Back in 1992, George Soros broke the Bank of England. By shorting the British pound, he forced the UK to leave the European Exchange Rate Mechanism and made a $1 billion profit in the process.
Stanley Druckenmiller – the man behind the trade
However, what is less well known is that Soros did not spot the currency opportunity. That honour went to Stanley Druckenmiller, who had joined Soros‘s Quantum Fund back in 1988. Before Soros headhunted him, Druckenmiller had already established an impressive reputation, including as head of the equity research group at Pittsburgh National Bank, and as head of the Dreyfus Fund. He also had his own fund, Duquesne Capital Management.
What Druckenmiller noticed seems simple – that the Bank of England did not have sufficient foreign currency reserves to support the pound, which in turn meant that they could not raise interest rates without running into problems. However, no one else spotted it, Druckenmiller was right, and the rest is history.
The Soros years and beyond
Druckenmiller continued to enjoy enormous success throughout the 1990s. With one of the industry’s best trading records, he was one of the most recognized and revered traders on the planet. Much like Soros, he adopted a macro-economic approach and at one point was managing over $12 billion in assets in his own hedge fund in addition to his responsibilities with Soros. It was only in 2000 that he left Soros after taking a bath on technology stocks. However, he continued to run his own hedge fund, returning an average of 30% a year without any losing years until 2010, when his funds was down 5% and he decided that it was time to retire – but not before putting his fund into the black for the year.
The Wisdom of Druckenmiller
So, what words of wisdom does Druckenmiller have for other traders?
First of all, he believes that you may continue to be aggressive when you are trading successfully. While many fund managers may lock in profits if they are doing well early in the year, Druckenmiller believes that when you have won the right to trade aggressively, you should continue to do it.
Second, he recalls when, early in his career, he produced a report on the banking industry. Although he was highly satisfied with his work, his director looked at the paper and said it was useless. It might have contained all sorts of fascinating fundamental data, but it didn’t show why stock prices went up and down. Since then,
Druckenmiller has focused on identifying factors that are highly correlated with price movements – and says that many analysts still don’t do this.
Third, Druckenmiller emphasizes that you have to maximize your successes. It doesn’t matter how many times you succeed or fail – it’s more important to measure your successes and failures. If you believe strongly in a trade, you may want to be aggressive. On the other hand, he warns against using too much leverage, saying that a good trade can still lose huge amounts of money if you over-leverage it.
Finally, he cautions against using valuation to time your market entry. For Druckenmiller, the two most important factors are liquidity and technical analysis. Valuation may tell you how far the market may move, but liquidity is what catalysis market movements – and technical analysis is what detects liquidity.
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