Today, I want to tell you a story…
It’s about one of the most successful investors of our time and the biggest mistake he made in his career.
It seems a good time to retell this tale, given the state of the stock market.
The Biggest Mistake Of Stanley Druckenmiller’s Career
The protagonist of this story is the famous Stanley Druckenmiller.
Stanley began his career at age 23 in a Pittsburgh bank. He outgrew his position quickly, and, within three years, in 1981, he started his own asset management firm.
This venture proved to be such a success that, in 1989, the notorious Wall Street Trader George Soros hired Stanley to manage the Quantum Fund.
Stanley’s success continued. In 2000, he was able to boast that he had never had a losing year in all his career. This is remarkable given the challenging investing landscape of the 1980s.
However, in 2000, the story takes a turn.
Druckenmiller, a veteran of many boom and bust cycles, noticed that tech stock valuations were becoming unreasonably high. Some tech stocks were trading at a PE ratio of 100 or more. For comparison, Apple (AAPL) currently trades at a PE of 25.
Stanley thought this was nuts. In January 2000, he famously stormed into Soros’s office to tell him he was selling everything and stepping aside. He wanted out.
Unfortunately, not all his colleagues shared his view, and they stayed in the market.
In the short term, this was highly profitable for them, as the mania continued. This, of course, made Druckenmiller crazy—watching his former colleagues making spectacular gains while he was out of the market.
Soon, he could no longer resist the urge to be a part of the continuing rally, and, in March, he finally picked up the phone and bought $6 billion worth of tech stocks.
This happened one hour before the Dot-com market finally reached its tipping point and the bubble burst.
It was the worst trade Druckenmiller had ever made.
Six weeks later, his extraordinary record finally broken, Druckenmiller had to leave the Quantum Fund.
The Moral Of The Story And Why It’s Relevant Today
When Druckenmiller talks about this experience today, it’s interesting that he doesn’t think he learned anything new from it.
He already knew that he shouldn’t have done what he did and that emotions and the fear of missing out (FOMO) have no place in investing.
But, while Stanley might not have learned anything from his disastrous trade, you and I should.
Nobody, no matter how emotionally strong you think you are, is immune to such feelings.
And it is crucial you are able to recognize them if and when they surface.
Right now, I see a lot of FOMO behavior in the stock market.
All the news, no matter how bad, is shrugged off, and prices keep climbing.
Because of this, many investors who missed the initial rally are now jumping in, even though stocks are expensive.
Please, don’t make the same mistake.
This is not the time to be a buyer.
This is the time to be patient, to resist the fear of missing out, and to wait for a pullback.
And you can rest assured that I’ll be here to alert you the instant that happens.