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.

From Morgan Stanley, this is Hard Lessons.

Where iconic investors reveal the critical moments that have shaped who they are today.

Today on the show, the legendary macro investor Stan Druckenmiller.

In conversation with Iliana Bouzali, Morgan Stanley's Global Head of Derivatives Distribution and Structuring.

Druckenmiller ran Duquesne Capital Management for three decades, with roughly 30% annualized returns and no losing years from 1981 to 2010.

He now leads the Duquesne Family Office, managing his own capital, and as a philanthropist, championing education, medical research, and the fight against poverty.

Stan, thank you very much for doing this.

I'm thrilled to be here, I think the world of Morgan Stanley.

So, it's the least I can do.

Oh, that is, uh, that's a privilege for us to have you here.

I've been privy to some of your equity trades over the past year or so.

Where it did feel you were early.

And I'm curious if you can maybe take us through one or two and how they came together.

I'll pick one that might surprise you.

Cause it's not very sexy and it's not AI or anything.

But it, I think it's a good example of our process at Duquesne.

In the middle of last summer and toward the fall, the AI thing started to get.

Let me say disturbingly heated.

Hmm.

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, um, Teva Pharmaceuticals.

So Teva was this apparently, if you didn't know what was going on, boring, um, generic drug company out of Israel selling at six times earnings.

So we met with the company.

Big transition going on.

Uh, 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 the generic drugs, which that's why they were six times earnings.

With biosimilars and even some, 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.

Cause he hadn't made the transition yet.

Value investors didn't want it and were actually selling it because they 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.

Fascinating.

And very intriguing.

I say it's intriguing because I think many people, maybe people not in the market.

But certainly many people when they think of Stan Druckenmiller, they think of huge macro investor.

And I have seen you dabble, more than dabble.

Really go into areas of the market, especially in equities that are much more niche.

Such as healthcare or biotech.

And my question is, do you have to be an expert, an analyst?

Someone that understands the whole pipeline of drugs to get that right.

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, 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, when the analysts start talking about genetic sequencing and gene editing and proteins, it's going to go right over Stan's head.

But, um, I get a layer 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, cause I'm not smart enough to understand a lot of the actual facts.

So you filter not just the data, but the people that work for you.

My advantage is not IQ, it's trigger pulling.

I, I admit it's some kind of intelligence.

But my mother-in-law says I'm an idiot savant.

Oh.

Um, I wasn't in the top 10% of my class.

A lot of people think I'm smarter than I am because I've, I'm good at our business.

But I have a very narrow form of intelligence that allows me to love and play this game.

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 market go up and move.

And honestly, 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 a, 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.

Should we turn to markets?

Do we have to?

Oh, it seems to be a, it seems to be almost obligatory with you.

Okay.

So when it comes to markets, it seems to me you treat them less like forecasts.

And more like systems that kind of reveal themselves.

So let's pretend you don't have a hedge fund.

And you come down from Mars and you have to start a portfolio from scratch.

How do you anchor it at this moment in time?

What do you buy first?

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.

Cause 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 is very much AI driven.

Mhm.

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 the position, the dollar will go down on its own.

And we think that is the most likely course here.

And, uh, we own copper.

It's not a genius trade.

It's a big consensus trade.

Uh, 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 with 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.

The equity market has changed a lot over the past decade.

And you have all these new type of capital, whether it's multi-strat hedge funds.

Retail investors, systematic players, ETFs.

How has that changed the time horizon that you feel you have edge in?

Versus, let's say, 10 years ago.

Are you more comfortable with the one week, the one month, the one year trade?

Or maybe it's not prescriptive.

How do you think about that?

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 in 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.

Cause I'd rather just have nice calm markets that move in a direction.

But it 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.

You said, I'd rather have trending markets.

Fair.

Am I wrong in sometimes thinking you're more comfortable being contrarian?

Or do you embrace the consensus more?

How do you think about that?

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, 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.

As we're finishing, I want to say thank you for being here.

I got to know you later in your career.

And it's just been fascinating to see you think and trade.

To see you in action.

You've been very generous with your time.

And on behalf of Morgan Stanley, thank you very much.

As I said in the beginning, I wouldn't do this for many.

And I think the world of Morgan Stanley.

So it's a life to be here.

Thank you, Stan.

Thanks, Iliana.

You've been watching Hard Lessons, an original series from Morgan Stanley.

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