Stanley Druckenmiller Hard Lessons Can Be Necessary

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Mr. Charlie Ellis has explained to the book Winning the Loser’s Game – professional players force others to make an error which helps the professional player to win whereas amateur players play a faulty shot. This is similar to the investing field. And the main difference between an amateur and a professional investor. We have to keep on defending ourselves and wait for others to make errors. We need to stay on the pitch and wait for the loose ball for hitting it outside of the boundary.

Return of the investment instruments and our return having a gap which is known as a behavioral gap, which tells that investors’ behavior affects their own returns.

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Amateur investors do not focus on risk management. Generally, they focus on the risk after they meet to the risk. It is similar to wearing a helmet after facing a road accident as a precaution. Whereas professional investors do things in a different manner, they buy things which others do not want to buy and they sell things which everyone wants to buy. Mr. Howard Marks are given this technique as a second level thinking.

Howard Marks – Second Level Thinking

During the year 2015, Stanley Druckenmiller was getting an introduction as –

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During the year 1981, a 28 years old Mr. Druckenmiller has started with Duquesne Capital Management. During the year 1987, Mr. Druckenmiller had buildup long position as he felt that 2200 level supported zone for the Dow Jones but on Monday, Dow goes down to 1738 level which known for “Black Monday”. On Monday, after lunchtime, Stocks got to bounce back and Mr. Druckenmiller has covered all his position. Mr.Drukenmiller has left his job to join George Soros. In the year 1989, Mr.Drukenmiller has shorted Japan Index Nikkei which is still down from the top of the year 1989.

In the year 1992, Mr.Drukenmiller has shorted the pound currency and he turns out to be a winner. Mr.Drukermiller has a track record of generating a return of 31.50%, 29.60%, 53.40%, 68.80% and 63.20% in the year 1989, 1990, 1991, 1992 and 1993 respectively.

But during the year 1994, Fund lost in a bet against the yen and 1998, Quantum fund had lost $2 billion in Russia. The worst is about to come. Mr.Drukenmiller has invested in the IT stocks and he was uncomfortable with his positions so that he booked and took gained. But he had hired new young employees in the year 1999 and they kept on making money by investing in the IT stocks.

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He had double his position at the top to the tech stocks and when IT bubble got burst, Quantum fund had lost 21% or $7.60 billion since their peak value.

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Mr.Drukenmiller cannot able to see others making money and he can’t. So that he also makes an emotional error. Mr.Drukenmiller was known that what he is doing but he cannot able to stop his emotion and he has occurred an error. Sometimes it is important to see others making money. And we need to stay with not making money.

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Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick


We have seen that equity investment has provided decent returns to those who have made an investment into a decent business with having decent management. I have also explained a similar concept to my articles of Pat Dorsey and Kite Flying regarding business + management combination.

Accounting is a language of business, we need to understand it well so that we can make communication with numbers.

I will try to explain all manipulation in a simple manner into the upcoming issues of the same series.

Entire series of “Numbers tells you everything” is based on the books –

I have tried to cover up concepts available with the above books.


Bill Ackman Get of Your Soapbox

When we have a view on something in the world then we are getting attached to that view. So that when we get any dis-confirming evidence against our view then also many a time, we hesitant to accept it. We are overconfident on their own view that we do not accept any opposing view.

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Majority of people love to share their success but not their failure. People intend to hide their failure. We love to share our success because it gives us a social recognition and self-esteem. We feel guilty for our failure and stop ourselves from sharing it with people. Also, we feel fearful about the mistake or meeting the failure.

Bill Ackman had started a hedge fund with the name of Gotham in the year 1993 and he turnouts the $3 million to the $568 million at the peak of the year 2000. He becomes more confident and started taking positions to the illiquid investment as concentrated bets at a wrong time; such behavior has affected him with the closure of Gotham hedge fund.

In the year 2004, Mr.Ackman has started another fund with the name of Pershing Square Capital Management and become one of the most activist investors. He acquires large enough shares of the company and asks to the management to become more shareholder-friendly and if management fails then Mr.Ackman get on to the board.

Few of the companies where of Mr.Ackman was done an activist investment such as Wendy, McDonald, MBIA Inc., Target, Sears, Valeant, J. C. Penney, and Herbalife.

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Above mentioned companies earn a gross margin of around 42-46% whereas Herbalife earns around 80%. Mr.Ackman shows that top-selling product of Herbalife is Formula 1 shake which is not much known. And they sell this product 10-20 times compared to the competitor brand such as Oreos, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, and Clorox which is manufactured by GNC, Unilever, and Abbot Labs. Herbalife is not selling products to the consumer but they sell products to the distributors, their distributor is all over the globe.

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Mr.Ackman has read all available information, he gets into the science of products, R&D for the product, read annual reports, SEC filing, etc.

Mr.Ackman has given a three-hour presentation to people, interview to CNBC, CNN, and Bloomberg, etc. Now, how Mr.Ackman can admit defeat after telling everybody about the Herbalife. And also stock had declined by around 35% after his presentation. But during that panic selling movement, Dan Loeb, founder of the hedge fund Third Point LLC has bought 8.24% of the Herbalife and becomes a second largest shareholder. Herbalife stock price rose by 20% in five days. After that filing shows that activist investor Carl Icahn took a 12.98% stake in Herbalife.

Mr.Ackman has made a public commitment regarding his investment idea which has mentally created pressure on him and this pressure has to stop him by making a proper decision.

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Due to the public commitment and also a fear of losing a reputation, he faced difficult to cover his wrong position. If we keep on making our moves commitment to the public then we may face difficult to change moves when we may go wrong. We should focus on not making a commitment in public which helps us to change our move and saved our capital. When our odds go against us, it will cost us mentally, emotionally and financially. Mr.Ackman was on short after three years also. We will go wrong, we can meet failure but such kind of public commitment can stop us from accepting our failure and saved our remaining capital to restart again.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

Warren Buffett Beware of Overconfidence

When we own something, we value it more preciously. If we purchase any stocks than it becomes a value for us. We value more which we are holding, which is known as an endowment bias. Due to the higher value for us, we cannot able sold out or go away from our holding.

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Mr. Buffett has always mentioned that not to become too much confidence.

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We can see that Mr. Buffett does not get overconfidence on his own holding, but especially he mentioned that he can have poor performance for his investment. And when he felt that he could not able to manage fund then he has discontinued his partnership approach.

Mr. Buffett has made much successful investment such as see’s candy, Coca-Cola, GEICO, Nebraska Furniture Mart, etc. But he has also made a mistake to make an investment to the Salomon Brothers, US Air, and Dexter Shoes, etc.

When Berkshire had purchased Dexter shoes than they have issued shares of Berkshire for acquiring a Dexter. Dexter got bought by Berkshire for the worth of $433 million which turnouts to be a ZERO a few years later. Mr. Buffett has mentioned into his letter to shareholders that one of the biggest mistakes he had made was to acquire Dexter shoes and that is by issuing a share of Berkshire. Berkshire share was quoted at $16765 at the time of Dexter acquisition which is currently quoted at $304057, which has grown by 13% CAGR for the same period and at the same time Dexter becomes zero. Mr. Buffett had bought H.H.Brown and Lowell Shoe in the year 1991 and 1992 respectively before the acquisition of Dexter.

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In the year 2000, Mr. Buffett has recognized his mistake and write of remaining accounting goodwill. The overconfidence of Mr. Buffett has hampered a huge value to the Berkshire which teaches us that we should not be overconfident for any of the trade. When we are overconfident, we cannot able to see the negative part of our trade. We have to be neutral with our holding. I always mentioned that there is not a favorite stock of mine when people asked me for my favorite holding. I would like to hold the stock until it remains within my criteria of holding. As and when it goes out of it, I put a sell order into it. If we consider any of our investment as a favorite, then we get attached towards it and we cannot able to sell it when it is going out of our criteria.

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Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick