What happened on the way to the stockbroker is funny now
Nobody can make big money by relying on what someone else tells them to do
So, “this is kind of a funny story at least, it is 15 years later, because the pain has subsided a little,” Stanley Druckenmiller told his audience at The Lost Tree Club.
“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 $200m in them in about February and by mid-March I had gotten completely beat up. And I was very proud of the fact that I never had a down year.
“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, and we ended up like 35% on the year. And the Nasdaq’s gone up 400%.
“So, in January 2000 I go into Soros’s office and say, ‘I’m selling all the tech stocks, everything. This is crazy at 104 times earnings. This is nuts.’ I didn’t fire the two gunslingers, because they didn’t have enough money to really hurt the fund, but they started making 3% a day and I’m out. And it is driving me nuts. I mean, their little account is up 50% on the year. I think Quantum was up 7%. It’s sitting there.
“So like around March I just had to play. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought billions worth of tech stocks, and in six weeks I had left Soros and I had lost billions in one play. You ask 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.”
“I will tell you something curious,” said Jesse Livermore in
Reminiscences of a Stock Operator, decades earlier. “A stock speculator sometimes makes mistakes and knows that he is making them. After he makes them he will ask himself why he made them; and after thinking over it cold-bloodedly a long time after the pain of punishment is over, he may learn how he came to make them, and when, and at what particular point of his trade; but not why. And then he simply calls himself names and lets it go at that.”
After repeated admonitions about tipsters (“A man must believe in himself and his judgment if he expects to make a living at this game. No, sir, nobody can make big money on what someone else tells him to do”), in 1901 Livermore made money almost effortlessly, before letting a play on cotton with the “Cotton King”, Percy Thomas, lead to a huge loss that grew even larger as he sat on it violating yet another of his own cardinal rules.
As Livermore more or less tells it in Reminiscences: “I was not bullish on cotton, but he was. I could not see the bull side at all, but he did. I cannot give you in detail the various steps by which I reached the state of mind that proved so costly to me. I think it was his assurances of the accuracy of his figures, which were exclusively his, and the undependability of mine, which were not exclusively mine but public property. When we began I was not only bearish, I was short the market. And once I had covered because he made me think I was wrong, I simply had to go long.
“It was the most asinine play of my career. Instead of standing or falling by my own observation and deductions, I was playing another man’s game. Having taken the first wrong step, I took the second and the third. I allowed myself to be persuaded not only into not taking my loss but into holding up the market. That is a style of play foreign to my nature and contrary to my trading principles and theories. Even as a boy in the bucket shops I had known better
“I got to feeling nervous and decided to lighten my load. This meant cleaning up either the cotton or the wheat. It seems incredible that knowing the game as well as I did I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. It was an utterly foolish play of all speculative blunders there are few greater than trying to average a losing game. After I got out of wheat, the price went up without stopping. If I had kept it I might have taken a profit of about $8m.
“And having decided to keep on with the losing proposition, I bought more cotton! And why do you think I bought it? To keep the price from going down! If that isn’t a supersucker play, what is? And then it was too late. When I sold out my line I was not completely cleaned out, but I had left fewer hundreds of thousands than I had millions before I met my brilliant friend Percy.”
To quote Plato: “The victory over self is of all victories the first and best while self-defeat is of all defeats at once the worst and the most shameful.”
To which should be added economist Thomas Schelling’s perennial question: “Who is this rational individual who in selfdisgust grinds his cigarettes down the disposal swearing that this time he means never again to risk orphaning his children and is on the street three hours later looking for a store that’s still open; who eats a high-calorie lunch knowing that he will regret it, does regret, resolves to compensate with a low-calorie dinner, but eats a high-calorie dinner knowing he will regret it; who spoils the trip to Disneyland by losing his temper when his children do what he knew they were going to do when he resolved not to lose his temper when they did it?”
“I had learned a great deal about the game of stock speculation, but I had not learned quite so much about the play of human weaknesses,” Livermore concluded. “There is no mind so machine-like that you can depend upon it to function with equal efficiency at all times. I now learned that I could not trust myself to remain equally unaffected by men and misfortunes at all times.”