I think contrarianism is overrated. I do like it when I have extreme conviction and no one else believes it. It gives me even more conviction.
From Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. Today on the show, the legendary macro investor Stan Druckenmiller in conversation with Iliana Bouzali, Morgan Stanley's global head of derivatives distribution and structuring. Druckenmiller ran Duquesne Capital Management with roughly 30% annualized returns and no losing years from 1981 to 2010. He now leads the Duquesne family office, managing his own capital, and as a philanthropist championing education, medical research, and the fight against poverty. Stan, thank you very much for doing this.
I'm thrilled to be here. I think the world of Morgan Stanley, so it's the least I can do.
Oh, that is a—that's a privilege for us to have you here. I've been privy to some of your equity trades over the past year or so where it did feel you were early. And I'm curious if you can maybe take us through one or two and how they came together.
I'll pick one that might surprise you because it's not very sexy and it's not AI or anything, but I think it's a good example of our process at Duquesne. In the middle of last summer and toward the fall, the AI things started to get, let me say, disturbingly heated and started at least to have some rhyme with what I went through in '99-2000, and we were looking for other areas. The group brought in a company, Teva Pharmaceuticals. So Teva was this apparently—if you didn't know what was going on—boring generic pharmaceutical company out of Israel selling at six times earnings. So we met with the company; big transition going on. Richard Francis had come in, who ran the same playbook at Sandoz. I was very impressed with him; he knew how to take low-hanging fruit in terms of operating efficiency, but much more importantly, he was taking them from a generic drug company to a growth company by embracing biosimilars—replacing the generic drugs, which is why they were at six times earnings, with biosimilars and even some actual drugs. The amazing thing is the investor base were value investors, so they hated it. The stock sat there at six times earnings while you could see this incredible management initiative going on. No one really believed him, and again, growth investors didn't want it because they hadn't made the transition yet. Value investors didn't want it and were selling it because he was doing a growth strategy. So that was about six or seven months ago and the stock was at 16; today it's 32. Not much has happened other than he's proved biosimilars, and they've come up with a drug that's not a generic, so it's rerated from six times earnings to, I guess, 11.5 or 12 times earnings. So it was a whole different set of circumstances, but it encapsulates what we look at. If you look at today, you're not going to make any money. If you try and look ahead at what might change and how investors might perceive something ahead—this one happened a little more quickly than I thought, but that would be a recent name.
Fascinating and very intriguing. I say it's intriguing because I think many people—maybe people not in the market, but certainly many people—when they think of Stan Druckenmiller, they think of a huge macro investor. I have seen you dabble—more than dabble, really go into areas of the market, especially in equities, that are much more niche, such as healthcare or biotech. My question is: do you have to be an expert, an analyst, someone that understands the whole pipeline of drugs to get that right?
Thank God the answer is an emphatic no. But I've got to have an expert at Duquesne who is and trust his judgment. And then I've got to have a feel for how the market will embrace the change he's describing. We did make a big move into biotech. I could sense that there was a potential leadership change just because of the phobia around AI. And I knew, because I've been on the board of Memorial Sloan Kettering for 30 years, that probably the best use case out there of AI is biotech through drug discovery, diagnostics, monitoring, everything. Biotech had been on its butt for like four years. I also grew up with technical analysis and you could see the momentum changing. So that was the theory behind biotech. But honestly, when the analysts start talking about genetic sequencing and gene editing and proteins, it's going right over Stan's head. But I get their level of enthusiasm. We have a very good biotech team. That's really important because I trust them, and when they're really enthusiastic, that's as important to me as the actual facts because I'm not smart enough to understand a lot of the actual facts.
So, you filter not just the data, but the people that work for you.
My advantage is not IQ; it's trigger-pulling. I admit it's some kind of intelligence, but my mother-in-law says I'm an idiot, so... I wasn't in the top 10% of my class. A lot of people think I'm smarter than I am because I'm good at our business, but I have a very narrow form of intelligence that allows me to love and play this game.
I know many people who would love to get inside your head and understand your mental models. You spoke to us about your way of thinking, and I have a really honest, basic question: how much of it can be taught, and how much of it is innate?
Look, I was given a gift. I don't know why I was given the gift, but I have this gift and it's for compounding money. Certainly part of it is innate. You either have the skill set for this business or you don't. Having said that, I had a great mentor in Pittsburgh when I started out, and I find it very common that great investors have incredible mentors. So to me, it's a necessary condition that you have sort of this innate skill set or gift, but it's almost a necessary condition on top of it that you have a mentor. I'm sure there's some people out there that that's not true of, but for me it was a combination. I was very lucky to have two mentors. One, I learned all the kind of stuff we're talking about. And then Soros—it's funny, when I went there, I thought I would learn what makes the yen and the mark move. And modestly, I learned I knew much more about that than he did. What I learned from him was sizing. It's not whether you're right or wrong; it's how much you make when you're right and how much you lose when you're wrong. And that was an invaluable lesson. So you can have something innate, but if you don't have mentors and people to teach you, you're not going to maximize it as much as you do when you do have them.
Should we turn to markets?
Do we have to?
It seems to be almost obligatory with you.
Okay.
So when it comes to markets, it seems to me you treat them less like forecasts and more like systems that kind of reveal themselves. So let's pretend you don't have a hedge fund and you come down from Mars and you have to start a portfolio from scratch. How do you anchor it at this moment in time? What do you buy first?
That's a hard question. Just a couple of principles before I would start. It appears to me the US economy is already strong, and it's going to get much stronger because we're looking at a lot of stimulus. My guess is the Fed is certainly not going to hike and probably going to cut. So that's a backdrop. But against that backdrop, it would be wonderful if we were undervalued. We're not undervalued; we're toward the top of the valuation range historically. What would be exciting about developing a hedge fund portfolio right now is the one thing I'm sure of is there's massive disruption and massive change ahead. So for the opportunity set for the next three or four years, I'm really excited. Macro has been dead for 10 or 15 years; I don't think that's the case anymore. If you know anything about me, I tend to change my mind every three weeks. But given the backdrop, we would probably be long an eclectic basket of equities. Until the fall, the last three years, our portfolio was very much AI-driven. We still have drips and drabs of AI around, but it's not driving the engine anymore to some extent. We still have big positions in Japan and Korea; some of them are AI, some of them are not. We're bearish on the US dollar, mainly because it's sort of the top of the historic range in terms of purchasing power, and foreigners are way overloaded in dollars. I don't know whether it's like a "sell America" trade, because it's more like if they don't buy American assets on a net basis, because of the trade balance and because of the positioning, the dollar will go down on its own, and we think that is the most likely course here. And we own copper. It's not a genius trade; it's a big consensus trade. There's no meaningful supply coming on; it's very tight for the next eight years. And obviously, you have a big add-on from AI and data centers. We're not long copper equities as much as we just keep rolling the front end. We have some gold; that's mainly a geopolitical trade, it's not so much a monetary trade. And then because we're long all these risk assets I just mentioned, we're short bonds. I don't necessarily expect to make money short bonds, but I think we might make a lot. If I'm right on the economy and it's a disinflationary growth, I probably break even and don't lose anything, but it allows me to hold the other assets I mentioned. If I'm wrong and the strong growth creates inflation—it wouldn't be that unusual if the Fed were to cut into a booming economy for inflation to take off, particularly with what's going on in commodities. So I'm open-minded to that. But we create a matrix, and the bonds are helpful in both ways.
The equity market has changed a lot over the past decade, and you have all these new types of capital, whether it's multi-strats, hedge funds, retail investors, systematic players, ETFs. How has that changed the time horizon that you feel you have edge in versus, let's say, 10 years ago? Are you more comfortable with the one-week, the one-month, the one-year trade, or maybe it's not prescriptive? How do you think about that?
Most trades I put on, I think in terms of 18 months to three years; that's how long I think they're probably going to evolve. Not every trade—some are a year, some are five years—but I will admit that I've put on a three-year trade that five days later I'm out of and I've reversed. But if you're talking about how I conceptualize it, all this noise about how much the system and the market has changed, that has not changed what I just said at all. The violence that creates is more useful for entry points if it goes against what my belief over the given time frame is. So I think it's a lot of noise. It makes my life annoying because I'd rather just have nice calm markets that move in a direction, but it also creates opportunities, and you have to use the volatility as opposed to being abused by the volatility—other than mentally, which I'm going to be—but you can't let yourself be a victim of volatility. And you can take advantage of it; it's just hard mentally.
But you said, "I'd rather have trending markets." Fair. Am I wrong in sometimes thinking you're more comfortable being contrarian, or do you embrace the consensus more? How do you think about that?
I think contrarianism is overrated. Soros used to say the crowd's right 80% of the time; you just can't be caught in the other 20% because you can get your head handed to you. I get some intellectual satisfaction out of playing in the 20%, but as a concept, I think contrarianism is overrated. I do like it when I have extreme conviction and no one else believes it; it gives me even more conviction. I don't care if a trade is crowded. If I think the thesis is right and the trend is with me—for entry points, I care, but I don't really care in terms of the investment. It doesn't bother me.
We had an investor Zoom call in December 2022 and we were discussing macro, rates, dollar, US versus rest of the world. And after we spoke a little bit, I asked you what you think on rates. And I will quote essentially verbatim what you said. You said, "I couldn't care less about rates. The only thing that matters is AI and Nvidia."
I don't remember that, but that's nice.
What was going on? How did you see it?
So the Nvidia story is quite interesting, and it's a perfect example of the process we spoke about earlier where I rely on other people. So I have some young superstars in my firm and they had a network and they started really talking about AI. This was in early to mid-'22. And then I started noticing that the kids at Stanford were shifting from 50/50 crypto and 50/50 AI to more going to AI. And that's something we've always looked at in venture is where the kids are going. When we bought Palantir in '08-09, it was because that was a cool company back then that all the kids wanted to go to. So my partner had people from his AI network in—they're in Palo Alto—they came in and explained AI. Most of it went over my head, but I knew that this was really big.
Why did you feel it was really big? It could have been a fad. You didn't feel this way for other fads.
Because I had total trust in my partner and I thought I was grasping the enormity. It turns out I wasn't grasping the enormity because I didn't know about large language models, but I knew about all the other conventional stuff that was going on in AI. So I said to my partner, "What should I buy?" He said, "Nvidia. That's the way to play AI." So just on about as much as you just heard, I bought a not-big position in Nvidia, but enough to get hurt on or to make some money on. And then about two weeks later, ChatGPT happened, which he had not mentioned in our conversation. Well, even I understood okay, the enormity of what that meant when I saw even the rudimentary things it was doing back then. So then I doubled the position. And then one of the great services you and Morgan Stanley provide are these macro calls, and all the macro guys, including myself—luckily I hadn't talked yet—were espousing their views on the world, which are probably worth a nickel and a cup of coffee. And an analyst there who was from the tech world said, "You guys are in the trees and you're missing the forest. There's something much bigger than anything you're talking about, even for macro." And he went on to amplify everything I had heard three or four weeks ago about AI, but this time I had ChatGPT between that conversation and him. So then I doubled my position again. Literally, I don't think I knew how to spell Nvidia three months before. And when the stock took off, I knew through years of experience when you have massive change, investors just can't make themselves keep up with it. And it was funny because the person who knew 10 times more than anybody at the table, and probably 50 times more than me about AI—he sold his Nvidia shortly thereafter. But I knew that this stock would go up for at least two or three years and go up a lot. And I said publicly in an interview about 5 months later, "I cannot possibly see myself selling Nvidia over the next two or three years," because it had already gone from like 150 to 390. And this person couldn't believe I still owned it. And I said, "Not only do I own it, the way these things evolve, this stock can't not go up for at least 3 years." So then the stock goes to 800, and I violated everything I said in the interview. I couldn't stand success. It had gone from 150 to 800. I was long-term in it; I couldn't deal with it and I sold it. And then it was 1,400 like five weeks later, and I was sick. But it's amazing how little I knew about Nvidia. I couldn't even tell you what the earnings were.
It's a sign of confidence, and it's because you're Stan Druckenmiller that you can be so blatantly honest about the way you think about these things. I think it's very encouraging to portfolio managers that are coming up in the business and they often feel like they need to be intellectually very much on their game constantly. What I'm getting from this—the ability to filter, to manage instead of being wedded to a spreadsheet—is really unique and quite helpful. You said something that you violated what you had said and sold at 800. Would you have done that 20 years ago? Is this a sign of a more mature way of trading now versus before?
Probably not. I'm not used to making six times my money in an equity in two years, and I'm not Warren Buffett. I think I would have screwed it up 20 years ago when I was good, too.
What are some things, if there are some things, that you have unlearned over the past 20, 30 years, or you had to unlearn?
I don't unlearn anything because scars are something I always keep in mind because they can help you out. But I will say, through a bunch of circumstances that I won't repeat, I was promoted way too early. I was made an analyst when I was 23 and I was made sort of the head portfolio guy by the time I was 26. And I didn't go to business school, so I never learned all the fundamentals I needed to learn in terms of analysis. So I relied heavily—and my mentor was really into it, and back then nobody was doing it—on technical analysis, and I learned all the intricate details of it. Okay, I can unequivocally tell you that technical analysis is about 20% as effective today as it was then because no one was using it. But when everybody's using it, it doesn't work anymore because you don't have a unique thing to act against. So it's kind of sad because it's easy and you can be lazy. You don't have to work that hard; just look at a chart instead of going into a 10-Q and all this other stuff. But technical analysis is a problem. And in the same vein, price versus heat news was huge for me for 20 or 30 years. And if you had great news and a stock wasn't responding to the news, 90% of the time the news was coming that was bad. Unfortunately, around 2000, a lot of smart people started coming into our business. I was the only one in my class, I think, from Bowdoin that went into the financial industry because we'd been in a bear market for 10 years. Well, then again, every wise guy learned what I'm just talking about, so it doesn't work anymore. So back then, if the company reported horrible earnings, opened down in the aftermarket, and then was up 10% the next day, it was almost guaranteed to be higher 6 months later. That's not true anymore because everybody else has learned that. So those would be the two big things. I haven't unlearned them, but I don't rely on them to the extent that I used to.
They've been loved to death. Are there any other signals that have been elevated in importance then, conversely to signals that have been diminished?
Not really. There's no silver bullet, and I'm the great beneficiary of 40 years of scars and successes that I can go back on, and a lot of pattern recognition because there's not much I haven't seen in this business. I'd say the biggest disappointment in my career has been: I think I have more wisdom and I have more tools of the trade than I had in my 30s and 40s, and I was a much better portfolio manager then because back then I had courage. I would take bigger, convicted positions. I'm trying to regain some of my nerve just because it's more fun.
So you're chickening out?
Oh, for sure. I've been chickening out for a long time. I'm Mr. Taco—except it's not "T", it's "Taco". Dr. Druck always chickens out.
In terms of other maybe experiences that you've had or a chip on your shoulder, do you have a chip on your shoulder that makes you better at this?
No. No. I just grew up—my dad and my sisters played games with me all the time. I'm just a really sore loser. I love games, but I really hate to lose. So I'm just very driven. It's a sickness. I don't know where it comes from, but I might as well channel it and make it productive instead of just a disease, because it is a little bit unseemly, but it's who I am.
Embrace it. Finally, this show is called Hard Lessons. Can you look back in your life or career and maybe take us through something that you had to learn the hard way?
Let me just say I have so many scars, you can't believe it. Everyone knows how I played the NASDAQ melt-up in '99, sold it perfectly in January, and then bought the exact top. And someone says, "What did you learn from that?" I said, "Nothing. I learned not to do that 20 years before, but I got emotional, which I fight every day." I would literally, like, throw up like once or twice a week just from anxiety when I'd have a drawdown and so forth. And at some point in my career, I learned that you're going to continue to make mistakes. You're going to continue to get emotional. You're going to continue to have that happen from now and then, but you've got a gift. And just stop torturing yourself for like 48 hours or maybe longer over this, because you've been doing this long enough and the record is there long enough that it's no longer like a random accident—which I did not believe for like 15 years. So the hard lessons have been like hundreds of mistakes, but they're just a moment in time. And when you have these drawdowns—and if there's money managers listening to this and you're good—it's easier said than done: just get over it and move on.
So Stan Druckenmiller had imposter syndrome for 15 years.
Yes. Maybe longer.
Wow. Maybe longer. Incredible. As we're finishing, I want to say thank you for being here. I got to know you later in your career, and it's just been fascinating to see you think and trade, to see you in action. You've been very generous with your time. And on behalf of Morgan Stanley, thank you very much.
As I said in the beginning, I wouldn't do this for many, and I think the world of Morgan Stanley. So it was delightful to be here.
Thank you, Stan.
Thanks, Iliana.
You've been watching Hard Lessons, an original series from Morgan Stanley. You can listen to an extended audio version of this episode on Apple, Spotify, or wherever you get your podcasts. For more information about the series, visit morganstanley.com/hardlessons.