfolio scare you? Ok. Well, you should probably just own a 60/40 portfolio and get the market return with no work. Go to the beach.

If you are going to put in the hours of research to find cheap individual stocks, why destroy all chances of outperforming by equal-weighting into 30 positions? You’re just a running back who completed a 90-yard run and then kneels so the team can kick a field goal at the one-yard line. What’s the point of even playing?

Readers of this newsletter and listeners of the Chit Chat Stocks Podcast are likely searching for individual stocks that can put up strong absolute returns. Ask yourself: Am I hamstringing my potential simply due to too much diversification?

I can already hear the comments and narratives in the readers’ heads:

“This is insane. I should only own 10 stocks? That is not enough diversification! It’s too risky!!!”

My response would be: Why do you care so much about diversification? If you do, buy a set of index funds. The point of looking at individual stocks — spending hours and hours every week — is to get outsized returns and build a nest egg to give you the financial flexibility for yourself and your family. Faster than you would with index funds, I guess.

If you are too diversified, you are almost guaranteed to meet the returns of the index. You are telling yourself “I want to put in all this work but make sure I don’t reap any of the rewards.” It’s asinine, frankly. And illogical.

Does running concentrated come with more risks? Yes, that’s the point. But that’s why you put in the work.

The only caveat is that some people may own dozens of starter positions but have the majority of their portfolios in 10 stocks. I think this is a fine way to go about it, but not my style. I hate clutter in all forms.

All three of these lessons relate together. You need to analyze what the future might look like for a company, think in probabilities about the future for it, and consider the optimal position sizing for the asset in your portfolio.

There’s not much else to it.

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Show Notes (unedited)

“Buffett in the last 30 years has compounded just under 20 percent. A thousand dollars 30 years ago would be $177,000 today, 24 up years and six down years of which three of the six were more than 20 percent…our speaker tonight if he invested $1,000 30 years ago, today it would be $2.6 million before taxes and after taxes, because people say hedge funds don't do a very good job, they're not tax efficient, $300,000 still. Thirty years, no losses.”

(Ryan) Who is Stan Druckenmiller and how did he become such a prominent fund manager?

Stan Druckenmiller is a professional fund manager, lead investor at the Duquesne Family Office, and previous portfolio manager (CIO?) of the Soros Quantum Fund. 

Before getting into his investing career, I think it can be fun to study what his early life was like.

Stan Druckenmiller was born in 1953. Until he was 9, he lived in a few small towns in South Jersey, then when his parents split he moved to Richmond, Virginia with his father who was a chemical engineer. 

He was never really a great student (interesting how that differs from Norbert Lou): “The first thing I'd say very clearly, I'm no genius. I was not in the top 10 percent of my high school class. My SATS were so mediocre I went to Bowdoin because it was the only good school that didn't require SATs”

So he attended Bowdoin College, which is a small liberal arts college in Brunswick, Maine, and there he studied English for the first two years because his goal at the time was to one day become an English professor. However, he says that during college, he was having a hard time understanding the financial section in the newspaper so he decided to take an economics course, and he instantly fell in love with it. He then went on to major in economics as well and I believe attended the University of Michigan for grad school. 

However, he ended up dropping out there and working construction for 6 months before getting a job at Pittsburgh National Bank through his first wife’s step father. He started there as a chemicals and banking analyst, but when he was 27 his boss at the time (which he now calls his first mentor) decided to promote him to Chief Investment Officer of the entire Pittsburgh National Bank.

Here is a long quote about it from an excerpt of a speech:

While he was in charge there he made a big investment that worked out that we’ll talk about in a little bit, but I want to carry on with some more of his backstory. 

After his successful bet he was asked to give a presentation at a dinner in NY. Someone at that dinner came up to him and recommended that he should start his own investment firm instead of working at a bank. He said he didn’t have any money, so the guy said well I’ll pay you $10,000 a month just to talk to you.

So after he made a little bit of money off this consulting business, and when he started trying to raise money to start his own investment firm. After about a year and a half, he had raised $900,000 in committed capital and decided to start Duquesne Capital Management. This was in 1981 and he was 28 years old at the time. 

Eventually, he came across George Soros (he says he “sought him out as a mentor”), and decided to work under him. So starting in 1988, Druckenmiller began managing the Quantum Fund for George Soros while also running Duquesne. 

(Brett) What did he learn from George Soros?

First off, in a speech he gave at a private event, he gave an important piece of advice that I really like. He says “If you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It’s not even close.”

And so for him, that was George Soros. 

So what did he learn from him? Well during a speech he gave at USC he said “If there’s one thing I’ve learned from him, it’s that when you’re right, and you know something, you really feel it, you can’t have enough.”

He went on to say:

“For those who follow baseball, I had a higher batting average; Soros had a much bigger slugging percentage. When I took over Quantum, I was running Qantum and Duquesne. He was running his personal account, which was about the size of an institution back then, by the way, and he was focusing 90% of his time on philanthropy and not really working day to day. In fact a lot of the time he wasn’t even around. And I’d say 90% of the ideas he were using came from me, and it was very insightful and 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. And again it’s because he was taking my ideas and he just had more guts.”

(Brett) Performance stats:

Druckenmiller’s stats are simple to me. For 30 years through 2010, he posted an average of 30% annual returns for 30 years. That is how someone who started with him for $1,000 would turn into $2.6 million (pre-tax). That’s $26.2 million if you put in $10k and $262 million if you put in $100k. Of course, taxes matter but the return firepower is (literally) off the charts of what the efficient market hypothesis people would say is possible. 

Famous Investments:

• (Ryan) 1979 Oil Bet: Shortly after being named CIO of Pittsburgh National Bank, the Shah of Iran goes under. Which meant that it looked like the price of oil was going to shoot up. He says “I’m 26 - 25, excuse me. I don’t have any experience. I don’t know anything about portfolio managers. So, I go well, this is easy. Let’s put 70% of our money in oil stocks and let’s put 30% in defense stocks and let’s sell all our bonds.” The list he proposed went up 100% while the S&P was flat. That’s when they named him CIO.

• (Ryan) 1981 Treasury Bet: Shortly after he started Duquesne, Ronald Reagan became president and he named Paul Volcker to run the federal reserve. As many people know Paul Volcker was absolutely keen on taming inflation. Inflation at the time was 12% and everyone thought it was going to go higher. Druck describes the situation:

“Paul Volcker had other ideas. And he had raised interest rates to 18% on the short end, and I could see that there was no way this man was going to let inflation go. So I had just started at Duquesne, I had a small amount of new capital. I took 50% of the capital and put it into 30-year treasury bonds yielding 14%, and I owned nothing else… And sure enough, the bonds went up despite a bear market in equities. Right out of the chute I was able to be up 40%.”

• (Brett) 1992 British Pound: This is probably the investment Druckenmiller is most well-known for. “In 1992 in August of that year my housing analyst in Britain called me up and basically said that Britain looked like they were going into a recession because the interest rate increases they were experiencing were causing a downturn in housing. The same time, if you remember, Germany, the wall had fallen in '89 and they had reunited with East Germany, and because they'd had this disastrous experience with inflation back in the '20s, they were obsessed when the deutsche mark and the (unint.) combined, that they would not have another inflationary experience. So, the Bundesbank, which was getting growth from the (unint.) and had a history of worrying about inflation, was raising rates like crazy. That all sounds normal except the deutsche mark and the British pound were linked. And you cannot have two currencies where one economic outlook is going like this way and the other outlook is going that way. So, in August of ‘92 there was 7 billion in Quantum. I put a billion and a half short the British pound”

• (Brett) ‘06 Housing Market: “An analyst from Bear Stearns came in and showed me some subprime situation, the whole housing thing, and we were able to figure out by mid-'05 that this thing was going to end in a spectacular housing bust… we were lucky enough that it turned out to be correct. My returns weren't very good in '06 because I was a little early, but '07 and '08 were - they were a lot of fun.”

Philosophy: How would we sum up his overall investing strategy?

(Brett) I think Druckenmiller’s philosophy is actually very difficult to pin down, unlike someone such as Buffett who has articulated what he has done and explained why the strategy works and why he owns what he owns today.

But with Druckenmiller, if we piece together what he owns and what he has talked about working for him in the past, I think his strategy is:

• Asset agnostic. Don’t be afraid to invest in equities, fixed income, currencies, or commodities

• Thinking in probabilistic scenarios and waiting or a fat pitch

• When the fat pitch arrives, act like “a pig” and bet much bigger than the diversification heads would say you should

“The first thing I heard when I got in the business, not from my mentor, 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. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere.”

“the mistake I'd say 98 percent of money managers and individuals make is they feel like they got to be playing in a bunch of stuff”

Brett topic: Pre-momentum

One way I think Druckenmiller makes money is getting into assets before they hit a momentum trend, being able to identify KPIs (or whatever he thinks will drive the stock to start ripping) before everyone else.

What is momentum?

“Momentum is the speed or velocity of price changes in a stock, security, or tradable instrument. Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend. Stocks that tend to move with the strength of momentum are called momentum stocks.”

If you look at his oil/defense bet in the late 70’s to something like Nvidia today, I think Druckenmiller is great at getting into a secular growing or momentum stocks before they turn into momentum stocks. 

I think this quote sums it up perfectly:

“It doesn't matter what a company's earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today”

Brett topic: Thinking in probabilities and position sizing

Related to the pre-momentum idea, it looks like Druckenmiller takes this future visualization idea and lays out probabilities for various scenarios. You can see it today when he talks about various macroeconomic scenarios in interviews. He is always saying “this is my view but there are various probabilities I need to weigh.”

Thinking in probabilities helps him visualize potential downside scenarios, which he says has helped him with his track record over the years:

“I think my record is knowing not when to play as much as when to play”

When there is a lot of downside, a lot of uncertainty for future scenarios, or general cloudiness on what a sector/asset class will do, Druckenmiller tends to either stay out of it or try to stay neutral for his portfolio. He plays not to lose. For example, right now he says that is what he is doing in foreign currencies (although I won’t pretend to know anything about that market).

But when the opposite occurs, and Druckenmiller can get a conviction in an outcome occurring with a minimal downside (i.e. the fat pitch) he will swing big. Bigger than most people would think to do. 

Aside on dotcom stocks:

“I was short $200 million in dotcom stocks. I lost $600 million. All of them eventually went bankrupt”

Today: Nvidia, cloud computing, and weight loss drug investments

Let’s take a look at Druckenmiller’s equity portfolio today. 

He has positions in Nvidia, Microsoft (and has been long the cloud for a while but recently sold Alphabet and Amazon) as well as Eli Lilly. To me, it looks like he is playing the AI secular trend as well as the weight loss drug secular trend.

In a 2023 interview, he talked about Nvidia and AI:

“if this is a secular move, you don’t just have a 10 month trend”

Druckenmiller would likely admit he is not an AI software or semiconductor expert. But it seems like he saw Nvidia as a company that was a secular theme that – if AI is real – would turn into a potential 10 bagger and outperform the market greatly. Did he weigh a fantastic risk/reward opportunity perfectly? 

Closing: What can we as individual investors learn from Stan Druckenmiller? Is he the best investor ever?

(Brett) I think there are some good takeaways from Druckenmiller’s philosophy. I have a few major takeaways I think individuals would be smart to take away from:

• Don’t invest in the present. Invest in the future (and look at various time frames)

• Think in probabilities, not black and white (lesson: even if an outcome occurs don’t just “result” from what happened cough cough Carvana)

• If you see a fantastic risk/reward opportunity (minimal downside, fantastic upside) bet BIG. Bigger than

Also, over the long-term I would like to learn how to invest in more asset classes. Or, perhaps just a focus in equities and on shorting. Everyone hates shorting but I think that is just the bull market talking and it can be quite helpful for anyone looking to do well through all market environments if you can properly build up the skill and risk management. 

Here is what he says about people getting into the business of investing:

(Ryan) To be clear, yes, there’s tons to be learned from Druck. But I think for the average person, it would be very dangerous to replicate his style. Especially with some of the macro bets. But here are some of the things I took away:

• Learn several asset classes: “I was also lucky to travel across asset classes. I traded commodities, currencies, bonds, and equities, and it gave me the discipline, if I didn’t have a good idea in equities, I was happy to have no equities.”

• Try to forecast: “Never, ever invest in the present. It doesn’t matter what a company’s earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that’s where the price will be.” 

• Pay attention to world events: This is something I probably don’t do enough. But if you just actually think through the implications of world events, you can probably benefit in the short-term. “The thought that every event in the world affects some security price somewhere I just found incredibly intellectually (unint.) to try and figure out what the next puzzle was and what was going to move what.”

• Don’t be afraid to concentrate your portfolio: I know this is dangerous advice for most people, but if you are truly at the level where you have seen enough investment pitches go by, that you can identify a fat pitch from a mediocre one, then don’t be afraid to bet heavy. “The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch that basket very carefully.