Stanley Druckenmiller builds concentrated portfolios around 2-3 high-conviction ideas rather than diversifying broadly. He looks 18-24 months ahead for fundamental shifts and avoids asset classes entirely when he lacks conviction, letting a few positions drive most of his returns.
There is so much bullsh t out there on the Internet that every once in a while when you do see a video from a goat like Stan Druckenmiller, it makes you stop in your tracks. The caption, as you can see, is why you should not diversify your portfolio.
My idea of risk control is a little non conventional. I like putting all my eggs in one basket and then watching the basket very carefully.
Putting all your eggs in one basket. That's contrary to what they tell you in all the books, what you hear on social media, with all the passive investing crowd. And it's fucking true. This is exactly how I ran my portfolio as a professional fund manager. He used to look at macro as well as dabbling in stock selection, but he could basically invest across any and all of the asset classes. He didn't believe in diluting his portfolio with incrementally shitter ideas. It's a killer soundtrack, by the way.
I don't know what they teach at Marshall, but at most business schools they teach, I think, a lot of nonsense called risk adjusted return and diversification.
Absolutely. So what he's talking about here is going for absolute return, total return, in other words, performance. Don't worry about the benchmark. And then like most closet fund managers do, they try and keep up with the benchmark, which means that they tend to play it safe and invest more broadly so in more stocks than they might otherwise do because there's something known as tracking error. And tracking error is basically the deviation from the index that you're being measured against as a pro, to play it safe, they hold more stocks. It's more representative, more similar to the market itself that you could otherwise be tracking for like no cost with an etf.
If you look at a normal portfolio, most people will make 70, 80% of money that year on two or three ideas.
You hear that 70 to 80% of your return could come from only two or three ideas. So why dilute those by owning 50 companies more than you need to do and therefore scaling those positions down, those winners down, so that there might only be 2% of your portfolio, rather than potentially 5 or 10% of your portfolio Concentration over diversification, Even though they'll have.
30 or 40 things in their portfolio.
I believe in about 15 to 20. I currently hold 16 by the way. But for many people, many traditionalists, 30 or 40 stocks would be concentrated. Not according to Druck. He's a badass, an OG. For him, maybe five, 10 positions. That's how he defines concentrated.
My concept was to put into Those two or three ideas that I had the most conviction in. I was also lucky to travel across asset classes. I traded commodities, currencies, bonds and equities. And it gave me the discipline. If I didn't have a good idea in equities, I was happy to have no equities.
You hear that? So if he's lacking conviction in a particular asset class, in this case he's talking about stocks specifically, he just wouldn't invest in them. He's a hedge fund manager, so he wasn't accountable to external investors or shareholders in the same way that so many mutual funds are, for example. So it meant that he could follow his conviction and his philosophy better than he might otherwise have been able to do with basically the handcuffs on and other conflicts of interest. So he's saying go where the opportunities are, follow the money, so to speak. Do not add positions for the sake of adding positions, which other people do under the cope or guise of adding diversification, diversifying.
The only other thing I'd say is too many investors look at the present. The president is always is already in the price.
And this is why technical analysis is bullshit. The present is always in the price, and hence there is no such thing as expensive or cheap, only the price if it appears cheap. In other words, it has a low multiple, it has a low rating. And that's because the prospects for that company are not looking too great. It's not looking good, Bev. So what Stan's talking about here is looking ahead 18 to 24 months out and trying to anticipate where there could be change. Maybe a poor performer could come good. That's usually what people look at in the value space, where they're looking at turnaround opportunities. Or a good company that's growing could continue to grow or grow even faster than the market is expecting. You need to know something or be prepared to bet and speculate in a way that the majority, the consensus are not and they haven't already acted on.
You have to think out of the box and sort of visualize 18 to 24 months from now what the world is going to be and what securities might trade at.
He's talking about having a worldview there as well. So don't listen to groupthink. You need to form your own worldview, and that will really help you to construct your portfolio and have conviction sufficient to run a concentrated portfolio of only a handful of positions, potentially maybe 10 to 15.
What a company's been earning is ridiculous. It doesn't mean anything. What you have to look at is what people think, what a company's earning, what people think it's going to earn. And if you can see something two years, it's going to be entirely different than the conventional wisdom. That's how you make money.
Now I wouldn't disagree with what Stan said there, but humbly I would add something further. It's clear that with established business models, quality businesses, there is greater earnings visibility into the future. And if it was the case that all known information is already in the price, that might suggest that that earnings visibility wouldn't produce excess return. But it does. The reason those companies can still outperform the market is because the majority of investors are investing over the very short term. They have become increasingly short termist. And as I know firsthand from from my process, outperformance exists from the two year point onwards. But inside of that, exactly as Stan is saying, you're unlikely to find any outperformance.
My first boss used to say the obvious is obviously wrong. If you invest in conventional wisdom, you're going to lose your butt.
The obvious is obviously wrong. Look across the Internet. All you see nowadays guys on social media is get rich quick so overnight day trading nonsense or alternatively passive investing set and forget in ETFs little and often and don't bother doing anything else as though there's nothing in between. Well, our philosophies align and I learned a great deal from investors like Stan and developing my process. So this video is legendary. I really wanted to share it with you and if you want to learn more about how I do things, comment below. You can also send me me a DM on Instagram. I'll send you through the free training video which you can check out. Take it easy Batman.
