Druckenmiller: 3 plays for the 'wildest cocktail' in 40 years of investing

James Marlay

Livewire Markets

Stanley Druckenmiller has been running money for the Duquesne Family Office since 1981, and to date, he hasn't recorded a negative calendar year return. No down years in 40, think about that for a minute. Druckenmiller gained notoriety in the early 90s when he and George Soros bagged over $1 billion in profits by shorting the British pound. Today, the market veteran says the backdrop is the 'wildest cocktail' he has seen in 40 years of investing.

"I've been doing this as some kind of chief investment officer since 1978. And this is about the wildest cocktail I've ever seen in terms of trying to figure out a roadmap."

In a recent interview hosted by Goldman Sachs, Druckenmiller discussed the multi-asset approach at the core of this incredible record. 

Image: Stan Druckenmiller, Chairman and CEO of Duquesne Family Office

Druckenmiller made a point of highlighting the incredible amount of stimulus that has been deployed by the United States in response to the Covid-19 crisis.

"The Cares Act added trillions of dollars in fiscal stimulus. How big was it? In three months, we increased the deficit more than if you took the last five recessions combined. And those were big ones. That was '73, '75, the '82 recession, the early '90s, the dotcom bust, and then, of course, the great financial crisis."

Here is a snapshot of his three key plays for the current environment, his view on surging tech stocks, what Druckenmiller believes is the core to long-term investing success, and his singular approach to risk management. 

1) Short long-dated US treasuries 

"I have a short treasury position, primarily as the long end."

Effectively, Druckenmiller thinks the prices in US Treasury bonds are too high and that long term yields are too low.

2) Long commodities: 

"Because the Fed could drive me crazy... I also have a large position in commodities. The longer the Fed tries and keep rates suppressed so they'll have stimulus in the pipeline, the more I win on my commodities."

3) Short the US dollar

"The quicker they respond, the quicker, I might have a problem with my commodities. And then because of the juxtaposition of our policy response versus Asia, I have a very, very short dollar position."

On surging tech stocks

Druckenmiller says that a high inflation environment would be a drag on tech stocks but says comparisons with the bust of 2000 are ridiculous. The veteran investor acknowledges that the combination of high-valuations and rising bond yields is a lousy backdrop for tech stocks. 

Using a baseball analogy where there are nine innings, Druckenmiller says the transition towards The Cloud is moving from the first innings to the third or fourth innings. Citing conversations with management teams of multiple companies, he anticipates a continued acceleration in the transition towards Cloud-based technology.

"Company after company I talk to is actually speeding up the transition because they're going to competitively die if they stay behind within digital transformation."

You'd think that this perspective would benefit the established players like Amazon, Microsoft and Google, stocks that have been relative under performers in recent months. Druckenmiller describes these stocks as the GARP names of the market right now and says they don't look overvalued and are out of favour. However, if the stimulus taps remain fully open, he says the speculative market will continue to run hot.

"If the Fed continues to push the envelope in terms of friendliness, I'm not really too worried about those stocks. If anything, I would think they could keep going somewhat."

Asia over the US for the next five years

Druckenmiller says he has exposure to a raft of Asian markets including China, Japan and Korea that have run hard thus far in 2021. He says he has 'no idea' how they will perform in the short term, but expects the region to outperform over the next five years.

"When I look at how much the United States borrowed from their future, and when I looked at what Asia and how they've handled it, I just think they're the big, big winner coming out of COVID."

A multi-asset approach is the key to success

To have not recorded a negative return in three decades of investing is quite remarkable. However, Druckenmiller is pragmatic and modest when questioned about his recipe for success. He notes that time periods for measuring performance are arbitrary and it just so happens that his calendar year numbers have worked in his favour, despite numerous challenging periods.

He does call out three aspects of multi-asset investing that have assisted his investing returns. These are described in Druckenmiller's words below:

  • "Number one, it can point you in the right direction. And if you really believe something, you can make big, big gains there."
  • "Number two, as a macro investor, currencies and bonds trade 24 hours a day, and they're very liquid, and you can change your mind, which I've had to do a lot in my career because I've been wrong a lot in my career."
  • "Number three, this is more subtle, but it also gives you discipline not to be playing in it around in an area that is dangerous. If you're an equity-only investor, it's your job to be in equities. If you have the latitude to say, I'm just not going to play, it's too complicated, you don't play in them."

An "all eggs in one basket" approach to risk management 

Finally Druckenmiller sketched out his approach to risk management: “I’m very much of the philosophy, which also creates its own discipline: put all your eggs in one basket and watch the basket very carefully. I have found time and time again that every investor has three or four big winners a year, and usually, you know what they are. And where you get in trouble is something you’re not entirely focused on. When you put 50, 60, 70% of your assets or more in one asset class, trust me, you’re focused and you’re more risk-averse than something where you might have five or six, seven in and you can have a blow-up.”

Access the full interview

You can watch the interview with Stan Druckenmiller hosted by Goldman Sachs on the link below, or download a transcript via the pdf attached.

Access the interview

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pdf attached
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James Marlay
Co Founder
Livewire Markets

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