Hard Lessons: Stan Druckenmiller: Invest, then investigate

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'm thrilled to be here. I think the world of Morgan Stanley, so it's the least I can do.

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 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 drug 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, very impressed with him, 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 that's why they were six times earnings with biosimilars and even some actual drugs. The amazing thing is the investor base were value investors. So they hated it. So the stock sat there at six times earnings while you could see this incredible management initiative going on. And no one really believed him and again growth investors didn't want it because it hadn't made the transition yet. Value investors didn't want it and were actually selling it because he was doing a growth strategy. So that was about six or seven months ago and the stock was 16 and today it's 32 and not much has happened other than he's proved biosimilars, they've come up with a drug that's not a generic so it's rerated from six times earnings to I guess 11 and a half or 12 times earnings. So it was a whole different set of circumstances but encapsulates what we look at. If you look at today, you're not going to make any money. If you try and look ahead and what might change and how investors might perceive something ahead, this one happened a little more quicker than I thought, but that would be a recent name.

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. But 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. So 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.

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 can't. 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.

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 basically 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 go up and 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.

Do we have to?

That's a hard question. Just a couple 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 the big beautiful bill looking 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 that 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 actually 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 more an eclectic basket of equities. For 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 sort of the top of the historic range in terms of purchasing power and foreigners are way way overloaded in dollars and 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 supply coming on of meaningful supply, 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 are the, 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. I 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 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.

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, you know, 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 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 I mean, you can't let yourself be a victim of volatility. And you can take advantage of it. It's just hard mentally.

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, I mean, for entry points, I care, but I don't really care in terms of the investment. It doesn't bother me.

I don't remember that, but that's nice.