Stanley Druckenmiller is by all accounts one of the greatest investors who has ever lived. If you don’t know who Druckenmiller is read this. He recently sat down for an interview with Kiril Skoloff at RealVision and he said something really interesting withquote from Druckenmiller via The Acquirer’s Multiple:
These algos have taken all the rhythm out of the market and have become extremely confusing to me.
And when you take away price action versus news from someone who’s used price action news as their major disciplinary tool for 35 years, it’s tough, and it’s become very tough.
I don’t know where this is all going. If it continues, I’m not going to return to 30% a year any time soon, not that I think I might not anyway, but one can always dream when the free money ends, we’ll go back to a normal macro trading environment.
What’s interesting isn’t necessarily Druckenmiller’s take on the state of the markets. Although it is worthy of consideration. What is interesting is that he has enough self-awareness to see that what worked for for decades no longer works. In short, Druckenmiller’s edge is not what it once was.
Suffice it to say the active vs. passive debate has been beaten into the ground. One thing is clear. If you are going to be an active investor, of any kind, you need to have an edge. While an edge is necessary for long-term success as an active investor, it is not sufficient. Other things come into play like luck.
Anthony Isola at A Teachable Moment was asked by a reader about a speculative investment. He responded thusly:
As far as investing in speculative things like this you need to ask yourself three questions.
- Do I have an edge?
- Do I have access to more info than others?
- Can I rely on data and my expertise to make a decision or am I just in love with a story?
The answers to those questions will lead you to make a good decision.
Having an edge is job number one. Every investor would do well to do an inventory of their edges like Howard Lindzon did in this recent post talking about venture investing. Josh Brown at The Reformed Broker recently explained why it is that the private equity funds wealthy RIA clients are getting pitched are in all likelihood edge-less.
Since we are human we are likely to be overconfident when it comes to assessing our investing abilities. However doing a forensic analysis of your edge and your investment performance is a good step in assessing your skill, and willingness, to go down the active investment path. There’s nothing wrong with being humble in the face of adversity, like Stanley Druckenmiller, the big mistake is thinking you have an edge when in reality you have none.
