How To Trade Like Stan Druckenmiller, George Soros And Jim Rogers

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. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… 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 the basket very carefully. -Stan Druckenmiller

This quote comes from a speech Druck gave at the Lost Tree Club back in January. I’ve read the speech twice now and I’m sure I’ll read it many more times (and recommend you do the same – here’s the link). For those who don’t know, Druck generated 30% average annual returns at his hedge fund over a period of 30 years and never had a single down year – possibly the best track record ever.

I’m sharing this quote with you here because I think it’s central to what we are trying to accomplish. I want to help you close the gap between being an average investor and being a phenomenal investor. That’s my whole purpose with this thing.

But there’s one huge road block we run into. Being a “pig” isn’t easy. For many people, it may not be possible. As Druck explains in his speech, when he and Soros famously shorted the British pound they put 200% of the fund into that one trade. 200%! They put every penny into the trade and then borrowed against every penny to lever up their returns. That’s what he means by ‘being a pig.’ How many people could put this trade on and still sleep at night? This also goes against everything we are taught when learning how to invest. Step one is to diversify, right? What they don’t tell you is the greatest investors of all time look at step one and call, “bullshit.”

The reason phenomenal investors are able to forego diversification like this is because their skill set is different. They are capable of doing the research such that they can have a high level of confidence in an idea. And when they are very, very confident about an idea they can afford to swing for the fences because their batting average with high confidence ideas is very, very good (and, probably even more important, they’re also willing to admit when they’re wrong and get out quickly). And why put any money into anything else when you have one really, really good idea?

Most investors can’t do this simply because they just don’t have very good batting averages. So bridging the gap between being an average investor and being a phenomenal one is first raising your batting average. This requires both knowledge and experience. The second step is trusting your knowledge and experience when you find a high confidence idea (while also limiting the damage when you’re wrong). And when I say, “high confidence idea,” I’m thinking of a quote from another Soros disciple, Jim Rogers:

One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do… I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up… I wait for a situation that is like the proverbial “shooting fish in a barrel.” -Jim Rogers

You have so much confidence in an idea that it feels like a “sure thing” or as sure of a thing as there possibly can be in the financial markets. This is how I felt about Herbalife back in January and that’s exactly what I did. I put about half of my own personal liquid assets into that one trade. That’s what “being a pig” meant to me.

Bridging the gap between being an average investor and phenomenal investor is a process. The average investor should be diversified in order to protect them from their own lack of investing skill. But the phenomenal investor throws it out the window and says “I’ll just be in cash until there’s a trade opportunity so compelling that I simply can’t resist. Then I’ll back up the truck.” (This is probably why guys like Jeff Gundlach and Mohamed El-Erian are mostly in cash right now in their personal accounts – they’re waiting for a compelling opportunity and don’t feel compelled to hold anything just to stay invested.)

It’s up to each individual to determine where they are in the process and how their personal risk tolerance should dictate how they implement these ideas in their own investments. A broad ETF portfolio, like any of the models presented in Meb Faber’s new book, is ideal for a beginning investor or one with a very low tolerance for risk. Just via the cost savings versus traditional investment methods this will vault her performance far ahead of most other individual investors. More advanced and aggressive investors, however, should focus more on the most attractive individual risk/reward opportunities they can find based upon their own analysis because that’s where I believe the Druck/Soros/Rogers-type returns lie.

A version of this post first appeared on The Felder Report PREMIUM