Billionaire hedge fund manager Stan Druckenmiller does not mince words. In a speech to the Lost Tree Club in Palm Beach in January of this year, he calls himself a “pig” and says that advice to create a diversified portfolio is “misguided.” He also recaps his highly profitable call on the collapse of the housing market back in 2006, and warns that the ongoing easy money-fueled five-year plus rally in global financial markets could “end very badly.”

Stan Druckenmiller – The importance of a mentor

One if the first subjects Stan Druckenmiller brought up during his January speech was all the valuable lessons he had learned from his mentors. He mentioned his first mentor, Speros Drelles, investment chief at Pittsburgh National Bank, taught him to focus on the future rather than the present with investments, and also that central bank policy moved markets even more than earnings.

Druckenmiller also highlighted fellow hedge fund billionaire George Soros as his second mentor, noting that Soros taught him the importance of making just a few big bets (that is, holding concentrated positions instead of being diversified).

Stan Druckenmiller – Soros and the big bet on the British pound

In his discussion of his experiences with the legendary Soros, Druck related the story of how he identified the British pound as a near-lock short back in 1992 and told Soros he was making a huge bet ($5.5 billion) on it. Soros told him “Don’t be a fool, you should put at least 200% our net worth ($15 billion) on this once in 20-year opportunity.”

According to Druckenmiller, “We didn’t get the whole $15 billion on, but we got on enough that I’m sure that some people in the room have read about it in the financial press.”

Stan Druckenmiller – 80% of “big money” made on investments relating to central bank mistakes

[drizzle]Going back to the lesson he learned from his mentor Speros Derlles, Stan Druckenmiller notes that probably 80% of the “bib, big money” he’s made has been on an investment somehow related to central bank policy.

Druck said he knew as early as 2004 that the U.S. Fed was “making a mistake with way too loose monetary policy.” He notes they did not yet know exactly how this obvious mistake was going to play out, but they knew it would “end badly.”

It took another 18 months for things to come to a head, but in an interesting historical note, the retired founder of Duquense Capital Management admits it was the report of a single Bear Stearns analyst in mid-2005 that set him on the track of the housing bubble and subprime crisis. He started making his bets soon after, but pointed out that he really did start making serious money until well over a year later, and 2007 and 2008 were the real paydays.

Stan Druckenmiller – Buying Internet stocks in January 2000 was biggest mistake

In the Q & A Session after his speech, Druckenmiller was asked what was his biggest mistake. He laughed and said it was a “doozy.” He went on to describe how he knew that tech stocks were way overvalued in 1999, so he shorted them and lost $600 million, but then went long on tech to end up 35% the year. He said he still knew things were crazy overvalued, but he eventually bought in just before the tech boom crash in 2000, and lost almost $3 billion.

Stan Druckenmiller worried things could end badly

“I just have the same horrific sense I had back in ’04,” Druckenmiller said in his speech. “Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there.”

“I know it’s so tempting to go ahead and make investments and it looks good for today,” he also commented, “but when this thing ends, because we’ve had speculation, we’ve had money building up four to six years in terms of a risk pattern, I think it could end very badly.”

Despite his pessimism, however, Druckenmiller said he was not “net short” stocks at this point.

“You have to be on alert to that ending badly. Is it for sure going to end badly? Not necessarily. I don’t quite know how we get out of this, but it’s possible,” he pointed out.

See the full speech below.

Stan Druckenmiller Macroinvestors
Via Goldman Sachs Research

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