The New Market Wizards Interview

Summary

Jack Schwager's chapter "Stanley Druckenmiller: The Art of Top-Down Investing," published in 1992, is the foundational primary text of the Druckenmiller record — the source to which every later interview ultimately refers. Conducted while he was still running the Quantum Fund alongside his own Duquesne Capital, the interview captures the method at full maturity: a manager averaging 45% annually since adopting his flexible style, months from breaking the Bank of England.

The chapter's enduring value is that Druckenmiller explains not just what he does but how each piece was learned. Speros Drelles and technical analysis at Pittsburgh National Bank; the Shah-of-Iran oil bet that made him chief investment officer at 26; the leveraged T-bill futures blowup that nearly bankrupted his young firm; the 1987 crash, where he flipped from leveraged long to net short on the morning of Black Monday; and the Soros lessons that turned a talented trader into the greatest risk manager alive.

Full Text

Registered OCR errata (2026-08-01): line 206 "WOITY" = "worry". Keep as-is for verbatim matching; do not silently "fix" — downstream quote checks rely on source fidelity.

Stanley Druckenmiller

THE ART OF TOP-DOWN INVESTING

Stan Druckenmiller belongs to the rarefied world of managers who control multibillion-dollar portfolios. Achieving a near 40 percent return on a $100 million portfolio is impressive, but realizing that performance level on a multibillion-dollar fund is incredible. In the three years since he assumed active management control of the Quantum Fund from his mentor and idol, George Soros, Druckenmiller has realized an average annual return of over 38 percent on assets ranging between $2.0 billion and $3.5 billion.

Druckenmiller has been on a fast track ever since he decided to for-sake graduate school for the real world. After less than one year as a stock analyst for the Pittsburgh National Bank, Druckenmiller was promoted to the position of director of equity research. Druckenmiller dismisses his sudden promotion as the act of an eccentric, albeit brilliant, division manager. However, one suspects there was more to it, particularly in light of Druckenmiller’s subsequent achievements. Less than one year later, when the division head who had hired Druckenmiller left the bank, Druckenmiller was promoted to assume his slot, once again leapfrogging a host of senior managers maneuvering for the same position. Two years later, in 1980, at the young age of twenty-eight, Druckenmiller left the bank to launch his own money management firm, Duquesne Capital Management.

In 1986, Druckenmiller was recruited by Dreyfus as a fund manager. As part of the agreement, Dreyfus permitted Druckenmiller to continue managing his own Duquesne Fund. By the time Druckenmiller joined Dreyfus, his management style had been transformed from a conventional approach of holding a portfolio of stocks into an eclectic strategy incorporating bonds, currencies, and stocks, with the flexibility of trading any of these markets from both the short side and the long side. Dreyfus was so enamored with Druckenmiller’s innate market approach that the company developed a few funds around him, the most popular being the Strategic Aggressive Investing

Fund, which was the best-performing fund in the industry from its date of inception (March 1987) until Druckenmiller left Dreyfus in August 1988.

Druckenmiller’s popularity at Dreyfus proved to be too much of a good thing. Eventually, he found himself managing seven funds at Dreyfus, in addition to his own Duquesne Fund. The strain of all this activity and his desire to work with Soros, who Druckenmiller considers the greatest investor of our time, prompted him to leave Dreyfus for Soros Management. Shortly thereafter, Soros turned over the management of his fund to Druckenmiller, as Soros left to pursue his goal of helping to transform the closed economies of Eastern Europe and the former Soviet Union.

The longest-running measure of Druckenmiller’s performance in the markets is his own Duquesne fund. Since its inception in 1980, the fund has averaged 37 percent annually. Druckenmiller stresses that the early years of Duquesne’s performance are not directly relevant since the fund’s structure changed completely in mid-1986 to accommodate the flexible trading approach he now uses. Measured from this later starting point, Druckenmiller’s average annual return has been 45 percent.

I interviewed Druckenmiller at his co-op apartment on a weekend day. I was surprised by his youth; I had hardly expected someone who had been managing one of the world’s largest funds for several years to still be in his thirties. As we relaxed in the living room, our conversation began with Druckenmiller’s story of how he got started in the business.

I had enrolled in graduate school to study for an economics degree. However, I found the program overly quantitative and theoretical, with little emphasis on real-life applications. I was very disappointed and dropped out in the second semester. I took a job as a management trainee at the Pittsburgh National Bank, with the idea that the program would provide me with a broad overview that would help me to decide on an area of focus.

I had been at the bank for several months when I received a call from the manager in the trust department. “I hear you attended the University of Michigan,” he said. When I confirmed his statement, he said, “Great.” He asked whether I had an M.B.A. I told him that I did not. He said, “That’s even better. Come on up; you’re hired.”

What job did he give you?

I was hired as a bank and chemical stock analyst.

Was that the type of position you perceived yourself heading toward?

I really had no idea what kind of job I would end up with. Most of the people who entered the management training program at the bank had an immediate goal of becoming a loan officer. I thought that I had been doing pretty well when the head of the loan department informed me that I would make a terrible loan officer. He said that I was too interested in the actual functioning of the companies, whereas a loan officer’s job was essentially a sales position. He thought my personality was too abrupt and generally unsuitable for sales. I remember feeling quite let down by being told that I was going to be a failure, when all along I had thought that I was doing quite well in the program.

Tell me about your early experiences as a stock analyst.

The director of investments was Speros Drelles, the person who had hired me. He was brilliant, with a great aptitude for teaching, but he was also quite eccentric. When I was twenty-five and had been in the department for only about a year, he summoned me into his office and announced that he was going to make me the director of equity research. This was quite a bizarre move, since my boss was about fifty years old and had been with the bank for over twenty-five years. Moreover, all the other analysts had M.B.A.’s and had been in the department longer than I had.

“You know why I’m doing this, don’t you?” he asked.

“No,” I replied.

“For the same reason they send eighteen-year-olds into war.”

“Why is that?” I asked.

“Because they’re too dumb to know not to charge.” Drelles continued, “The

small cap [capitalization] stocks have been in a bear market for ten years [this conversation transpired in 1978], and I think there’s going to be a huge, liquidity-driven bull market sometime in the next decade. Frankly, I have a lot of scars from the past ten years, while you don’t. I think we’ll make a great team because you’ll be too stupid and inexperienced to know not to try to buy everything. That other guy out there,” he said, referring to my boss, the exiting director of equity research, “is just as stale as I am.”

So, essentially, you leapfrogged your boss. Was there any resentment?

Very much so, and it was quite unpleasant. Although I now realize that my boss handled himself very well given the circumstances. He was very bitter, but I certainly understand his sense of resentment much better now than I did then. I couldn’t envision myself responding any better twelve years from now if someone replaced me with a twenty-five-year-old.

Obviously, Drelles didn’t just make you head of research because of your youth. There must have been more to it.

I had a natural aptitude for the business, and I think he was impressed with the job I did analyzing the banking industry. For example, at the time, Citicorp was going crazy with international loans, and I had done a major bearish piece, which proved to be correct. Although I hadn’t taken a business course, I was fairly lucid in economics and probably made a good impression with my grasp of international money flows.

What was done with the research that you generated?

The analysts presented their ideas to a stock selection committee, which consisted of seven members. After the presentation, there was an intense

question-and-answer period in which the analysts defended their recommendations.

What happened to the recommendations after the presentation?

If a majority of the committee approved the idea, it would be placed on the stock selection list. Once a stock was placed on the list, the portfolio managers at the bank were permitted to buy that stock. They were not allowed to purchase any stocks that were not on the list.

What happened if you were bearish on a stock?

If the recommendation was accepted, the stock would be deleted from the approved list.

Did you like being an analyst?

I loved it. I came in at six in the morning and stayed until eight at night. Remember, this was a bank, not a brokerage firm at which such hours represent normal behavior. Interestingly, even though Drelles had been at the bank for thirty years, he kept similar hours.

What kind of analytical approach did you use in evaluating stocks?

When I first started out, I did very thorough papers covering every aspect of a stock or industry. Before I could make the presentation to the stock selection committee, I first had to submit the paper to the research director. I particularly remember the time I gave him my paper on the banking industry. I felt very

proud of my work. However, he read through it and said, “This is useless. What makes the stock go up and down?” That comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stocks go up and down.

What did you find was the answer?

Very often the key factor is related to earnings. This is particularly true of the bank stocks. Chemical stocks, however, behave quite differently. In this industry, the key factor seems to be capacity. The ideal time to buy the chemical stocks is after a lot of capacity has left the industry and there’s a catalyst that you believe will trigger an increase in demand. Conversely, the ideal time to sell these stocks is when there are lots of announcements for new plants, not when the earnings turn down. The reason for this behavioral pattern is that expansion plans mean that earnings will go down in two to three years, and the stock market tends to anticipate such developments.

Another discipline I learned that helped me determine whether a stock would go up or down is technical analysis. Drelles was very technically oriented, and I was probably more receptive to technical analysis than anyone else in the department. Even though Drelles was the boss, a lot of people thought he was a kook because of all the chart books he kept. However, I found that technical analysis could be very effective.

Did the rest of the analysts accept you as the research director, even though you were much younger and less experienced?

Once they realized that Drelles had made a decision and was going to stick with it, they accepted the situation. However, later that same year, Drelles left the bank, and I suddenly found myself unprotected. I was only twenty-five years old, while all the other department heads were in their forties and fifties. As soon as the news broke that Drelles was leaving, a power struggle ensued among the

department heads vying for his position.

Every Monday morning, I and the other department heads would present our views to the head of the trust department, a lawyer without any investment background. It was understood that he would use these presentations as input in making an eventual decision on Drelles’s replacement. Clearly, everyone assumed that I was out of the running. The general belief was that I would be lucky to simply hold onto my job as research director, let alone inherit Drelles’s position.

As it turned out, shortly after Drelles left, the Shah of Iran was overthrown. Here’s where my inexperience really paid off. When the shah was deposed, I decided that we should put 70 percent of our money in oil stocks and the rest in defense stocks. This course of action seemed so logical to me that I didn’t consider doing anything else. At the time, I didn’t yet understand diversification. As research director, I had the authority to allow only those recommendations I favored to be presented to the stock selection committee, and I used this control to restrict the presentations largely to oil and defense stocks.

I presented the same strategy to the head of the trust department each Monday morning. Not surprisingly, the other department heads argued against my position just for the sake of taking the opposite view. They would try to put down anything I said. However, there are times in your career when everything that you do is right—and this was one of those times. Of course, now I would never even dream of putting 70 percent of a portfolio in oil stocks, but at the time I didn’t know better. Fortunately, it was the ideal position to have, and our stock selection list outperformed the S&P 500 by multiples. After about nine months, to everyone’s complete amazement, I was named to assume Drelles’s former position as the director of investments.

When did you leave the bank?

In 1980 I went to make a presentation in New York. After the talk, one of the audience members approached me and exclaimed, “You’re at a bank! What the hell are you doing at a bank?”

I said, “What else am I going to do? Frankly, I think I’m lucky to be there, given the level of my experience.”

After about two minutes of talking, he asked, “Why don’t you start your own

firm?”

“How can I possibly do that?” I asked. “I don’t have any money.”

“If you start your own firm,” he replied, “I’ll pay you $10,000 a month just to speak to you. You don’t even have to write any reports.”

To put this in perspective, when I started at the bank in 1977, I was making $900 a month. When I was promoted to the research director position, my annual salary was still only $23,000, and all the analysts who reported to me were making more than I was. Even after my promotion to Drelles’s position, I was still earning only $48,000 a year. In this context, the offer of $10,000 a month, not counting the money I could potentially earn on managing funds, seemed extremely attractive. I figured that even if I fell completely on my face, I could still get another job that would pay more than I was making at the bank.

In February 1981, with one other analyst and a secretary, I launched Duquesne Capital Management. We began with $1 million under management, which generated $10,000 per year in fees. Most of our income came from the $10,000 per month consulting fee arrangement. We started off extremely well, catching the sharp upmove in low cap stocks. 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.

I don’t understand. How did you get obliterated if you went into a 50 percent cash position?

Well, we got obliterated on the 50 percent position we still held.

Yes, but you would have lost only half as much as everyone else.

At the bank, the standard procedure had been to always be nearly fully invested. Although I wasn’t working for a bank anymore, I had obviously still maintained some of this same mentality. 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.

During the fourth quarter of 1981, the stock market partially rebounded. We were still extremely bearish at that point, and we dumped our entire stock position. We placed 50 percent in cash and 50 percent in long bonds. We loved the long bond position because it was yielding 15 percent, the Fed was extremely tight, and inflation was already coming down sharply. It seemed like a gift.

We did very well, and by May 1982 our assets under management had grown to $7 million. One morning, I came into work and discovered that Drysdale Securities—our consulting client—had gone belly-up. I immediately called my contact at the firm, but he was no longer there.

I realized that I had an immediate problem. My overhead was $180,000 per year and my new revenue base was only $70,000 (1 percent on the $7 million we managed). I had no idea how we could possibly survive. At the time, our firm had assets of just under $50,000, and I was absolutely convinced that interest rates were coming down. I took all of the firm’s capital and put it into T-bill futures. In four days, I lost everything. The irony is that less than a week after we went bust, interest rates hit their high for the entire cycle. They’ve never been that high since. That was when I learned that you could be right on a market and still end up losing if you use excessive leverage.

At the time, I had a client who had sold out a software company at a very young age. He had given the proceeds from this sale, which were quite substantial, to a broker who lost half the amount in the options market. In desperation, this broker had brought him to me, and I ended up doing extremely well for the account. Since it was an individual account, whereas all my other accounts were pensions, I was actually able to go short in the stock market. I was also long bonds. Both positions did very well, and his account went up dramatically.

As a last resort, I went to see this client to ask him if he might be interested in funding us in exchange for a percentage of the company. At the time, it probably looked like one of the dumbest purchases anybody could ever make. Here was a firm with a $40,000 negative net worth and a built-in deficit of $110,000 per year, run by a twenty-eight-year-old with only a one-year track

record and no particular reputation. I sold him 25 percent of the company for $150,000, which I figured would be enough to keep us going for another twelve months.

One month later, the bull market began, and within about a year, our assets under management climbed to $40 million. I think 1983 was the first year I had a quarter in which I actually made more than my secretary. We had a bit of a setback during the mid-1983 to mid-1984 period, but the company continued to do well thereafter, particularly once the bull market took off in 1985.

Given the success of your own trading company, why did you leave to join Dreyfus as a fund manager?

In 1985 I met Howard Stein, who offered me a consulting agreement with Dreyfus. He eventually convinced me to officially join Dreyfus as a manager of a couple of their funds. They even tailored new Dreyfus funds around my particular style of investment. As part of the agreement, I was allowed to continue to manage the Duquesne Fund. In fact, I’m still managing Duquesne today.

What were your personal experiences preceding, during, and after the 1987 stock market crash?

The first half of the year was great because I was bullish on the market, and prices went straight up. In June I changed my stripes and actually went net short. The next two months were very rough because I was fighting the market, and prices were still going up.

What determined the timing of your shift from bullish to bearish?

It was a combination of a number of factors. Valuations had gotten extremely

overdone: The dividend yield was down to 2.6 percent and the price/book value ratio was at an all-time high. Also, the Fed had been tightening for a period of time. Finally, my technical analysis showed that the breadth wasn’t there—that is, the market’s strength was primarily concentrated in the high capitalization stocks, with the broad spectrum of issues lagging well behind. This factor made the rally look like a blow-off.

How can you use valuation for timing? Hadn’t the market been overdone in terms of valuation for some time before you reversed from short to long?

I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a Catalyst enters the picture to change the market direction.

The catalyst being what?

The catalyst is liquidity, and hopefully my technical analysis will pick it up.

What was happening in terms of liquidity in 1987?

The Fed had been tightening since January 1987, and the dollar was tanking, which suggested that the Fed was going to tighten some more.

How much were you up during the first half of 1987 before you switched from long to short?

The results varied depending on the fund. I was managing five different hedge funds at the time, each using a different type of strategy. The funds were up

roughly between 40 percent and 85 percent at the time I decided to switch to a bearish posture. Perhaps the strongest performer was the Dreyfus Strategic Aggressive Investing Fund, which was up about 40 percent during the second quarter (the first quarter of the fund’s operation). It had certainly been an excellent year up to that point.

Many managers will book their profits when they’re up a lot early in the year. It’s my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive. The years that you start off with a large gain are the times that you should go for it. Since I was well ahead for the year, I felt that I could afford to fight the market for a while. I knew the bull market had to end, I just didn’t know when. Also, because of the market’s severe overvaluation, I thought that when the bull market did end, it was going to be dramatic.

Then I assume that you held on to your short position until the market actually topped a couple of months later.

That’s right. By October 16, 1987, the Dow had come down to near the 2,200 level, after having topped at over 2,700. I had more than recouped my earlier losses on the short position and was back on track with a very profitable year. That’s when I made one of the most tragic mistakes of my entire trading career.

The chart suggested that there was tremendous support near 2,200 based on a trading range that had been built up during most of 1986. I was sure that the market would hold at that level. I was also playing from a position of strength, because I had profits from my long positions earlier in the year, and I was now ahead on my short positions as well. I went from net short to a 130 percent long. [A percentage greater than 100 percent implies the use of leverage. ]

When did you make this transition?

On Friday afternoon, October 16, 1987.

You reversed from short to a leveraged long position on the day before the crash? You’re kidding!

That’s right, and there was plenty of liquidity for me to switch my position on that day.

I’m not surprised, but I’m somewhat puzzled. You’ve repeatedly indicated that you give a great deal of weight to technical input. With the market in a virtual free-fall at the time, didn’t the technical perspective make you apprehensive about the trade?

A number of technical indicators suggested that the market was oversold at that juncture. Moreover, I thought that the huge price base near the 2,200 level would provide extremely strong support—at least temporarily. I figured that even if I were dead wrong, the market would not go below the 2,200 level on Monday morning. My plan was to give the long position a half-hour on Monday morning and to get out if the market failed to bounce.

When did you realize that you were wrong?

That Friday afternoon after the close, I happened to speak to Soros. He said that he had a study done by Paul Tudor Jones that he wanted to show me. I went over to his office, and he pulled out this analysis that Paul had done about a month or two earlier. The study demonstrated the historical tendency for the stock market to accelerate on the downside whenever an upward-sloping parabolic curve had been broken—as had recently occurred. The analysis also illustrated the extremely close correlation in the price action between the 1987 stock market and the 1929 stock market, with the implicit conclusion that we were now at the brink of a collapse.

I was sick to my stomach when I went home that evening. I realized that I had blown it and that the market was about to crash.

Was it just the Paul Tudor Jones study that made you realize that you were wrong?

Actually, there’s a second important element to the story. In early August of that year, I had received a call from a woman who was about to leave for a vacation to France. She said, “My brother says that the market is getting out of hand. I have to go away for three weeks. Do you think the market will be all right until I get back?”

I tried to be reassuring, telling her, “The market will probably go down, but I don’t think it will happen that quickly. You can go on your vacation without WOITY.”

“Do you know who my brother is?” she asked.

“T have no idea,” I answered.

“He’s Jack Dreyfus,” she informed me.

As far as I knew, Dreyfus was busy running a medical foundation and hadn’t paid much attention to the market for the past fifteen or twenty years. The following week, Howard Stein brought a visitor to my office. “This is Jack Dreyfus,” he announced.

Dreyfus was wearing a cardigan sweater and was very polite in his conversation. “I would like to know about the S&P futures contract,” he said. “As you know, I haven’t looked at the market for twenty years. However, I’ve been very concerned about the conversations I’ve been hearing lately when I play bridge. Everyone seems to be bragging about all the money he’s making in the market. It reminds me of everything I read about the 1929 market.”

Dreyfus was looking for evidence of margin buying to confirm his conjecture that the market was poised for a 1929-type crash. The statistics on stocks didn’t reveal any abnormally high level of margin buying. However, he had read that people were using S&P futures to take long positions in the stock market at 10 percent margin. His hypothesis was that the margin-type buying activity was now going into futures. To check out this theory, he wanted me to do a study to see if there had been any unusually heavy speculative buying of S&P futures.

Since we didn’t have the data readily available, it took us a while to complete the study. Ironically, we finished the analysis on Friday afternoon, October 16, 1987. Basically, the data showed that speculators had been consistently short

until July 1987 and after that point had switched to an increasingly heavy long position.

I went to see Jack Dreyfus on Saturday, October 17, to show him the results of the analysis. Remember, he had expressed all his concerns about the market in August. At this point, I was already very upset because Soros had shown me Paul Tudor Jones’s study.

Dreyfus looked at my study and said, “I guess we’re a bit too late to capitalize on my fears.” That was the clincher. I was absolutely convinced that I was on the wrong side of the market. I decided that if the market opened above the support level on Monday morning, which was about 30 Dow points lower, and didn’t immediately rally, I would sell my entire position. As it turned out, the market opened over 200 points lower. I knew I had to get out. Fortunately, there was a brief bounce shortly after the opening, and I was able to sell my entire long position and actually go net short.

That same afternoon, five minutes to four, Dreyfus came by. He said, “Forgive me for not telling you before, but I had already sold S&P futures to hedge my exposure in the stock market.”

“How much did you sell?” I asked.

“Enough,” he answered.

“When did you go short?” I asked.

“Oh, about two months ago.” In other words, he had gone short at exactly the top, right around the time I had told his sister not to worry about an imminent top in the stock market. He asked, “Do you think I should cover my short position here?”

At that point, even though the Dow had already fallen 500 points to near 1,700, the futures were trading at a level that was equivalent to a Dow of 1,300. I said, “Jack, you have to cover the position here. The S&P futures are trading at a 4,500-point discount based on the Dow!”

He looked at me and asked, “What’s a discount?”

So did he cover his position at that point?

He sure did—right at the absolute low.

Getting back to your career path, why did you leave Dreyfus?

I felt that I was managing too many funds (seven at the time I left). In addition to the actual management, each fund also required speaking engagements and other activities. For example, each fund held four board meetings per year.

How could you possibly find the time to do all that?

I couldn’t; that’s why I left. During this entire time period, I had been talking to Soros on an ongoing basis. The more I talked to him, the more I began to realize that everything people had told me about him was wrong.

What had they told you?

There were all these stories about turnover at the firm. George had a reputation for paying people well but then firing them. Whenever I mentioned that Soros had tried to hire me, my mentors in the business adamantly advised me not to go.

Soros had actually started referring to me as his “successor” before I ever joined the firm. When I went to Soros’s home to be interviewed, his son informed me that I was his tenth “successor.” None of the others had lasted too long. He thought it was hysterical. And when I arrived at Soros’s office the next day, the staff all referred to me as “the successor.” They also thought it was very funny.

Did you consider simply going back and managing your Duquesne Fund full-time after you left Dreyfus?

That was certainly an option. In fact, Duquesne’s assets under management had grown tremendously without any marketing at all simply because of all the

publicity I had received from the strong performance of the Dreyfus funds.

Why didn’t you go that route?

Quite simply, because George Soros had become my idol. He seemed to be about twenty years ahead of me in implementing the trading philosophy I had adopted: holding a core group of stocks long and a core group of stocks short and then using leverage to trade S&P futures, bonds, and currencies. I had learned a tremendous amount just in my conversations with Soros. I thought it was a nolose situation. The worst thing that could happen was that I would join Soros and he would fire me in a year—in which case I would have received the last chapter of my education and still have had the option of managing Duquesne. In the best case, it would all work out.

Did your relationship with Soros change once you started working for him?

The first six months of the relationship were fairly rocky. While we had similar trading philosophies, our strategies never meshed. When I started out, he was going to be the coach—and he was an aggressive coach. In my opinion, George Soros is the greatest investor that ever lived. But even being coached by the world’s greatest investor is a hindrance rather than a help if he’s engaging you actively enough to break your trading rhythm. You just can’t have two cooks in the kitchen; it doesn’t work. Part of it was my fault because he would make recommendations and I would be intimidated. After all, how do you disagree with a man with a track record like his?

Events came to a head in August 1989 when Soros sold out a bond position that I had put on. He had never done that before. To make matters worse, I really had a strong conviction on the trade. Needless to say, I was fairly upset. At that point, we had our first let-it-all-out discussion.

Basically, Soros decided that he was going to stay out of my hair for six months. Frankly, I wasn’t too optimistic about the arrangement because I thought that he had been trying to do that all along but was simply incapable of it. The situation was saved, however, by events heating up in Eastern Europe in late

1989. As you may know, transforming Eastern Europe and the Soviet Union from communist to capitalist systems has been Soros’s main endeavor in recent years. He has set up foundations in eleven countries to help achieve this goal. With George off in Eastern Europe, he couldn’t meddle even if he wanted to.

Everything started to come together at that time. Not only was I trading on my own without any interference, but that same Eastern European situation led to my first truly major trade for Soros’s Quantum Fund. I never had more conviction about any trade than I did about the long side of the Deutsche mark when the Berlin Wall came down. One of the reasons I was so bullish on the Deutsche mark was a radical currency theory proposed by George Soros in his book, The Alchemy of Finance. His theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tight monetary policy, the country’s currency would actually rise. The dollar provided a perfect test case in the 1981-84 period. At the time, the general consensus was that the dollar would decline because of the huge budget deficit. However, because money was attracted into the country by a tight monetary policy, the dollar actually went sharply higher.

When the Berlin Wall came down, it was one of those situations that I could see as clear as day. West Germany was about to run up a huge budget deficit to finance the rebuilding of East Germany. At the same time, the Bundesbank was not going to tolerate any inflation. I went headlong into the Deutsche mark. It turned out to be a terrific trade.

How large a position did you put on?

About $2 billion.

Did you have any difficulty putting on a position that size?

No, I did it over a few days’ time. Also, putting on the position was made easier by the generally bearish sentiment at the time. The Deutsche mark actually fell during the first two days after the wall came down because people thought that the outlook for a growing deficit would be negative for the currency.

Any other major trades come to mind? I’m particularly interested in your reasoning for putting on a trade.

In late 1989 I became extremely bearish on the Japanese stock market for a variety of reasons. First, on a multiyear chart, the Nikkei index had reached a point of overextension, which in all previous instances had led to sell-offs or, in the worst case, a sideways consolidation. Second, the market appeared to be in a huge speculative blow-off phase. Finally, and most important—three times as important as everything I just said—the Bank of Japan had started to dramatically tighten monetary policy. Here’s what the Japanese bond market was doing at the same time. [Druckenmiller shows me a chart depicting that at the same time the Nikkei index was soaring to record highs, the Japanese bond market was plummeting.] Shorting the Japanese stock market at that time was just about the best risk/reward trade I had ever seen.

How did you fare at the start of the air war against Iraq when the U.S. stock market abruptly took off on the upside and never looked back? Were you short because the market had been in a primary downtrend before that point? If so, how did you handle the situation?

I came into 1991 with positions that couldn’t have been more poorly suited to the market price moves that unfolded in the ensuing months. I was short approximately $3 billion in the U.S. and Japanese stock markets, and I was also heavily short in the U.S. and world bond markets.

I started to change my market opinion during the first two weeks of 1991. On the way down, the pessimism regarding the U.S. stock market had become extreme. Everybody was talking about how the market would crater if the United States went to war against Iraq. Also, the breadth was not there. Even though the Dow Jones index had fallen to a new recent low, only about eighty of the seventeen hundred New York Stock Exchange stocks had made new lows.

By January 13, I had covered my short S&P futures position, but I was still short stock. On that day, I spoke to Paul Tudor Jones, who had just returned from

participating in a roundtable discussion sponsored by Barron’s. He told me that eight out of the eight participating money managers had said they were holding their highest cash position in ten years. I’ll never forget that the S&P was near 310 and Paul said, “340 is a chip shot.” I was already turning bullish, but that conversation gave me an extra push in that direction. I was convinced that once the war started, the market had to go up, because everyone had already sold.

Why didn’t you wait until the war had actually started before you began buying?

Because everybody was waiting to buy after the war started. I thought it was necessary to start buying before the January 15 deadline set by the United States.

Had you switched completely from short to long before the huge rally on the morning following the start of the air war?

I had in the Duquesne Fund because it was more flexible. In Soros’s Quantum Fund, we had switched our S&P futures position from short to long, but we still had a huge short position in actual stocks. A large portion of this position was in the bank and real estate stocks, which were difficult to cover. We were fully long within a few days after the start of the war.

How did you fare after the smoke cleared?

As incredible as it may seem, we ended up having an up January after going into the month with a $3 billion short position in equities worldwide, a $3 billion short position in the dollar versus the Deutsche mark, and a large short position in U.S. and Japanese bonds—all of which proved to be the exact wrong positions to hold.

Why did you have such a large short position in the dollar versus the Deutsche mark?

This was the same position we had held on and off for over a year since the Berlin Wall had come down. The basic premise of the trade was that the Germans would adhere to a combined expansionary fiscal policy and tight monetary policy—a bullish combination for their currency.

What caused you to abandon that position?

There were two factors. First, the dollar had been supported by safe-haven buying during the U.S. war with Iraq. One morning, there was a news story that Hussein was going to capitulate before the start of the ground war. The dollar should have sold off sharply against the Deutsche mark on the news, but it declined only slightly. I smelled a rat. A second factor was the talk that Germany was going to raise taxes. In other words, they were going to reverse their expansionary fiscal policy, which would eliminate one of the primary reasons for our being long the Deutsche mark in the first place. In one morning, we bought about $3.5 billion against the Deutsche mark.

The United States is experiencing a protracted recession and extremely negative consumer sentiment [at the time of this interview, December 1991]. Do you have any thoughts about the long-term economic prospects for the country?

In my view, the 1980s were a ridiculous repeat of the 1920s. We had built up the debt-to-GNP ratio to unsustainable levels. I became more convinced about the seriousness of the problem with all the leveraged buyouts of the late 1980s, which made the overall debt situation get worse and worse. I have never believed that the current economic downturn was a recession; I have always viewed it as a debt liquidation, which some people call a depression. It’s not

simply a matter of a two-quarter recession. It’s a problem where you build up years of debt, which will act as a depressant on the economy until it gets worked off over a long period of time. A debt liquidation tends to last for years.

Given your very negative long-term view of the U.S. economy, are you holding a major long position in bonds?

I was long until late 1991. However, an attractive yield should be the last reason for buying bonds. In 1981 the public sold bonds heavily, giving up a 15 percent return for thirty years because they couldn’t resist 21 percent short-term yields. They weren’t thinking about the long term. Now, because money market rates are only 4.5 percent, the same poor public is back buying bonds, effectively lending money at 7.5 percent for thirty years to a government that’s running $400 billion deficits.

The current situation is just the inverse of 1981. In 1981 the public should have seen Volcker’s jacking up of short-term rates to 21 percent as a very positive move, which would bring down long-term inflation and push up bond and stock prices. Instead, they were lured by the high short-term yields. In contrast, now with the economy in decline, the deficit ballooning, and the administration and the Fed in a state of panic, the public should be wary about the risk in holding long-term bonds. Instead, the same people who sold their bonds in 1981 at 15 percent rates are now buying them back at 7.5 percent because they don’t have anything better to do with their money. Once again, they’re not focusing on the long term.

Your long-term performance has far surpassed the industry average. To what do you attribute your superior track record?

George Soros has a philosophy that I have also adopted: The way to build longterm returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits. Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has

already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

What else have you learned from Soros?

I’ve learned many things from him, but perhaps the most significant is that 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. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.

As an example, shortly after I had started working for Soros, I was very bearish on the dollar and put on a large short position against the Deutsche mark. The position had started going in my favor, and I felt rather proud of myself. Soros came into my office, and we talked about the trade.

“How big a position do you have?” he asked.

“One billion dollars,” I answered.

“You call that a position?” he said dismissingly. He encouraged me to double my position. I did, and the trade went dramatically further in our favor.

Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.

Although I was not at Soros Management at the time, I’ve heard that prior to the Plaza Accord meeting in the fall of 1985, other traders in the office had been piggybacking George and hence were long the yen going into the meeting. When the yen opened 800 points higher on Monday morning, these traders couldn’t believe the size of their gains and anxiously started taking profits. Supposedly, George came bolting out of the door, directing the other traders to stop selling the yen, telling them that he would assume their position. While these other traders were congratulating themselves for having taken the biggest profit in their lives, Soros was looking at the big picture: The government had just told him that the dollar was going to go down for the next year, so why shouldn’t he

be a pig and buy more [yen]?

Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.

How do you handle the pressure of managing a multibillion dollar portfolio?

I’m a lot less nervous about it now than I was a few years ago. The wonderful thing about our business is that it’s liquid, and you can wipe the slate clean on any day. As long as I’m in control of the situation—that is, as long as I can cover my positions—there’s no reason to be nervous.

According to Druckenmiller, superior performance requires two key elements: preservation of capital and home runs. The first principle has been quite well publicized, but the second is far less appreciated. From a portfolio perspective, Druckenmiller is saying that in order to really excel, you must take full advantage of the situations when you are well ahead and running a hot hand. Those are the times to really press, not rest on your laurels. Great track records are made by avoiding losing years and managing to score a few high-doubledigit-or triple-digit-gain years. On an individual trade basis, going for home runs means really applying leverage in those infrequent circumstances when you have tremendous confidence. As Druckenmiller puts it, “It takes courage to be a pig.”

Another important lesson to be drawn from this interview is that if you make a mistake, respond immediately! Druckenmiller made the incredible error of shifting from short to 130 percent long on the very day before the massive October 19, 1987, stock crash, yet he finished the month with a net gain. How? When he realized he was dead wrong, he liquidated his entire long position during the first hour of trading on October 19 and actually went short. Had he been less open-minded, defending his original position when confronted with contrary evidence, or had he procrastinated to see if the market would recover, he would have suffered a tremendous loss. Instead, he actually made a small profit. The ability to accept unpleasant truths (i.e., market action or events

counter to one’s position) and respond decisively and without hesitation is the mark of a great trader.

Although Druckenmiller employs valuation analysis and believes it is important in gauging the extent of a potential future price move once the current market trend reverses, he emphasizes that this approach cannot be used for timing. The key tools Druckenmiller applies to timing the broad market are liquidity analysis and technical analysis.

In evaluating individual stocks, Druckenmiller recalls the advice of his first boss, who made him realize that the initial step in any analysis is determining the factors that make a particular stock go up or down. The specifics will vary for each market sector, and sometimes even within each sector.

Druckenmiller’s entire trading style runs counter to the orthodoxy of fund management. There is no logical reason why an investor (or fund manager) should be nearly fully invested in equities at all times. If an investor’s analysis points to the probability of an impending bear market, he or she should move entirely to cash and possibly even a net short position. Recall Druckenmiller’s frustration at being extremely bearish in mid-1981, absolutely correct in his forecast, and still losing money, because at the time, he was still wedded to the idea that a stock manager had to be net long at all times. There is little question that Druckenmiller’s long-term gains would have been dramatically lower and his equity drawdowns significantly wider if he restricted himself to the long side of the stock market. The flexibility of Druckenmiller’s style—going short as well as long and also diversifying into other major global markets (e.g., bonds and currencies)—is obviously a key element of his success. The queen in chess, which can move in all directions, is a far more powerful piece than the pawn, which can only move forward.

One basic market truth (or, perhaps more accurately, one basic truth about human nature) is that you can’t win if you have to win. Druckenmiller’s plunge into T-bill futures in a desperate attempt to save his firm from financial ruin provides a classic example. Even though he bought T-bill futures within one week of their all-time low (you can’t pick a trade much better than that), he lost all his money. The very need to win poisoned the trade—in this instance, through grossly excessive leverage and a lack of planning. The market is a stern master that seldom tolerates the carelessness associated with trades born of desperation.

Key Themes

The chapter is the earliest complete statement of top-down macro analysis — valuation for risk, liquidity for direction, technicals for timing — and of technical confirmation as an independent information source. The Soros passages are the canonical text of extreme concentration, being a pig, and the asymmetric arithmetic behind ruthless risk management: dollars made when right versus lost when wrong. The 1987 and T-bill stories supply the counterweight — intellectual humility and the lethal difference between being right and being right with leverage.

Context & Significance

Published the same year as the sterling trade, the interview freezes Druckenmiller at the inflection point between the Duquesne years and global fame. Its Schwager-series reach made his method the most widely studied macro framework among professional traders — "preservation of capital and home runs" and "it takes courage to be a pig" entered the industry's permanent vocabulary through this chapter alone.

For this KB it serves as the trunk of the tree: the Lost Tree speech, the Norges Bank interview, and the Talks at GS session all restate these doctrines with later stories, but the formulations here are the originals. It is also the essential counterpoint to the legend — a manager who lost everything in four days, blew the day before the crash, and built the greatest record in the industry on the lessons. Read alongside Lost Tree Club (2015), it shows the philosophy at the beginning and at the summit, in the same words.