Some investors are happy if they can get a 10 percent gain. Some won’t be satisfied unless they can double their money.
Fund managers tend to slow down after achieving their annual return goal in a quarter, knowing that if they push for more, they may risk losing what they already have.
But that’s not the case with super speculators. George Soros is one example.
Here is a famous quote from him: “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.”
Stanley Druckenmiller, who worked for Soros and helped him grow the asset size of Quantum Fund from US$1 billion in 1998 to US$20 billion in 2000, admitted the most important thing he learned from Soros is exactly that.
When Druckenmiller had made a 30-40 percent profit, he wouldn’t start playing defense. Instead, he would get more aggressive to achieve home runs.
The maths is like this: If there are a few outstanding years of 100 percent plus gain, a fund will be well placed to achieve a decent long-term return.
Druckenmiller was actually the key person behind Quantum Fund’s legendary short sterling trade.
Right before the stock crash in 1987, Druckenmiller sensed something was going wrong and dramatically switched from a net long position to a net short position, and hence escaped the crisis unscathed.
That said, Druckenmiller’s almost gambler-like investment approach can also easily backfire. It is said he once betted heavily on US Treasury bill futures and lost everything.
This article appeared in the Hong Kong Economic Journal on April 20.
Translation by Raymond Tsoi
[Chinese version 中文版]
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