Lessons from the Best Investor of All Time

In my opinion, Stanley Druckenmiller is the best investor of all-time. This isn’t due to a specific trade or a couple really good years of performance. It’s a combination of his massive compounded annualized returns of 30%+ over a 30-year period combined with the fact that he NEVER HAD A DOWN YEAR. You read that right. While Warren Buffett has also achieved phenomenal long-term returns on capital, he’s had down years. No one has more success with significant upside and limited downside than Druckenmiller.

For context, if you had invested $1,000 in the S&P 500 and achieved an annualized 10% return, you’d have just under $18,000 thirty years later. However, if you had invested that $1,000 with Druckenmiller, and contributed nothing else, you’d have over $2,600,000 thirty years later. The power of compounding. Anyone can hit the lottery, but in order to succeed at this magnitude for three decades with no downside in any year, it’s undeniable that Druckenmiller has cracked the code when it comes to managing risk and achieving significant returns.

Unfortunately, despite his unparalleled success, Druckenmiller’s foresight is largely absent from the financial industry today. While Druckenmiller undoubtedly has skills and knowledge that make him one-of-a-kind in his area of expertise, his success provides numerous valuable and applicable lessons for business owners and entrepreneurs hoping to get the most out of their capital.

Conviction

Did you know that over 97% of active investment managers (i.e., those who don’t simply copy indices like the S&P 500) underperform their benchmarks over a 20 year period? In other words, less than 3% of active managers actually provide any value at all to clients. The number is likely even smaller since this doesn’t account for management expenses.

Why do so many investment managers fail to beat the S&P 500’s historical 10%, let alone come anything close to Druckenmiller’s 30%? Here’s what Stan said himself:

“When I’ve looked at all the investors (that) have very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common. And it’s the exact opposite of what they teach in a business school. It is to make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying. … So, [these investors] concentrate their holdings. This is very counterintuitive. In my thinking, [concentrating your bets] decreases your overall risk because where you tend to be in trouble is if you have 35 or 40 names. If you start paying attention to one. If you have a big massive position, it has your attention. My favorite quote of all time is maybe Mark Twain: “Put all your eggs in one basket and watch the basket carefully.”I tend to think that’s what great investors do.”

In my words, most investment managers are cowards. Over 97% of them get paid to slightly deviate from the popular indices to exemplify their business school “prowess” in the name of “diversification,” which we’re all told is a good thing. However, with diversification comes “de-worsification.” They’re blindsided by their own egos, investing in things they don’t understand.

Think about it this way. You, as an expert in a single business that consumes most of your time, barely get by in difficult times. Yet, we’re supposed to believe that these MBAs can somehow know enough about 35, 50, 100, or even 200 businesses spread across multiple industries, countries, and asset classes to wisely invest client capital? Doesn’t that just sound utterly insane? It may not at first, but once you actually talk to some of them and listen beyond the corporate doublespeak, you’ll realize most aren’t that impressive.

Here’s the good news. You, as a business owner or entrepreneur, already have your large, concentrated bet — YOUR BUSINESS. You already hold conviction. Meanwhile, advisors will try to convince you to pull capital out of your OWN business to invest in someone ELSE’s business (buying equities), in which you have no control or access to profits. If you really believed the S&P 500 was your best ROI with the most upside, why do you have a business at all? Why not just sell it and use the funds to become a professional investor?

It’s because you know deep down that it’s not uncommon for successful small businesses to provide tremendous returns on capital that far exceed what any advisor is likely to get you in public markets. Now, if you have a very good reason for investing in stocks at a particular point in time, by all means. From time to time, there are some VERY attractive opportunities. But, if you’re just blindly participating solely because everyone else is, then you deserve the same outcome.

Outsized Bets

This is probably my favorite quote from Druckenmiller:

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

If you’ve ever heard of Stan before today, you’ve probably heard of his famous trade that “broke the Bank of England” when he was working under George Soros (not a fan, although he was an incredible investor) and alongside Scott Bessent (the current Treasury Secretary).

The theory was, after the fall of the Soviet Union in the late 1980s, and after the Berlin Wall came down, the world was highly pessimistic about the German economy and deutschemark (their currency) due to rising inflation. Really, it was too much uncertainty for Wall Street to deal with, so the easy way out was to avoid this situation entirely.

Druckenmiller did his research and saw things differently. After the influx of new workers arrived in West Germany, Druckenmiller saw a free market boom coming. He also knew that Germans were terrified of inflation following the Weimar Republic just a half a century prior that led to the rise of Hitler and authoritarianism. And therefore, he thought the Bundesbank (Germany’s central bank) would raise rates to fight inflation and prop up the value of their currency.

However, the deutschemark was currently pegged to the British Pound. Due to Scott Bessent’s research on the U.K.’s declining housing market and overall weakening economy, Druckenmiller thought the Bank of England would be forced to devalue their currency to prop up the economy (like the U.S. does today). And therefore, while the world took this peg for granted, Druckenmiller put on a relatively small FX trade going long the deutschemark and short the British pound, believing the currencies would be decoupled.

Fast forward a little bit. Druckenmiller continued to keep this trade on, costing him a small percentage of the fund each year. His conviction grew as he did more research and watched new developments that supported his thesis. He went to his boss George Soros and explained why he wanted to use the $7.5 billion fund to take a 100% position in this trade. You read that right. 100%. And guess what, as you may have expected, Soros wasn’t a fan of this.

But not for the reason you might think. Soros heard Druckenmiller’s pitch on the trade and looked back in disgust. Then, Soros responded with, “That is the most ridiculous use of money management I ever heard. What you described is an incredible one-way bet. We should have 200 percent of our net worth in this trade, not 100 percent. Do you know how often something like this comes around? Like one every 20 years. What is wrong with you?”

Long story short, they took a substantial position (using leverage), the currencies decoupled, the deutschemark increased while the pound decreased, and the fund made over $1 billion on this one trade.

Most money managers have these egos which prevent them from taking outsized bets. When they try, they get burned because they don’t know what they don’t know. You (small business owner) don’t know the FX markets like Druckenmiller does. However, you have the humility to admit that. The lesson here is to invest in what you understand, be comfortable walking away from situations beyond your comprehension, but bet big when these asymmetric risk-reward opportunities come up in your wheelhouse.

Holding Cash

So what does Druckenmiller believe you should do with your capital when those big opportunities don’t exist? Here’s a story from 1981 after first launching his fund. For context, with heavy inflation in the U.S., Druckenmiller was highly pessimistic about the market as Fed Chairman Paul Volcker intended to raise rates aggressively. And therefore, Druckenmiller held a massive 50% cash position (something you rarely see anyone do today):

“By mid-1981, stocks were up to the top of their valuation range, while at the same time, interest rates had soared to 19 percent. It was one of the more obvious sell situations in the history of the market. We went into a 50% percent cash position, which, at the time, I thought represented a really dramatic step. Then we got obliterated in the third quarter of 1981…Well, we got obliterated on the 50 percent position we still held.” “You have to understand that I was unbelievably bearish in June 1981. I was absolutely right in that opinion, but we still ended up losing 12 percent during the third quarter. I said to my partner, ‘This is criminal. We have never felt more strongly about anything than the bear side of this market and yet we ended up down for the quarter.’ Right then and there, we changed our investment philosophy so that if we ever felt that bearish about the market again we would go to a 100 percent cash position.”

In the very first year he started managing his fund, Druckenmiller realized that if he’s really concerned about the market and no “fat pitches” are available, he’s willing to sit on a 100% cash position. Why did I call most investment managers cowards before? It’s because so many of them feel the exact same way, but they cannot fathom underperforming the market for a quarter or two by sitting in cash, so they do the same thing everyone else does. They knowingly stay fully invested in overvalued stocks.

In the world of finance, people aren’t judged by how well they perform. It’s all relative. If the market drops by 50% and your fund is down 48%, you’ve somehow “succeeded” generating 2% of “alpha” for your investors. You’re the hero. You’ve justified your existence. But good luck sleeping after that if you knew stocks were significantly overvalued but lacked the courage to de-risk your client portfolios before losing half their money…

Here’s the problem. If the market drops by 50%, can you imagine all the opportunities that would exist? But if your capital is down 48% (and you’re still a coward afraid to start buying before everyone else does), how can you possibly take advantage of this opportunity? What if you still had 90%-100% of your capital available to capture this upside? Then think of the bargains that could be found.

How does this relate to small business owners? We see many continuously “reinvesting” in low value-add opportunities. One needs to understand the difference between maintenance capex and growth capex. Maintenance capex represents expenditures for simply maintaining the business like replacing old vehicles, repainting a store front, or continuing an ad campaign. Growth capex represents expenditures for EXPANDING the business, such as a new salesperson, a new location, or more advanced machinery. THESE are the things that really move the needle. You should be minimizing maintenance capex and maximizing growth capex when those opportunities arise.

If you just made $800k in profit, yet you’re not super confident in the economy or your ability to take on a huge project, is it a wise use of capital to upgrade your entire fleet of depreciating vehicles that run perfectly fine for the most part? Does a fancier office building really drive value? Is this new marketing campaign really a solid driver of long-term organic revenue growth? Or might you be better building up a capital position to go all-in once you find that outsized bet that can 2x, 5x, or even 10x your capital?

Baseball

If you follow baseball, you’re probably familiar with the shift in statistical importance over the past decade. Teams used to value players with high batting averages. In applying Druckenmiller’s lesson, it’s not really about whether you get a hit. It’s about how much damage you do when you swing. Billy Bean (as portrayed by Brad Pitt) in the movie Moneyball encapsulates this perfectly. “Do I care if it’s a walk or a hit? Pete?”

In market terms, this goes to show that routine 6% returns (after inflation & taxes) don’t really move the needle. Avoiding outs is critical, but the real objective is maintaining that momentum as long as possible without losing (getting out) until you get that great pitch to knock out of the park. And that’s why teams today value OPS (on-base percentage plus slugging percentage) far more than batting average.

They’ve realized that a guy like Kyle Schwarber who hits .250 with a .370 OBP and a .580 slugging percentage (.950 OPS) is far more valuable than a contact guy like Luis Arraez who hits .290 but lacks any power (.720 OPS). We don’t need to swing for singles. Walks are just as good. But when we see that perfect pitch, we’re swinging hard.

How We Can Help

We know what we don’t know. We don’t know how to run your business. We don’t know how much inventory you need. We don’t know how to drive your sales. We don’t know your correct pricing. And we don’t know the overall growth trajectory for your business. Here’s what we do know:

1. How to help you build a SAFE opportunity fund that comes with attractive guaranteed, tax-free growth, and zero downside while paying you to wait for your next big bet

2. How to help you safely leverage your capital, maintaining that compounded growth on your underlying asset, while still giving you access to capital for outsized returns on your investments (leveraging OPM — other people’s money)

3. How to manage critical risks in your business by insuring against the loss of life for you or other partners while utilizing creative employee retention strategies to help you keep your best workers around

Conclusion

Think ahead to six months, a year, or two years from now. Can you really stomach the idea of losing a significant portion of your capital by blindly investing in OTHER people’s businesses? Can you look back and feel proud of the fact that it’s fine if you lost money in these overvalued stocks because everyone else did? Or, do you have the courage, patience, conviction, and discipline to follow Druckenmiller’s success story?

If you think like the crowd and invest with the crowd, you’ll never beat the crowd. When things do fall apart, the crowd won’t be sitting on capital to deploy at attractive valuations. The crowd will be begging you (if you follow Druckenmiller’s lead) to buy from them at insanely cheap prices. While stocks have daily liquidity, think of the leverage you’d have sitting on a bunch of capital when distressed sellers come to YOU in the private market.

Do you want to make sure you have exposure to this potential 10% return in the S&P 500 (before fees, taxes, and inflation) made up of companies you don’t control, while exposing your capital to significant downside? Or, do you have what it takes to remain patient to find those 5x or 10x opportunities? We’d rather take walks when there’s nothing good to hit, while being ready to swing hard when we find our pitch.