- Posted by Ivanhoff on March 6th, 2014 at 9:40 pm
When asked about the most important lessons that Stan Druckenmiller learned from George Soros, he says the following:
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
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.
In my previous post, I talked about the incredible power of using small position sizes. I also mentioned that some of the best performing and most popular investors in the world, have made names for themselves by using ginormous position sizes. George Soros is one of those investors.
On September 16, 1992, Soros’ fund sold short more than $10 billion in pounds, profiting from the UK government’s reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.
Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound. Soros’s profit on the bet was estimated at over $1 billion. He was dubbed “the man who broke the Bank of England”.
Stanley Druckenmiller, who traded under Soros, was the genius behind the idea. Soros just pushed him to take a bigger size. In this case, the bigger size was one of the reasons why this trade worked. What is more important here is to highlight their position size. They risked their entire YTD gain (they were up 12%).
Just to give you a perspective of how ballsy it is to risk 12% of your capital on one trade, consider the following simplified example:
Let’s assume that your trading capital is 200k and you want to buy a stock at $50 with a stop at 47; hence you risk $3 per share.
Risking 12% of your capital, means 12% * 200k = 24,000.
Divide 24,000 by the amount you risk per share ($3) to get the total number of shares you could afford to buy, which in this case is 8000 shares.
8000 shares * Current Market price of $50 = 400k. You would have to take on a 100% margin in order to risk 12% of your capital.
It is said that concentration creates wealth, diversification helps to protect it. The reality is that big returns are often just the opposite coin’s side of big drawdowns. Trading big position sizes is not for most market participants. If you still want to do it, you could learn a lot from people that have actually done it for a living. What are the four lessons from Soros’ s adventure with the British Pound:
1. Size matters.
When you manage billions of dollars, there are only a few great, high-liquid opportunities each year that will allow you to achieve substantial returns. The only way to achieve those bigger returns is to take on a bigger position size. The smaller your capital base, the more great trading opportunities you have in the market and you won’t have to risk big on any one of them.
2. Earn the “right” to trade Big first
They were up 12% for the year. It wasn’t an incredible return, but it wasn’t bad either. In their eyes, they were able to afford the luxury to trade big. Here’s what Stanley Druckenmiller says on the subject:
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.
The way to build long-term 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.
3. Proper Timing is Everything when you Trade Big
A good entry point allows you to go through normal market reactions. An amazing entry point allows to use tighter stop and therefore bigger position size. Here’s hedge fund manager Scott Bessent on Stan Druckenmiller:
One of the things that I learned from Stan Druckenmiller is how to enter a trade. The great thing about Stan is that he can be wrong, but he rarely loses money because his entry point is so good.
4. Have a contingency plan
They were prepared for the worse case scenario. Despite their conviction, they knew that they might lose money, so they had an exit plan. They made sure that they could afford the loss and stay in business.
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.
INSIDE THE HOUSE OF MONEY, STEVEN DROBNEY, WILEY, 2008
Schwager, Jack D. (2009-10-13). The New Market Wizards: Conversations with America’s Top Traders. HarperBusiness. Kindle Edition.
A Lesson In Position Sizing – How You Could Lose 25% in Two Stocks and Still Have A Great Year
Posted by Ivanhoff on March 3rd, 2014 at 9:16 pm
Let’s assume that at any single time you hold 50 high-beta positions with relatively equal capital allocation of about 2%. Your intention is to hold […]
The Next Big Thing
Posted by Ivanhoff on February 25th, 2014 at 3:09 pm
People ask too often what the next big thing is. Sometimes the next big thing is the last big thing. Some trends last a lot […]
Should Google, Apple and Facebook Act Like Venture Capital Firms?
Posted by Ivanhoff on February 23rd, 2014 at 11:59 am
A couple weeks ago, I watched an interesting presentation by Chris Dixon, who talked about risk taking, innovation and disruption: Big companies are working hard […]
Active vs Passive Catalysts
Posted by Ivanhoff on February 19th, 2014 at 12:58 pm
Catalysts have the potential to change investors and traders’ expectations. There are two distinctive types of catalysts in the stock market – active and passive. […]
Wall Street’s Games – Loving Google and Hating Apple?
Posted by Ivanhoff on January 31st, 2014 at 3:49 pm
Everyone wants to own the next Google or Apple, but it is easier said than done. Fifteen years ago, Google did not even exist […]
When Declining Correlation Meets Rising Volatility
Posted by Ivanhoff on January 21st, 2014 at 12:27 pm
This Market Review was originally published at socialLeverage50.com on Jan 18. The best (biotech, solar, cloud) and the worst performers (gold and silver miners) from […]
Why Are Biotech Stocks Outperforming By So Much?
Posted by Ivanhoff on January 19th, 2014 at 7:59 pm
Biotech stocks have gone parabolic over the past year, to a point that many have started calling them a bubble. Here’s the thing about sustained […]
Speculating About 2014
Posted by Ivanhoff on December 18th, 2013 at 12:26 am
There are two types of forecasts – lucky and wrong. Here are my educated guesses and speculations about 2014: 1) In 2014, we will see […]
From Ugly Ducklings To Swans in 12 Months
Posted by Ivanhoff on December 12th, 2013 at 11:07 am
2013 has been an year of huge comebacks and massive short squeezes. Some of the most hated stocks in 2012 – NFLX, FSLR, BBY, ended […]
- The Difference Between You and George Soros
- A Lesson In Position Sizing – How You Could Lose 25% in Two Stocks and Still Have A Great Year
- The Next Big Thing
- Should Google, Apple and Facebook Act Like Venture Capital Firms?
- Active vs Passive Catalysts
- Wall Street’s Games – Loving Google and Hating Apple?
- When Declining Correlation Meets Rising Volatility
- Why Are Biotech Stocks Outperforming By So Much?
- Speculating About 2014
- From Ugly Ducklings To Swans in 12 Months
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010