Here’s a great interview with investing legend Stanley Druckenmiller at Real Vision in which he discusses the importance of investors knowing whether they’re currently ‘hot’ or ‘cold’ with regards picking investments. He also provides some great insights into what you should do if you find yourself in an investing slump.
Here’s an excerpt from that interview:
One of the lucky things was the way my industry prices. You price on in at the end of the year. You take a percentage or whatever profit you made for that year. So at the end of the year psychologically and financially you reset to zero.
Last year’s profits are yesterday’s news so I would always be a crazy person when I was down in a year. But I know, because I like to gamble, that in Las Vegas ninety percent of the people that go there lose… and the odds are only 33 to 32 against you in most of the big games. So how can ninety percent lose?
It’s because they want to go home and brag that they won money. So when they’re winning and they’re hot they’re very very cautious and when they’re cold and losing money they’re betting big because they want to go home and tell their wife or their friends they made money. Which is completely irrational.
So this is important because I don’t think anyone has ever said it before:
One of my most important jobs as a money manager was to understand whether I was hot or cold.
Life goes in streaks and like a hitter in baseball, sometimes a money manager is seeing the ball and sometimes they’re not. If you’re managing money you must know whether you’re cold or hot, and in my opinion when you’re cold you should be trying for bunts. You shouldn’t be swinging for the fences. You got to get back in a rhythm. So that’s pretty much how I operated it.
If I was down I had not earned the right to play big and the little bets you’re talking about were simply on to tell me had I re-established a rhythm and was I starting to make hits again.
The example I gave you of the Treasury bet in 2000, it’s a total violation of that which shows you how much conviction I had. So this dominates my thinking but, if a once-in-a-lifetime opportunity comes along you can’t sit there and go, oh I have not earned the right.
Now I will also say that was after a four-month break. My mind was fresh, my mind was clean, and I will go to my grave believing if I hadn’t taken that sabbatical I would have never seen that in September and I would have never made that bet.
It’s because I had been freed up and I didn’t need to be hitting singles because I came back and it was clear and I was fresh. It was like the beginning of the season so I wasn’t hitting bad yet. I had flushed that all out. But it is really really important if you’re a money manager to know when you’re seeing the ball. It’s a huge function of success or failure.
You can watch the entire interview here:
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