Speaker A
I think contrarianism is overrated.
Stan Druckenmiller shares investment insights, emphasizing conviction, expert collaboration, and adapting to market disruptions in this Morgan Stanley Hard Lessons episode.
Key Takeaways
- Strong conviction combined with expert input is crucial for successful investing.
- Mentorship and learning risk management are key components of Druckenmiller's success.
- Markets should be approached as dynamic systems, not fixed forecasts.
- Current economic conditions favor growth with potential Fed rate cuts.
- Disruption and innovation, especially in biotech and AI, present significant investment opportunities.
Summary
- Stan Druckenmiller discusses the value of conviction in investing, especially when contrarian views are supported by strong evidence.
- He highlights a recent investment in Teva Pharmaceuticals as an example of identifying undervalued companies undergoing significant transformation.
- Druckenmiller stresses the importance of relying on expert analysts within his team, particularly in complex sectors like biotech.
- He shares his investment philosophy, focusing on trigger pulling and sizing rather than pure IQ or forecasting.
- Mentorship played a critical role in his development, notably learning risk management and position sizing from George Soros.
- Druckenmiller views markets as systems that reveal themselves rather than predictable forecasts.
- He believes the US economy is strong and stimulus-driven, with the Federal Reserve likely to cut rates rather than hike.
- Despite high valuations, he is optimistic about opportunities arising from massive disruption and change in the coming years.
- He notes a recent shift in his portfolio towards AI-driven investments and an eclectic basket of equities.
- Macro investing, considered dormant for 10-15 years, is now becoming relevant again according to Druckenmiller.
Full Transcript — Download SRT & Markdown
Speaker A
I do like it when I have extreme conviction and no one else believes it.
Speaker A
It gives me even more conviction.
Speaker B
From Morgan Stanley, this is Hard Lessons.
Speaker B
Where iconic investors reveal the critical moments that have shaped who they are today.
Speaker B
Today on the show, the legendary macro investor Stan Druckenmiller.
Speaker B
In conversation with Iliana Bouzali, Morgan Stanley's Global Head of Derivatives Distribution and Structuring.
Speaker B
Druckenmiller ran Duquesne Capital Management for three decades, with roughly 30% annualized returns and no losing years from 1981 to 2010.
Speaker B
He now leads the Duquesne Family Office, managing his own capital, and as a philanthropist, championing education, medical research, and the fight against poverty.
Speaker C
Stan, thank you very much for doing this.
Speaker A
I'm thrilled to be here, I think the world of Morgan Stanley.
Speaker A
So, it's the least I can do.
Speaker C
Oh, that is, uh, that's a privilege for us to have you here.
Speaker C
I've been privy to some of your equity trades over the past year or so.
Speaker C
Where it did feel you were early.
Speaker C
And I'm curious if you can maybe take us through one or two and how they came together.
Speaker A
I'll pick one that might surprise you.
Speaker A
Cause it's not very sexy and it's not AI or anything.
Speaker A
But it, I think it's a good example of our process at Duquesne.
Speaker A
In the middle of last summer and toward the fall, the AI thing started to get.
Speaker A
Let me say disturbingly heated.
Speaker C
Hmm.
Speaker A
And started at least have some rhyme with what I went through in 99, 2000.
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And we were looking for other areas.
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The group brought in a company, um, Teva Pharmaceuticals.
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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.
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So we met with the company.
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Big transition going on.
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Uh, Richard Francis had come in who ran the same playbook at Sandoz.
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Very impressed with him, knew how to take low hanging fruit in terms of operating efficiency.
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But much more importantly, he was taking them from a generic drug company to a growth company by embracing biosimilars.
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Replacing the the generic drugs, which that's why they were six times earnings.
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With biosimilars and even some, some actual drugs.
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The amazing thing is.
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The investor base were value investors.
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So they hated it.
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So the stock sat there at six times earnings while you could see this incredible management initiative going on.
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And no one really believed him and again, growth investors didn't want it.
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Cause he hadn't made the transition yet.
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Value investors didn't want it and were actually selling it because they he was doing a growth strategy.
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So that was about six or seven months ago.
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And the stock was 16 and today it's 32 and not much has happened.
Speaker A
Other than he's proved biosimilars, they've come up with a drug that's not a generic.
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So it's rerated from six times earnings to I guess 11 and a half or 12 times earnings.
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So it was a whole different set of circumstances.
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But encapsulates what we look at.
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If you look at today.
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You're not going to make any money.
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If you try and look ahead and what might change and how investors might perceive something ahead.
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This one happened a little more quicker than I thought.
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But that would be a recent name.
Speaker C
Fascinating.
Speaker C
And very intriguing.
Speaker C
I say it's intriguing because I think many people, maybe people not in the market.
Speaker C
But certainly many people when they think of Stan Druckenmiller, they think of huge macro investor.
Speaker C
And I have seen you dabble, more than dabble.
Speaker C
Really go into areas of the market, especially in equities that are much more niche.
Speaker C
Such as healthcare or biotech.
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And my question is, do you have to be an expert, an analyst?
Speaker C
Someone that understands the whole pipeline of drugs to get that right.
Speaker A
Thank God, the answer is an emphatic no.
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But I've got to have an expert at Duquesne who is.
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And trust his judgment and then I've got to have a feel for how the market will embrace the change he's describing.
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But we, we did make a big move into biotech.
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I could sense that there was a potential leadership change.
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Just because of the phobia around AI.
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And I knew because I've been on the board of Memorial Sloan Kettering for 30 years.
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That probably the best use case out there of AI is biotech.
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Through drug discovery, diagnostics, monitoring, everything.
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So biotech had been on its butt for like four years.
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I also grew up with technical analysis.
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And you could see the momentum changing.
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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.
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But, um, I get a layer level of enthusiasm.
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We have a very good biotech team.
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That's really important.
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Because I trust them and when they're really enthusiastic.
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That's as important to me as the actual facts, cause I'm not smart enough to understand a lot of the actual facts.
Speaker C
So you filter not just the data, but the people that work for you.
Speaker A
My advantage is not IQ, it's trigger pulling.
Speaker A
I, I admit it's some kind of intelligence.
Speaker A
But my mother-in-law says I'm an idiot savant.
Speaker C
Oh.
Speaker A
Um, I wasn't in the top 10% of my class.
Speaker A
A lot of people think I'm smarter than I am because I've, I'm good at our business.
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But I have a very narrow form of intelligence that allows me to love and play this game.
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Certainly part of it is innate.
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You either have the skill set for this business or you don't.
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Having said that, I had a great mentor in Pittsburgh when I started out.
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And I find it very common that great investors have incredible mentors.
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So to me, it's a necessary condition that you have sort of this innate skill set or gift.
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But it's almost a necessary condition on top of it that you have a mentor.
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I'm sure there's some people out there that that's not true of.
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But for me, it was a combination, I was very lucky to have two mentors.
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One I basically learned all the kind of stuff we're talking about.
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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.
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And honestly, I learned I knew much more about that than he did.
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What I learned from him was sizing.
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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.
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And that was a, that was an invaluable lesson.
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So you can have something innate.
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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.
Speaker C
Should we turn to markets?
Speaker A
Do we have to?
Speaker C
Oh, it seems to be a, it seems to be almost obligatory with you.
Speaker A
Okay.
Speaker C
So when it comes to markets, it seems to me you treat them less like forecasts.
Speaker C
And more like systems that kind of reveal themselves.
Speaker C
So let's pretend you don't have a hedge fund.
Speaker C
And you come down from Mars and you have to start a portfolio from scratch.
Speaker C
How do you anchor it at this moment in time?
Speaker C
What do you buy first?
Speaker A
That's a hard question.
Speaker A
Just a couple principles before I would start.
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It appears to me the US economy is already strong.
Speaker A
And it's going to get much stronger.
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Cause we're looking at the big beautiful bill.
Speaker A
Looking a lot of stimulus.
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My guess is the Fed is certainly not going to hike and probably going to cut.
Speaker A
So that's a backdrop.
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But against that backdrop.
Speaker A
That would be wonderful if we were undervalued.
Speaker A
We're not undervalued, we're toward the top of the valuation range historically.
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What would be exciting about developing a hedge fund portfolio right now is the one thing I'm sure of.
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Is there's massive disruption and massive change ahead.
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So actually for the opportunity set for the next three or four years, I'm really excited.
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Macro has been dead for 10 or 15 years.
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I don't think that's the case anymore.
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If you know anything about me, I tend to change my mind every three weeks.
Speaker A
But given the backdrop, we would probably be long more an eclectic basket of equities.
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For until the fall, the last three years, our portfolio is very much AI driven.
Speaker C
Mhm.
Speaker A
We still have drips and drabs of AI around, but it's not driving the engine anymore.
Speaker A
To some extent.
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We still have big positions in Japan and Korea.
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Some of them are AI, some of them are not.
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We're bearish on the US dollar.
Speaker A
Mainly because sort of the top of the historic range in terms of purchasing power.
Speaker A
And foreigners are way, way overloaded in dollars and I don't know whether it's like a sell America trade.
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Because it's more like if they don't buy American assets on a net basis because of the trade balance.
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And because the position, the dollar will go down on its own.
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And we think that is the most likely course here.
Speaker A
And, uh, we own copper.
Speaker A
It's not a genius trade.
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It's a big consensus trade.
Speaker A
Uh, there's no supply coming on of meaningful supply, very tight for the next eight years.
Speaker A
And obviously you have a big add-on from AI and data centers.
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We're not long copper equities as much as we are.
Speaker A
The, we just keep rolling the front end.
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We have some gold.
Speaker A
That's mainly a geopolitical trade.
Speaker A
It's not so much a monetary trade.
Speaker A
And then because we're long all these risk assets I just mentioned, we're short bonds.
Speaker A
I don't necessarily expect to make money short bonds.
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But I think we might make a lot if I'm right on the economy and it's a disinflationary growth.
Speaker A
I probably break even, I don't lose anything, but it allows me to hold the other assets I mentioned.
Speaker A
If I'm wrong and the strong growth creates inflation.
Speaker A
It wouldn't be that unusual if the Fed were to cut into a booming economy for inflation to take off.
Speaker A
Particularly with what's going on in commodities.
Speaker A
So I'm open-minded to that.
Speaker A
But we create a matrix and the bonds are helpful in both ways.
Speaker C
The equity market has changed a lot over the past decade.
Speaker C
And you have all these new type of capital, whether it's multi-strat hedge funds.
Speaker C
Retail investors, systematic players, ETFs.
Speaker C
How has that changed the time horizon that you feel you have edge in?
Speaker C
Versus, let's say, 10 years ago.
Speaker C
Are you more comfortable with the one week, the one month, the one year trade?
Speaker C
Or maybe it's not prescriptive.
Speaker C
How do you think about that?
Speaker A
Most trades I put on, I think in terms of 18 months to three years.
Speaker A
That's how long I think they're probably going to evolve.
Speaker A
Not every trade, you know, some are a year, some are five years.
Speaker A
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.
Speaker A
But if you're talking about how I conceptualize it.
Speaker A
All this noise about how much the system in the market has changed.
Speaker A
That has not changed what I just said at all.
Speaker A
The violence that creates is more useful for entry points.
Speaker A
If it goes against what my belief over the given time frame is.
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So I think it's a lot of noise, it makes my life annoying.
Speaker A
Cause I'd rather just have nice calm markets that move in a direction.
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But it also creates opportunities and you have to use the volatility as opposed to being abused by the volatility.
Speaker A
Other than mentally, which I'm going to be, but I mean, you can't let yourself be a victim of volatility.
Speaker A
And you can take advantage of it.
Speaker A
It's just hard mentally.
Speaker C
You said, I'd rather have trending markets.
Speaker C
Fair.
Speaker C
Am I wrong in sometimes thinking you're more comfortable being contrarian?
Speaker C
Or do you embrace the consensus more?
Speaker C
How do you think about that?
Speaker A
I think contrarianism is overrated.
Speaker A
Soros used to say the crowd's right 80% of the time.
Speaker A
You just can't be caught in the other 20% because you can get your head handed to you.
Speaker A
I get some intellectual satisfaction out of playing in the 20%.
Speaker A
But as, as a concept, I think contrarianism is overrated.
Speaker A
I do like it when I have extreme conviction and no one else believes it.
Speaker A
It gives me even more conviction.
Speaker A
I don't care if a trade is crowded if I think the thesis is right and the trend is with me.
Speaker A
I mean, for entry points I care, but I don't really care in terms of the investment.
Speaker A
It doesn't bother me.
Speaker C
As we're finishing, I want to say thank you for being here.
Speaker C
I got to know you later in your career.
Speaker C
And it's just been fascinating to see you think and trade.
Speaker C
To see you in action.
Speaker C
You've been very generous with your time.
Speaker C
And on behalf of Morgan Stanley, thank you very much.
Speaker A
As I said in the beginning, I wouldn't do this for many.
Speaker A
And I think the world of Morgan Stanley.
Speaker A
So it's a life to be here.
Speaker C
Thank you, Stan.
Speaker A
Thanks, Iliana.
Speaker B
You've been watching Hard Lessons, an original series from Morgan Stanley.
Speaker B
You can listen to an extended audio version of this episode on Apple, Spotify, or wherever you get your podcasts.
Speaker B
For more information about the series, visit morganstanley.com/hardlessons.
Topics:Stan DruckenmillerMorgan Stanleyinvestment strategycontrarian investingbiotech investingTeva Pharmaceuticalsmacro investingAI in investingportfolio managementmarket disruption
