In mid-1999, Stanley Druckenmiller found himself in a bind.
Soros’s number two at the Hungarian’s famous Quantum Fund believed the US stock market was in full-on bubble territory. Naturally, he was short tech to the tune of $200m. Druckenmiller was right; valuations were silly. The problem was, however, that the market kept going up. By May, the fund was down 18 per cent for the year.
So instead of blaming the Fed, his luck or retail traders, Druckenmiller did what any good trader does and decided to stop fighting the tape. The Quantum Fund reversed course and went neck-deep long tech, finishing the year up 35 per cent.
Retold by Michael Batnick in his excellent book Big Mistakes, this tale provides a key insight into the trading process of a man, who by some accounts, compounded capital at a mind boggling 30 per cent plus a year for 30 years.
Strong convictions held lightly is a theme that’s repeated itself over his illustrious career. In May 2016, Druckenmiller told investors at the Ira Sohn conference that the “bull market was exhausted” and recommended they ditch stocks and go long gold. The S&P 500 ended up outperforming the pet rock that year, prompting him to joke about his failed trade at the same conference in 2017. By that summer, his family office — Duquesne Capital — was all in on Chinese tech despite flagging structural issues with the country’s banking system a year before. And so on.
Which brings us neatly to a widely reported story from Wednesday, via Bloomberg:
The markets are in a “raging mania” and rising inflation is a big threat, investor Stan Druckenmiller said.
Inflation could hit 5% to 10% in the next four to five years, Druckenmiller said Wednesday in a CNBC interview, adding that the Federal Reserve has created conditions that have sent valuations soaring. Deflation is also a risk, he said.
“Everyone loves a party but inevitably after a big party there is a hangover,” he said. “We are in a raging mania.”
The issue here isn’t so much what Druckenmiller said — he could yet be right or wrong — but the fact it’s presented without the context that he may have woken up this morning and thought the exact opposite.
So perhaps when it comes to forecasts from Stan, and other famous traders, we should remember linguist Roman Jakobson’s quip during the debate as to whether to appoint Vladimir Nabokov as a professor in Harvard’s Faculty of Arts and Sciences back in 1957:
Gentlemen, even if one allows that he is an important writer, are we next to invite an elephant to be Professor of Zoology?