Many traders and investors are having an extremely difficult time with the current market. It is the first time that many have traded without a dovish Fed providing a tailwind, and the severity of the correction in certain parts of the market is already quite extreme.
This is one of the most challenging markets that many traders have ever faced, and they are not happy about the decisions and mistakes they have made as this bear market has unfolded.
It is important to understand, however, that even the best traders and investors in the world are not immune to mistakes and a lack of discipline. Even when they know what they should do, there are many times when they fail to do it and pay a heavy price.
Stanley Druckenmiller is considered to be one of the greatest investors of all time. He is known for producing an average return of 30% per year for many years and not having any down years at his hedge fund. He is profiled in the book The New Market Wizards by Jack D. Schwager.
In 2015, Druckenmiller was interviewed by Ken Langone, one of the founders of Home Depot (HD) . A transcript of the entire interview can be found here, but in light of current market challenges I found this exchange to be particularly fascinating:
Langone: "You mentioned some of your biggest winners in your career. What is the biggest mistake you made, and what did you learn from it?"
Druckenmiller: "Well, I made a lot of mistakes, but I made one real doozy. So, this is kind of a funny story; at least it is 15 years later because the pain has subsided a little. But in 1999, after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put $200 million in them in about February, and by mid-March, the $200 million short, I had lost $600 million, gotten completely beat up, and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought, well, I'm finished.
"So, the next thing that happens is I can't remember whether I went to Silicon Valley or I talked to some 22-year-old with Asperger's. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gunslingers because we only knew about IBM and Hewlett-Packard. I needed Ventas and Verisign. I wanted the six. So, we hired this guy, and we ended up on the year - we had been down 15, and we ended up like 35 percent on the year. And the Nasdaq's gone up 400 percent.
"So, I'll never forget it. January of 2000, I go into Soros's office, and I say I'm selling all the tech stocks, selling everything. This is crazy. 104 times earnings. This is nuts. Just kind of, as I explained earlier, we're going to step aside, wait for the next fat pitch. I didn't fire the two gunslingers. They didn't have enough money to really hurt the fund, but they started making 3 percent a day, and I'm out. It is driving me nuts. I mean, their little account is like up 50 percent on the year. I think Quantum was up seven. It's just sitting there.
"So like around March, I could feel it coming. I just - I had to play. I couldn't help myself. And three times during the same week, I pick up a - don't do it. Don't do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks, I had left Soros, and I had lost $3 billion in that one play.
"You asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So, maybe I learned not to do it again. But I already knew that."
Knowing what to do and actually doing it are two very different things in the market. Even the greatest investors in the world have to relearn things they already know many times. They are still impacted by their emotions and will make bad decisions for the wrong reasons.
Druckenmiller says "I didn't learn anything" but he did learn something. He learned that he isn't going to always be disciplined and do what he knows he should do. What is different about Druckenmiller is that he admits this failing and then he took steps to address it and get back on track. He took his punishment and then went back to work.
Every human being is subject to this issue and Wall Street has dealt with that to some extent by employing computer algorithms to help to deal with the frailty of human nature. Computers execute strategies coldly and bloodlessly, but those that design the strategies are still human and, at times, are very good at doing things that they really know they shouldn't.
There are several lessons here.
The first is that you WILL make some dumb mistakes. You will do things that you know that you shouldn't. It isn't due to a lack of knowledge. It is due to emotions and being human.
The second lesson is that if you recognize this problem and address it, then you can fix it. Druckenmiller came back from his $3 billion loss because he identified the problem, reset his strategy, and went back to work.
If you are struggling with the market, it is very likely you are kicking yourself for some of the mistakes that you have made. Without being psychic, I can predict that you have held on to some stocks longer than you should have and let losses grow too big in places before you dealt with them. That is the mistake that everyone makes in a market like this.
The answer to the problem is greater self-awareness. Admit to yourself that you just didn't do what you should have done. The problem is not a lack of knowledge. It is a lack of clarity combined with a lack of discipline. We have a general idea of what to do, but we don't establish clear rules, and then we fail to act.
The great thing about the market is that we always have an opportunity to improve. We are given a chance to recognize our failings and to deal with them. If you have been struggling, you can start fresh tomorrow.