by Jesse Felder, The Felder Report
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully. -Stan Druckenmiller
This quote comes from a speech Druck gave at the Lost Tree Club back in January. I’ve read the speech twice now and I’m sure I’ll read it many more times (and recommend you do the same – here’s the link). For those who don’t know, Druck generated 30% average annual returns at his hedge fund over a period of 30 years and never had a single down year – possibly the best track record ever.
I’m sharing this quote with you here because I think it’s central to what we are trying to accomplish. I want to help you close the gap between being an average investor and being a phenomenal investor. That’s my whole purpose with this thing.
But there’s one huge road block we run into. Being a “pig” isn’t easy. For many people, it may not be possible. As Druck explains in his speech, when he and Soros famously shorted the British pound they put 200% of the fund into that one trade. 200%! They put every penny into the trade and then borrowed against every penny to lever up their returns. That’s what he means by ‘being a pig.’ How many people could put this trade on and still sleep at night? This also goes against everything we are taught when learning how to invest. Step one is to diversify, right? What they don’t tell you is the greatest investors of all time look at step one and call, “bullshit.”
The reason phenomenal investors are able to forego diversification like this is because their skill set is different. They are capable of doing the research such that they can have a high level of confidence in an idea. And when they are very, very confident about an idea they can afford to swing for the fences because their batting average with high confidence ideas is very, very good (and, probably even more important, they’re also willing to admit when they’re wrong and get out quickly). And why put any money into anything else when you have one really, really good idea?
Most investors can’t do this simply because they just don’t have very good batting averages. So bridging the gap between being an average investor and being a phenomenal one is first raising your batting average. This requires both knowledge and experience. The second step is trusting your knowledge and experience when you find a high confidence idea (while also limiting the damage when you’re wrong). And when I say, “high confidence idea,” I’m thinking of a quote from another Soros disciple, Jim Rogers: