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Legendary hedge fund manager Stanley Druckenmiller said it was "ridiculous" that rich people like him and billionaire Ken Langone get Social Security checks each month from the government.

"I mean it's ridiculous that our Social Security is not means tested. It's ridiculous," he said during a Q&A with Langone on January 18 at the Lone Tree Club in North Palm Beach, Florida.

Langone, 79, told Druckenmiller that he got $2,500 each month and that his wife got $1,000. Langone, who has an estimated networth of $2.7 billion, agreed with Druckenmiller.

Druckenmiller, 61, hasn't quite reached the age for retirement benefits. The age is 62.

For the past few years, though, Druckenmiller has been incredibly vocal about this issue, which he has called "generational theft."

Druckenmiller, who accurately called the housing crisis, has said he sees another "storm" coming because of entitlement transfer payments. Entitlements include programs such as Social Security and Medicare that primary go to older, retired workers.

The billionaire macro fund manager believes that seniors in this country are essentially stealing from the young via these transfers.

If Druckenmiller had his way, he would "freeze all the entitlement payments right now because they've already taken such a tremendous share away from the rest of our population."

Here's an excerpt of the transcript [via Cove Street Capital]:

Ken Langone: You've expressed concerns about entitlement. What's the solution? You got a loaded crowd here now. Be careful.

Stan Druckenmiller: That's a rough one. So, if you could go back to 1965, the senior poverty rate in this country was 30%, and it's 9% now. I think everybody can applaud that's a great achievement. The problem is you go back to 1965, your child poverty rate was 21%, and now it's 25%. So, all the gains we've made in terms of poverty the last 40 years have accrued to the elderly. If you look at the average per capita income in this country, we're spending 56% of every worker's dollars on the elderly, and we're spending 7% on children.

So, how would I solve it? Well, I couldn't, because if I wanted to do it, nobody would ever vote me in office. But I would just say that some solutions are a combination of tax reform dealing specifically with the problem because the longer it goes on, the more you're either going to have to raise taxes or cut spending down the road because of compounding. I would freeze-forget COLAs [Cost of Living Allowance]. I would freeze all the entitlement payments right now because they've already taken such a tremendous share away from the rest of our population.

You know, it's funny, if you go back to as late as 1970, entitlements were 28% of all federal outlays. Now they're 72%. And when you start talking about, 'Oh my God, we can't freeze this stuff.' Why not? You just picked up 50 points of share on everybody. Why not freeze it? And, you know, Ken and I have talked. I mean it's ridiculous that our Social Security is not means tested. It's ridiculous. The fact that he's getting — what is your monthly check?

Langone: Twenty-five hundred dollars a month.

Druckenmiller: It's ridiculous.

Langone: And Elaine gets another thousand.

Druckenmiller: While we have 24% of the kids in this country in poverty and probably, you know, the elephant in this room is obviously the healthcare system. You've got to get the market into the equation so people see the cost and they have to make an economic decision. A lot of this goes into end-of-life payments. You wonder if you had to pay 30 to 40% of the bill instead of not even knowing what the bill is, whether different choices would be made.

But you talk about entitlement. The federal debt right now is $17 trillion. The reason it's $17 trillion and not higher is because all those payments that are promised to Kenny, a lot of the people in this room, myself not too far in the future, they're not on the government balance sheet. Any company in America if you owe payments of that certainty, it would be debt. In the US government accounting, it's revenue.

If you present valued what we have promised to seniors in Medicare and Social Security and Medicaid payments, the federal debt right now under [GAAP] accounting would be $205 trillion, not 17, because we have a demographic boom, which is the other side of the baby boom. As everybody knows in this room, it's the gray boom. We are creating 11,000 new seniors, and we're only creating about 18% of youth employed to support those payments to them. So, we've got a big problem, and it really doesn't start until 2024, 2015, but if you wait 'til 2024, it's too late. It's not unlike climate change.

It's probably not a problem for 30 years, but if you wait 30 years, you can't fix it. So, you got to start now.

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Billionaire hedge fund legend Stanley Druckenmiller, the now retired founder of Duquesne Capital, thinks the Federal Reserve's aggressive approach to monetary policy could "end badly."

According to Druckenmiller, the Fed's policies in recent years have made no sense from a risk/reward perspective.

"I know you're frustrated about zero rates, I know that it's so tempting to make investments and it looks good for today, but when this thing ends, because we've had speculation, we've had money building up for four to six years in terms of a risk pattern. I think it could end very badly," he said on January 18 at the Lone Tree Club in North Palm Beach, Florida. His comments were only posted online late last week by hedge fund Cove Street Capital.

Druckenmiller, 61, accurately called the housing crisis. During his speech, he said that he has the same horrific feeling now as he did back then. 

"... I feel more like it as in '04 where every bone in my body said this is a bad risk/reward, but I can't figure out how it's going to end. I just know it's going to end badly, and a year-and-a-half later we figure out it was housing and subprime. I feel the same way now." 

Druckenmiller pointed out that there are some "early signs," including a huge percentage of initial public offerings (IPOs) that are unprofitable. He noted that the other time we had 80% of IPOs be unprofitable was in 1999, prior to the burst of the tech bubble. He also noted that there are "some really weird things" going on in the credit market. 

Here's an excerpt from his Q&A with billionaire investor Ken Langone [via Cove Street Capital]:

Ken Langone:"You mentioned in your talk that there are already early signs of excesses due to over-easy monetary policy. What are some of the signs you see?" 

Stan Druckenmiller:"Okay. I mentioned credit...Let's talk about that for a minute. In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they've already issued $1.1 trillion in debt, 50 percent more than they did in the '06, '07 period over that same time period. But more disturbing to me if you look at the debt that is being issued, Kenny, back in '06, '07, 28 percent of that debt was B rated. Today 71 percent of the debt that's been issued in the last two years is B rated. So, not only have we issued a lot more debt, we're doing so at much less standards. Another way to look at that is if those in the audience who know what covenant-light loans are, which are loans without a lot of stuff tied around you, back in '06, '07 less than 20 percent of the debt was issued cov-light. Now that number is over 60 percent. So, that's one sign. The other sign I would say is in corporate behavior, just behavior itself. So, let's look at the current earnings of corporate America. Last year they earned $1.1 trillion; 1.4 trillion in depreciation. Now, that's about $2.5 trillion in operating cash flow. They spent 1.7 trillion on business and capital equipment and another 700 billion on dividends. So, virtually all of their operating cash flow has gone to business spending and dividends, which is okay. I'm onboard with that. 

"But then they increase their debt 600 billion. How did that happen if they didn't have negative cash flow? Because they went out and bought $567 billion worth of stock back with debt, by issuing debt. So, what's happening is their book value is staying virtually the same, but their debt is going like this. From 1987 when Greenspan took over for Volcker, our economy went from 150 percent debt to GDP to 390 percent as we had these easy money policies moving people more and more out the risk curve. Interestingly, in the financial crisis that went down from about 390 to 365. But now because of corporate behavior, government behavior, and everything else, those ratios are starting to go back up again. 

"Look, if you think we can have zero interest rates forever, maybe it won't matter, but in my view one of two things is going to happen with all that debt. A, if interest rates go up, they're screwed and, B, if the economy is as bad as all the bears say it is, which I don't believe, some industries will get into trouble where they can't even cover the debt at this level.

"And just one example might be 18 percent of the high-yield debt issued in the last year is energy. And I don't mean to offend any Texans in the room, but if you ever met anybody from Texas, those guys know how to gamble, and if you let them stick a hole in the ground with your money, they're going to do it. So, I don't exactly know what's going to happen. I don't know when it's going to happen. I just have the same horrific sense I had back in '04. And by the way, it lasted another two years. So, you don't need to run out and sell whatever tonight." 

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Clik here to view.The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.

I’m here to tell you I was a pig.

And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully. -Stan Druckenmiller

This quote comes from a speech Druck gave at the Lost Tree Club back in January. I’ve read the speech twice now and I’m sure I’ll read it many more times (and recommend you do the same – here’s the link). For those who don’t know, Druck generated 30% average annual returns at his hedge fund over a period of 30 years and never had a single down year – possibly the best track record ever.

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Clik here to view.I’m sharing this quote with you here because I think it’s central to what we are trying to accomplish. I want to help you close the gap between being an average investor and being a phenomenal investor. That’s my whole purpose with this thing.

But there’s one huge road block we run into. Being a “pig” isn’t easy. For many people, it may not be possible. As Druck explains in his speech, when he and Soros famously shorted the British pound they put 200% of the fund into that one trade. 200%! They put every penny into the trade and then borrowed against every penny to lever up their returns. That’s what he means by ‘being a pig.’ How many people could put this trade on and still sleep at night? This also goes against everything we are taught when learning how to invest. Step one is to diversify, right? What they don’t tell you is the greatest investors of all time look at step one and call, “bullshit.”

The reason phenomenal investors are able to forego diversification like this is because their skill set is different. They are capable of doing the research such that they can have a high level of confidence in an idea. And when they are very, very confident about an idea they can afford to swing for the fences because their batting average with high confidence ideas is very, very good (and, probably even more important, they’re also willing to admit when they’re wrong and get out quickly). And why put any money into anything else when you have one really, really good idea?

Most investors can’t do this simply because they just don’t have very good batting averages. So bridging the gap between being an average investor and being a phenomenal one is first raising your batting average. This requires both knowledge and experience. The second step is trusting your knowledge and experience when you find a high confidence idea (while also limiting the damage when you’re wrong). And when I say, “high confidence idea,” I’m thinking of a quote from another Soros disciple, Jim Rogers:

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Clik here to view.One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do… I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up… I wait for a situation that is like the proverbial “shooting fish in a barrel.” -Jim Rogers

You have so much confidence in an idea that it feels like a “sure thing” or as sure of a thing as there possibly can be in the financial markets. This is how I felt about Herbalife back in January and that’s exactly what I did. I put about half of my own personal liquid assets into that one trade. That’s what “being a pig” meant to me.

Bridging the gap between being an average investor and phenomenal investor is a process. The average investor should be diversified in order to protect them from their own lack of investing skill. But the phenomenal investor throws it out the window and says “I’ll just be in cash until there’s a trade opportunity so compelling that I simply can’t resist. Then I’ll back up the truck.” (This is probably why guys like Jeff Gundlach and Mohamed El-Erian are mostly in cash right now in their personal accounts – they’re waiting for a compelling opportunity and don’t feel compelled to hold anything just to stay invested.)

It’s up to each individual to determine where they are in the process and how their personal risk tolerance should dictate how they implement these ideas in their own investments. A broad ETF portfolio, like any of the models presented in Meb Faber’s new book, is ideal for a beginning investor or one with a very low tolerance for risk. Just via the cost savings versus traditional investment methods this will vault her performance far ahead of most other individual investors. More advanced and aggressive investors, however, should focus more on the most attractive individual risk/reward opportunities they can find based upon their own analysis because that’s where I believe the Druck/Soros/Rogers-type returns lie.

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Legendary hedge fund manager Stanley Druckenmiller, who runs Duquesne Capital, made a huge bet on gold during the second quarter.

Duquesne, which is now run as a family office, finished the second quarter with 2.88 million shares of SPDR Gold Trust, according to the fund's 13F filing.

The new position is now Druckenmiller's largest long position.

Druckenmiller's GLD stake had a value of $300.3 million at the end of the quarter based on the June 30 closing share price of $104.27. Shares of GLD have fallen 5.5% since then.

Druckenmiller has previously said that when he sees something that really excites him he will "bet the ranch on it." We reached out to Druckenmiller for comment on his GLD position.

Druckenmiller also increased his position in Facebook to 1,872,700 shares, up from 252,000 shares in the first quarter. He also took big new positions in Freeport-McMoRan (3.547 million shares), Halliburton (1.547 million shares), and Wells Fargo (1,679,400 shares), the filing shows.

Hedge funds are required in 13F forms to disclose only long equity holdings. These regulatory filings don't come out until 45 days after the end of each quarter.

Here's how GLD shares performed during the second quarter:

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And here's how GLD has performed since the start of the second quarter:

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NOW WATCH: More trouble for Subway's Jared Fogle...

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I always advise investors to follow the smart money, and two people high on the list are Stanley Druckenmiller and Warren Buffett.

Second-quarter regulatory filings show that Stanley Druckenmiller, the famed hedge fund manager, just placed more than $323 million of his own money into a gold ETF, at a time when sentiment toward the yellow metal is in the basement. Meanwhile, Buffett announced this week that Berkshire Hathaway is purchasing aircraft parts supplier Precision Castparts for $32 billion.

Investors should take note!

Druckenmiller Sees Gold as a “Home Run”

Druckenmiller has commented in the past that if he sees something that really excites him, he’ll bet the ranch on it.

“The way to build long-term returns is through preservation of capital and home runs,” he said. “Grind it out until you’re up 30 to 40 percent, and then if you have the convictions, go for a 100-percent year.”

While I have always advocated for a diversified approach, this all-in approach has served him well. Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered 30 percent on an average annual basis. Thirty percent a year! That’s a superhuman, Michael Jordan-caliber performance—or Ted Williams, if we want to stick to baseball imagery. The point is that words such as “legendary” and “titan” were invented with people like Druckenmiller in mind.

During his career, the man has made some now-mythic calls, the most storied and studied being his decision to short the British pound in 1992. This bet against the currency forced the British government to devalue the pound and withdraw it from the European Exchange Rate Mechanism (ERM), which is why many people say the trade “broke the Bank of England.” It also made Quantum, George Soros’s hedge fund, $1 billion.

And now he’s making a call on gold. The $323-million investment is currently the single largest position in Druckenmiller’s family fund. It’s twice as large, in fact, as its second-largest position, Facebook, and amounts to 20 percent of total fund holdings.

His conviction in gold can be traced to his criticism of the Federal Reserve’s policy of massive money-printing and near-zero interest rates. Such ongoing low rates push investors and central banks alike into other types of assets, including physical gold.

Concerns over government policy is why prudent investors hope for the best but prepare for the worst. I’ve always advocated a 10-percent weighting in gold: 5 percent in gold stocks, 5 percent in bullion, then rebalance every year. This is the case in good times and in bad.

Trump on Gold

Love him or hate him as a presidential candidate, Donald Trump has the same attitude toward owning gold in today’s easy-money economy. After leasing a floor of the Trump Building to Apmex, a precious metals exchange, he agreed back in 2011 to accept three 32-ounce bars of gold as the security deposit, according to TheStreet.

The U.S. dollar, Trump says, is “not being sustained by proper policy and proper thinking.” Accepting the gold “was an opportunity… to show people what’s happening with the dollar so we can do something about it.”

Trump and Druckenmiller aren’t the only ones adding to their gold positions right now. As I told Daniela Cambone on this week’s Gold Game Film, the Chinese government is now reporting its gold consumption on a monthly basis. In July it purchased 54 million ounces. This is significant in the country’s march to become a world-class currency that’s supported by the International Monetary Fund (IMF) for special drawing rights.

Both of our precious metals funds, Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), aim to offer protection against the sort of monetary instability Druckenmiller and Trump have warned us about.

Buffett Makes the Biggest Deal of His Career in Airlines

Many investors know that Warren Buffett has been hard on the airline industry in the past, even going so far as to say, in his 2008 letter to Berkshire Hathaway investors, that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville [Wright] down.”

But since then it appears as if he’s come around—in a huge way. At more than $32 billion, his purchase of Precision Castparts is the largest-ever takeover in the aerospace sector, not to mention the largest deal Buffett’s ever been involved in.

More than that, though, the deal implies that Buffett, 85, sees great opportunity in the sector where previously he didn’t.

Indeed, the Wall Street Journal writes that the acquisition comes “as airlines’ seemingly insatiable appetite for new fuel-efficient jets in the past several years has left Airbus Group SE and Boeing Co. with combined orders on the books for over 10,000 jets.”

A couple of months ago, I shared with you Boeing’s estimate that $5.6 trillion in new aircraft orders will be placed over the course of the next 20 years. In the infographic below, courtesy of World Property Journal, you can see that Boeing’s world fleet is set to double in size during this period, from 21,500 units to 43,560.

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Precision Castparts, based in Portland, Oregon, manufactures parts used in gas turbines and aircraft engines. Its stock flew up 19 percent on the announcement.

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“We’re going to be in this business for the next 100 years,” Buffett told CNBC’s Squawk Box.
Follow the money!

SEE ALSO: A hedge fund likely made a killing investing in a company right before Warren Buffett acquired it

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Legendary hedge fund manager Stanley Druckenmiller says he loves Amazon because, unlike IBM, it's not focused on short-term quarterly earnings.

"The last 19 quarters, Amazon has missed their quarterly earnings nine times. They don't give a damn," Druckenmiller said at the DealBook Conference Tuesday.

He continued: "IBM has missed three quarters since 2006. They really care about their quarterly earnings."

Druckenmiller's Duquesne Capital — a family office — bought Amazon shares during the third quarter, Business Insider has learned.

Druckenmiller has previously criticized IBM for its stock buybacks, referring the company as a "poster child" for bad corporate growth.

IBM has seen 14 consecutive quarters of dropping sales, but that's not their only problem. Druckenmiller noted that IBM has shrunk its research and development as a percentage of sales.

"They are under major attack from Amazon, Palantir, all these companies out there are eating away," he said. "Their R&D has shrunk in absolute terms and as a percentage of their sales."

He pointed out that Amazon has increased its R&D.

'I love Amazon'

"Oh yeah, I love Amazon," Druckenmiller said. "Because they're investing in their future. [Jeff] Bezos is a serial monopolist," he said, referring to the company's founder.

Druckenmiller particularly likes Amazon's profitable cloud-computing business, Amazon Web Services.

"He's come up with this AWS, which is absolutely exploding ... If you're starting a business today, you don't need a tech department, you don't need a back office, you can use AWS. By the way, it's just ripping to shreds the 10 or 15 consultants from IBM ... that you used to need, but you don't need because now you go into cloud."

Druckenmiller is convinced that Amazon will eventually increase its profit margins on AWS.

DealBook's Andrew Ross Sorkin also asked Druckenmiller for his opinion on Netflix.

"Same thing," he said. "I only heard 30 seconds of [Netflix CEO Reed Hastings] ... but he said, 'If you manage for quarterly earnings, you're dead.' Then somebody on CNBC says, 'Well, it's easy for him to say with a stock price like that.' Well, why do you think he has a stock price like that? Because he thought about the long term and not cared about quarterly earnings and all this short-termism the whole time."

Watch the video below — start at the 13-minute mark for Amazon comments:

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NOW WATCH: This is what will happen when the Fed raises rates

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Stanley Druckenmiller doesn't think the Federal Reserve's experiment of keeping interest rates near 0% to spur economic growth will end well.

Speaking at The New York Times' DealBook Conference on Tuesday, Druckenmiller said"all you do" when keeping interest rates at 0% for this long is "pulling demand forward today.""This is not some permanent boost you get — you're borrowing from the future,"he said.

Druckenmiller also said he thought there had been "a misallocation of resources" because the zero-interest-rate policy had gone on so long and, he said, "so unnecessarily."

"The chickens will come home to roost," he added.

The basic idea supporting rates at 0% is that the economy isn't as strong as it needs to be (or should be), and only by keeping interest rates super low will the Fed be able to give the economy the space and time it needs to repair itself.

But in Druckenmiller's view, this policy has simply created bad behavior. And worse, he thinks, it has mortgaged the economy's future potential.

Druckenmiller told The Times' Andrew Ross Sorkin, "I love the title of your conference," referring to this year's DealBook event, titled "Playing for the Long Term,""because whether it's government, business, the Fed, or money managers, everybody is managing for the short term now."

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Clik here to view.And in Druckenmiller's view, this is an outgrowth of the Fed's policy.

Druckenmiller said he thought the Fed did a "terrific" job keeping the economy afloat back in 2008-2009 at the height of the financial crisis.

But Druckenmiller added that somewhere between 10.1% and 5.1% unemployment, with economic growth looking up and consumer spending bouncing back, you would've thought the Fed would get away from its emergency policy. But it hasn't.

And so Druckenmiller seems to be adopting the view that the Fed is sending signals about an economy that is simply not strong enough to handle anything but 0% rates despite many indications of an economy that is more than capable of handling normalized interest rates.

All in all, though, Druckenmiller simply thinks the Fed is making a mistake.

As an example, Druckenmiller recalled that in 2003 the economy was growing at a rate between 7% and 9% and the Fed had rates at 1.5%.

Druckenmiller said he knew at the time that the Fed was making a mistake, but he didn't know how it would play out (he said his guess would have been runaway inflation, and he acknowledged that this would have been dead wrong). A few years later, the housing bubble started to blow up, and then it became clear to Druckenmiller what the Fed's errors had created.

He feels the same way today: The Fed is making a mistake, but Druckenmiller doesn't know where or how it will go wrong. He just knows it will.

Watch Druckenmiller's full interview here.

SEE ALSO: DRUCKENMILLER: I know this going to end badly, I can feel it in my bones.

SEE ALSO: Hedge fund legend Stan Druckenmiller raved about Amazon, one of his newest investments

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Last April I wrote a post about the specific trading style that has made guys like Stan Druckenmiller, Jim Rogers and George Soros so successful. That post focused on a single quote from Druck which I found particularly compelling because it goes against what most investment pundits would tell you is the right way to invest.

But Druck made an even more poignant and timely point in that speech a year ago. He singled out specifically what he believes to be the most important factor behind the returns in risk assets, namely the stock market:

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

Interestingly, his further point in this regard was not the popular, “don’t fight the Fed.” In fact, it was just the opposite:

“80% of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period.”

He goes on to cite a specific time when the Fed made perhaps its most egregious error which led to some of the greatest profit opportunities of his career:

“Probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004… we had great conviction that the Federal Reserve was making a mistake with way too loose monetary policy.”

And “Too loose monetary policy” has severe repercussions:

“The problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing that doesn’t diminish, which is unintended consequences.”

What’s more, he says it’s happening again today:

“So that’s why, if you look at today… I’m experiencing a very strong sense of deja vu… If you look to me at the real root cause of the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors to do what they do.”

The trouble is we only discover the consequences once it’s too late for the Fed to really do anything about it:

“I feel more like it was in ’04 where every bone in my body said this is a bad risk reward, but I can’t figure out how it’s going to end. I just know it’s going to end badly and a year and a half later we figure out it was housing and subprime. I feel the same way now.”

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It could be even worse this time because the policies are that much more aggressive than they were back then:

“This is the first time in 102 years, A, the central bank bought bonds and, B, that we’ve had zero interest rates and we’ve had them for five or six years… To me it’s incredible.”

More aggressive policy creates even bigger potential problems:

“There are early signs… In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they’ve already issued $1.1 trillion in debt. 50% more than they did in the ’06, ’07 period over the same time period. But more disturbing to me if you look at the debt that is being issued in the last two years back in 0’6, ’07 28% of that debt was B rated. Today 71% of the debt that’s been issued in the last 2 years is B rated. So, not only have we issued a lot more debt, we’re doing so at much less standards.”

As a reminder, these are the words of the greatest money manager alive today. Since he gave this speech almost a year ago the corporate bond market has deteriorated significantly. And I’m fairly certain he doesn’t see the junk rout as being contained.

So how is Druck positioning himself to deal with the consequences of another “central bank mistake”? He recently made a massive bet on gold.

SEE ALSO: How Warren Buffett would plan for retirement

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Some of the biggest hedge fund names in the world are loading up on bets that China will sharply devalue its currency.

According to a Wall Street Journal report published Sunday, Kyle Bass, Stanley Druckenmiller, David Tepper, and David Einhorn have all positioned themselves for sharp devaluations in the yuan. 

But it's complicated. 

Movement in the yuan really caught the market's attention back in August 2015 when China devalued the yuan in a move that was the currency's largest in a decade.

Though as FT Alphaville's Matt Klein noted at the time, relative to some of the devaluations seen in recent financial history, this move was nothing, really.

The yuan, which is pegged against the US dollar, had been strengthening as the dollar's value increased dramatically and China kept their target peg at the same level.

Since that August break the yuan's value has continued to slide but is still likely far overvalued against what a market-set would be. That's more or less the point of these hedge funds making their currency bets. 

With the yuan sitting at around 6.6 against the US dollar currently, strategists at Bank of America think it could be headed to 6.9 by year-end.  

The basic idea behind devaluing your currency is that it makes your exports more attractive if trade partners are able to acquire more of your goods for the same amount of nominal dollars. This does, however, impact the purchasing power of your domestic consumers and the profits of exporting corporations. 

But with the People's Bank of China publicly pledging to defend the yuan — that is, continue to keep it relatively stable against the dollar — the PBoC has been forced to spend billions of dollars to defend its peg by accumulating yuan. 

As a result, the PBoC's foreign-exchange reserves have diminished significantly.

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Clik here to view.Earlier this week China's People's Daily warned investing legend George Soros against"going to war" on China's currency after Soros made comments at the World Economic Forum in Davos that a hard landing in China was inevitable and that China's problems were one of the "root causes" of the world economy's current struggles, particularly in emerging markets. 

Soros, you'll recall, is one of the world's famed currency speculators who "broke the Bank of England" back in the early '90s. According to The Journal, a Soros representative declined to comment on any currency positions. 

Bill Ackman also threw his hat into the yuan ring earlier this week when he disclosed in a letter to investors that he's been betting on a yuan devaluation since last summer and continues to hold that position. 

SEE ALSO: BILL ACKMAN: I'm short China and Saudi Arabia

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Clik here to view.With so many voices streaming at us through our televisions and computers, a person can’t be blamed for tuning out.

For the most part, tuning out is exactly what we should do. But sometimes it is very important that we pay attention…

By listening to Jeremy Grantham, Jim Grant and a host of other investors, a person could have avoided and profited the crashing of the tech bubble of the late ’90s.

By listening to Kyle Bass, Michael Burry and Prem Watsa, an investor could have avoided and even profited from the crashing of the housing bubble in 2008.

Today is another time when we all need to be paying attention. This time, the man we need to be listening to is Stan Druckenmiller.

For 25 years as a hedge fund manager, Druckenmiller compounded money at an annualized rate of return of 30%. Incredibly, he did it without a single down year.

Druckenmiller has a dire warning for all of us. One that requires action.

There is nothing for Druckenmiller to gain from providing this warning. He isn’t talking his book or trying to gain investor support — he isn’t promoting anything. He doesn’t even have a political agenda.

He is spending his own time and money to try to bring this issue to light because he believes it is crucial for the United States.

Druckenmiller simply believes that America is heading for a disaster, and he is trying to use his high-profile position to get people motivated to stop it.

What you need to know about Stan Druckenmiller is that his incredible investing performance was rooted in his skills in making macroeconomic forecasts.

When describing how he was able to compound money at such a crazy rate and not have a single down year, Druckenmiller said:

How did we do it? Very simple. While others were focusing on the present, we looked and focused on the future in terms of analyzing unsustainable situations.

And when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career.

The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation.

In 1940, entitlement payments, which include everything from disability payments to Social Security to Medicare, amounted to just over 20% of annual government spending in the United States.

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Today, entitlement spending has swelled to nearly 70% of the annual federal budget.

Things are about to get a whole lot more complicated. The 20-year baby boom that took place after World War II is now beginning to result in a retiree boom.

For context, Druckenmiller points out that in 2030, the average age of an American citizen will be older than the average age of a resident of Florida today.

This demographic trend is going to create an entitlement spending catastrophe.

The way the system works, the current workforce provides the tax revenue to support the current senior population. A huge rise in the retiree population relative to the number of people working results in a funding dilemma.

Since 1980, the number of working-age people the country has had has outnumbered those age 65 and over by a count of 5-to 1.

The country has had enough workers generating tax revenue to support the number of retirees.

By 2030, that ratio is going to drop to 2.5-to-1.

By 2029, there will be 11,000 new seniors arriving every day and only 2,000 new adults being added to the workforce to pay for them.

There is just no way that the workforce at that time is going to be able to fund the entitlements of these seniors.

This is a problem because those are commitments that have been made and will have to be paid.

Corporations are required to disclose on their balance sheet the future defined pension obligations that their employees have earned.

Those are very real liabilities for companies that are going to have to be paid, so they should be included.

The balance sheet of the United States, meanwhile, doesn’t account for the future payments that it has promised to its senior citizens. Again, like defined benefit pension payments, these are very real obligations.

They should be recorded as liabilities of the United States.

Here is how much the U.S. debt would increase, assuming no change in tax rates, if those obligations were included:

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That chart makes the size of the problem abundantly clear. There are a lot of people already very concerned with the amount of debt the United States has. Imagine how they would feel if they were aware that with these liabilities conclude the number is 20 times larger.

This is a case of simple math.

Either tax rates increase in a massive way or the payments to seniors have to be cut significantly. The status quo doesn’t work. There just isn’t going to be anywhere close to enough money coming in to fund the payments going out.

The country can’t borrow its way out of a funding issue of this size.

This issue that Druckenmiller is so passionate about is a huge problem. One with no possible solution that will be popular with the American voters.

Either higher taxes or lower benefits. Likely some combination of both. Both very unattractive options for big percentages of the voter base.

You can hear the politicians kicking this can further down the road, can’t you?

Fixing this is going to require some real sacrifice by the American people. That doesn’t sound like a very appealing platform upon which to get re-elected.

The finances of the entire world are run by short-term thinkers. Central bankers have been dead set on trying to inflate economies for a decade now using more and more aggressive easy-money policies.

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To try to make the short term a little better, these central bankers have been perfectly willing to roll the dice on the long term.

The issue that Druckenmiller has raised will have to be dealt with. I’m sure it will be dealt with far later than it should be as politicians do kick that can down the road.

By doing that, they are only going to make the corrective actions that the country has to take more severe.

It is crucial that all of us realize that our long-term financial well-being really needs to be taken care of by one person. That one person is the man or woman you look at in the mirror in the morning when you are brushing your teeth.

We have to make sure we protect our wealth diligently and invest in assets that will retain their value when the consequences of all of this short-term thinking arrive.

Because eventually, they will.

SEE ALSO: RICK RIEDER: The productivity slowdown is a 'statistical mirage'

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Clik here to view.Former hedge fund manager Stanley Druckenmiller is caught in the middle of a politically correct battle over investment management of a college endowment. In a rare opinion piece, the one-time manager of Duquesne Capital, particularly noted for his outstanding 2008 performance where he is reported to have made $260 million as well as working with George Soros to“break” the Bank of England in 1992, defended his investment approach.  His foe? A student graduating in 2019 who questioned investments in the fossil fuel industry.

Student questions Druckenmiller on fossil fuel investments

From one perspective Isabella McCann may exemplify the desires of a new generation: idealistic and committed to changing the world perhaps more so than any generation that preceded it since the late 1960s.

Writing in the Bowdoin Orient, McCann addressed an issue that, in part, has galvanized a political movement of sorts. She noted the national movement for fossil fuel divestment was gaining traction and encouraged Bowdoin College to join the movement. Citing recent student movement protests, some of which involved 1960s style sit-ins at Harvard and the University of Massachusetts Amherst that motivated official review of the school’s investment policies, she pointed to Yale. There student activists persuaded the school’s chief investment officer, David Swensen, a widely respected noncorrelated investing leader, to partially divest Yale’s $25.6 billion endowment from the fossil fuel industry. As previously noted in ValueWalk, MIT has refused to bend to activist wishes in regards to its endowment investments.

While Swensen took a quixotic approach with an eye to more than generating investing returns, addressing what appear to be the concerns of a generation, Druckenmiller took a more pragmatic tact.

Druckenmiller notes the potential to diminish investment returns by divesting from fossil fuels

In a response in the school newspaper, Druckenmiller, who graduated in 1975 and retired from managing outside money in 2010 when he returned $12 billion to investors, pointed to strong investing returns. In fact, his approach has delivered for the Bowdoin Investment Committee, putting the endowment in the top five percentile among comparative college and universities, he noted.

It’s not that Druckenmiller is defending the fossil fuel industry. He is a long / short pragmatist– when oil related investments are overvalued he sells, when they and their free cash flows are undervalued he invests.

“We do not buy stocks to support the fossil fuel industry, and we do not short them to destroy the industry,” he wrote, saying he agrees with McCann on the core issue. Pointing to “tens of millions” he and his wife have donated to combat climate change, Druckenmiller says his primary responsibility is to deliver returns for the college endowment and its good works.

Druckenmiller says that eliminating fossil fuel investments would mean that Bowdoin Investment Committee would not be able to invest with key asset managers. “Most of the managers (Bowdoin has) selected who have contributed to our outstanding returns would no longer be eligible to manage Bowdoin’s endowment.” He did not mention customized co-investment opportunities with fund managers where fossil fuels are a strategy carve-out.

“I do not think it is worth sacrificing future investment returns for an action that is simply symbolic,” he wrote. “If you limit options, you limit returns over time. This would adversely affect the College’s ability to support need-based financial aid, endowed professorships (which are used to attract world-class educators), and yes, Bowdoin’s ability to advance knowledge in climate science and a wide range of other disciplines over time.”

That is a very pragmatic view that appears to be at odds with Yale’s outlook on the topic. It will be interesting to compare Yale’s fossil fuel-free performance to that of Bowdoin and its carbon-based returns generation method.

SEE ALSO: Investors are fleeing hedge funds in droves

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Stanley Druckenmiller, head of Duquesne Capital, thinks that the macroeconomy is looking disastrous and there are two sources for the coming problems.

Druckenmiller thinks that leverage is far too high, saying that central banks and China have allowed for these excesses to continue and it's setting us up for danger.

The obsession with short-term gains is overwhelming the need for long-term reform at the Federal Reserve, he said.

"It's this kind of myopia that causes reckless behavior at the government and corporate level," said Druckenmiller.

He highlighted that net cash flow has gone negative while net debt is still climbing at an unprecedented rate. He also said that instead of investing in growth, companies are adding the debt for financial engineering like buybacks and M&A.

The corporate sector is stuck in a "vicious cycle" of chasing earnings and adding debt, he said.

China was the second source of worry. Druckenmiller argued that the Chinese government has been fueling home building and growth through debt, and that will come back to bite it.

Druckenmiller said that he sees the global risks tilted toward the downside, and has shifted his outlook on the market from bullish three years ago to bearish now.

"The bull market is exhausting itself," he said.

He continued that if the market is a picture of the future of business, then why would there be a premium on companies when they have borrowed all of their growth from the future? He advocated that investors switch their portfolio to gold.

Druckenmiller is a long-time hedge fund investor, founding Duquesne Capital in 1981, but he then shifted the firm to a family office in 2010.

Check out all of our Sohn Conference coverage here »

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The biggest investors in the market got together on Wednesday, and judging from their investment ideas they're pretty bearish.

About everything. 

The dour outlooks all came at the Ira Sohn Investment Conference on Wednesday. The conference itself is a forum for big-time investors, mostly hedge fund managers, to pitch bold ideas.

Thing is, this year nearly all of the ideas sounded grim for the world economy.

The conference's two macro-level investors — Stanley Druckenmiller of Duquesne Capital and Jeff Gundlach of DoubleLine Capital — both forecasted serious storm clouds on the horizon.

Druckenmiller decried central bank's "myopia" of low interest rates and said it is fueling a debt bubble at the corporate and government level. He then said the bull market is "exhausting itself" and that investors should go "significantly overweight" one safe asset: gold.

Gundlach took a hatchet to nearly everything in his presentation. He called negative interest rates an "optical illusion", said the Fed's desire to raise rates makes no sense and is hurting growth, and went after every major presidential candidate (regardless of whether they are still in the race) for their poor policies.

Both Druckenmiller and Gundlach's presentations focused on the mismanagement of large, influential organizations — whether it be the Fed, the US government or the Chinese government. These mistakes have allowed companies and investors to give into their worst impulses, thus distorting the world economy and putting it in peril.

Some of the more micro-focused presenters at Sohn also had worrying outlooks for the economy.

David Einhorn of Greenlight Capital introduced a short of heavy equipment-maker Caterpillar, saying that the world is at the end of a commodity supercycle.

Many emerging markets are commodity dependent and Caterpillar is known as a bellwether of the manufacturing sector. Thus, Einhorn saying that the company's shares are going to collapse 50% in two years is not an encouraging sign for either of those two groups.

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Adam Fisher of Commonwealth Capital talked about European and Japanese bonds, and didn't sound too bullish on either economy rebounding to strong growth.

Zach Schreiber, CEO of PointState Capital, called Saudi Arabia's economy "unsustainable" due to lower oil prices in the long-term and increasing needs for social spending. Schreiber even pointed to social unrest in the country in his thesis on why to short the Saudi currency.

So you've got lower oil prices for longer, Middle East instability, a continued manufacturing downturn, and a prolonged European and Japanese slowdown. There isn't much to get excited about.

To be sure, many of these investors are presenting shorts, so they're going to be negative. But the breadth of the dour views was startling. 

There were some positive views, but even in those presentations they were hedged.

Larry Robbins of Glenview Capital Management said that hedge funds and their investors would hit their long-term goals, but acknowledged that serious "waves" in the economy and markets have been disrupting returns in the near-term.

All in all, the mood from the presenters inside the conference was much like the weather outside in New York City on Wednesday: depressing and miserable.

SEE ALSO: Stanley Druckenmiller thinks the world is heading for a debt-fueled disaster

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Hedge fund legend George Soros lost a lot of money after the election of Donald Trump, according to a new report from The Wall Street Journal.

The Journal's Gregory Zuckerman and Juliet Chung cited people familiar with Soros' trading who said the billionaire became bearish after Trump's the victory, and those bets seem to have come back to bite him.

However, Soros' larger fund, Soros Fund Management, gained 5% over the year, according to the Journal.

Soros supported Trump's opponent, Hillary Clinton, and contributed millions to super PACs backing her campaign, so it may come as no surprise that he was skeptical of the market after Trump's upset victory.

Additionally, most Wall Street analysts believed that a Trump win would sow uncertainty and cause a sell-off.

Since Trump's election, Soros has criticized him, calling him a "would-be dictator" and warning about what his win could mean for the long-term health of democracy.

The Dow Jones industrial average is up nearly 10% since Election Day, and all three major US stock indexes have set all-time highs after Trump's win.

Stanley Druckenmiller, a Soros protégé who worked at his firm until 2000, was much more prescient. Druckenmiller bet that the market would rally on a Trump victory, and that bet appears to have paid off — his firm gained 10% in 2016, according to The Journal.

Druckenmiller, who donated mostly to Republican legislative candidates, joins Carl Icahn as another notable hedge fund manager to make winning bets on the Trump rally. Icahn said he bought $1 billion worth of stock futures on election night, as the market tanked, which made significant gains after its recovery.

SEE ALSO: Howard Marks says a piece of advice from Warren Buffett perfectly sums up the problem with economists, experts, and the media

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George Soros, a billionaire investor whose net worth is valued at $25 billion, has been one of the most vociferous critics of President Donald Trump.

He has an incredible backstory. Soros was a teenage Jewish refugee who barely escaped persecution by the Nazis, and he is now a philanthropist supporting the cause of refugees and a liberal world order.

To those primarily interested in markets, he is better known for his long and prolific career as an investor who famously "broke the Bank of England."

His track record has earned him comparisons with investing great Warren Buffett.

Following are some interesting facts about Soros' life, gleaned from his investing career and philanthropic endeavors.

As a Jewish teenager in Hungary in 1944-45, Soros and his family survived Nazi occupation using false identity papers prepared by his father.

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Source: Open Society Foundations

Later he fled Hungary for England and studied philosophy at the London School of Economics under Karl Popper while working as a railway porter and night-club waiter.

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Source: Open Society Foundations

After graduating, Soros wrote 'to every managing director in every merchant bank in London' asking for an interview but got 'just one or two replies.'

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Source: Los Angeles World Affairs Council

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Combing through recent SEC filings for Stanley Druckenmiller’s Duquesne Capital, we found something interesting.

In Q4 2016, Duquesne opened a $134 million long position in the iShares Russell 2000 Index (IWM). IWM is an exchange traded fund (ETF) that tracks the price of the Russell 2000—the bellwether US small-cap index. This position is their largest single holding, representing 13% of the total portfolio.

Given small caps are up over 17% since November, are they something retail investors should consider?

The Small-Cap Rally Has Legs

A major reason small caps have outperformed the market since the election are Trump’s policy proposals.

Regulation does greater harm to small firms, so if Trump lowers the burden, they will benefit greatly. Also, many small companies are unable to lower their tax liabilities using legal offshore structures like large firms do. Tax reform would help them “big league” their operations.

Another factor is that most small caps earn the bulk of their revenues domestically. That means that protectionist policies like tariffs would hurt them less than they would the large multinationals.

The strong dollar is another element. A rising dollar renders US-made goods more expensive for foreign buyers, and that hurts exporters. Small firms tend to be largely “US-centric” and are less exposed to currency risk.

The interplay of these and other influences have pushed share prices upward for firms that get 90% or more of their revenue from inside the US. In fact, they’re 5.2% higher since the election. Those with large exports have only edged up 2.2%.

Institutional investors are also bullish on small caps. The January edition of the Global Fund Managers Survey found that a record number of respondents think small caps will outperform large caps over the next 12 months.

What other insights can we glean from his recent filings?

Golden Opportunity

Druckenmiller held a $39 million stake in the world’s largest gold company Barrick Gold in Q2 2016. Although he liquidated the position last quarter, he still has exposure to the yellow metal.

Druckenmiller sold his Barrick holding on election night and told CNBC, “I sold all my gold the night of the election. All the reasons I owned it for the last couple years, it seems to me they may be ending.”

Well, it seems those reasons have resurfaced. In February, Druckenmiller told Bloomberg, “I wanted to own some currency and no country wants its currency to strengthen. Gold was down a lot, so I bought it.”

Since its December bottom, gold is up 8%. Also note gold’s steady rise after the Fed’s rate hike. In theory, gold should fall as rates climb. However, as we showed this month, rising rates are actually good for gold.

The real force for gold is higher inflation expectations. In January, the Consumer Price Index recorded a 2.5% year-over-year growth—its highest reading in almost five years. As gold is the ultimate inflation hedge, creeping inflation could be the catalyst that drives it higher.

Having analyzed the recent trades of this market wizard, what should investors keep in mind looking ahead?

Strict Screening

Buying the proverbial waterfront doesn’t give investors the best ‘’bang’’ for their ‘’buck.’’ Like Druckenmiller, it’s important for investors to have a predefined investment strategy. Otherwise, their own biases will lead them to losses. One man who developed an exemplary strategy was Benjamin Graham, the father of value investing.

Graham details his thesis in his seminal work, Security Analysis. The book is well worth the read. But at 725-pages long, it will collect dust, not profits, for most. For investors who want to quickly learn how to apply Graham’s strategy in today’s markets, download our free report 3 Proven Strategies for Investing in Uncertain Markets Like These.

Around $21 billion has flowed into US small-cap ETFs since November. That has pushed the price-to-earnings ratio for small caps 14% above its 20-year average. Astute investors should avoid the ETFs and look for specific opportunities. So, where does one start?

Each year from 2009–2015, the Russell 2000 Growth Index outperformed its value counterpart. However, fortunes changed in 2016 as value beat growth by 65%. History shows that long periods of growth outperformance have been followed by long tenures at the helm for value. This suggests that value small caps could be a good place to put your capital to work.

Investors should also focus on small-cap cyclicals, like financials. Since the election, cyclicals have outrun the market.

Risks to Be Aware Of

In closing, Druckenmiller looks to have timed the market perfectly once again with his moves into small caps and gold. Both assets look to be good bets going forward. However, as there have been big inflows into small caps recently, investors should proceed with caution. Having a predefined investment strategy is the perfect way to do just that.

In closing, Druckenmiller may have gotten the better of his former boss. In 2016, Duquesne Capital gained 10%, while Soros’ Fund was up 5%. Still, nobody knows better than Druckenmiller to never count Soros out.

Druckenmiller, describing Soros’s investment philosophy in 1994, said, “It’s not whether you’re right or wrong, you just have to have the max on when you’re right.” Given that Soros has bounced back from big losses in the past, investors would be wise to pay close attention to his next move.

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SEE ALSO: Here's why long-term investors should prefer dividends over buybacks

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Billionaire trader Stanley Druckenmiller, formerly a top investment strategist to George Soros, has listed his palatial Greenwich, Connecticut, estate for $31.5 million, the Wall Street Journal reported.

The estate has 12,238 square feet of living space and eight bedrooms in total. It sits on nearly 20 acres and is technically three lots combined into one.

Druckenmiller and his wife are selling the home because they don't get enough use out of it, listing agent Leslie McElwreath of Sotheby's International Realty told the Wall Street Journal.

Druckenmiller is also the former president of Duquesne Capital Management, which he founded before joining Soros Fund Management.

Let's take a look inside the home.

SEE ALSO: Trump's childhood home in New York City just sold for $2.1 million — take a look inside

The estate, known as Sabine Farm, was built by publisher H.J. Fisher in 1910.

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After Druckenmiller and his wife bought the estate in 2004, they renovated the mansion.

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The home has 12,238 square feet of living space.

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Billionaire trader Stanley Druckenmiller and his wife Fiona look to have scooped up an oceanfront Malibu pad next door to action star Jason Statham for $36 million, The Real Deal has learned.

The five-bedroom, seven-bathroom property on Malibu Colony Road, which totals 6,900 square feet, sold in an off-market deal for roughly $5,200 per square foot, records show. It last traded in late 2006 for $22.75 million, to an entity managed by attorney and wealth manager Andrew Katzenstein. The identity of the owner behind the entity was not clear.

The LLC that bought the property appears to have been named for the Druckenmiller’s canine companion Axel. The dog recently strutted his stuff at the Westminster Dog Show, according to Fiona’s Instagram account. Druckenmiller’s in house counsel is named on the deed.

A spokesperson for Druckenmiller was not immediately available for comment.

Information about the home is scant, but records show that it dates back to 1980, was last renovated in 2010, and spans two-stories. The estate sits on a 15,500-square-foot lot with a pool.

Druckenmiller, a former hedge funder who now manages his own Duquesne family office, has a net worth of about $4.7 billion, according to Forbes. He was formerly a close consigliere of finance giant George Soros.

The couple reportedly spend most of their time in New York, but also own a palatial Connecticut estate known as Sabine Farm, which they’re listing for $31.5 million.

Statham has lived at the property next door since 2009, when he paid $10.95 million to buy it from film producer Matt Palmieri.

Malibu Colony properties typically command top dollar, even as rentals. Police frontman Sting and his wife, producer Trudie Styler, are looking to lease their 5,550-square-foot beachfront abode on the same street for a whopping $200,000 a month.

SEE ALSO: George Soros' former right-hand man is selling his 20-acre estate for $31.5 million

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George Soros, the billionaire investor whose net worth is valued at $25 billion, has been one of the most vociferous critics of President Donald Trump.

Even though Soros once invested in a company started by Trump's son-in-law, the mogul's vocal stance has made him the subject of frequent right-wing conspiracy theories about paying people to show up to marches.

To those primarily interested in markets, he is better known for his long and prolific career as an investor who famously "broke the Bank of England." His track record has earned him comparisons with investing great Warren Buffett.

A teenage Jewish refugee who barely escaped persecution by the Nazis, he is now a philanthropist supporting the cause of refugees and a liberal world order. Here is Soros' incredible backstory.

Prashanth Perumal contributed to an earlier version of this story.

SEE ALSO: Hungary's president is trying to shut down a university started by George Soros

DON'T MISS: Jared Kushner didn't disclose business ties to George Soros, Peter Thiel, and Goldman Sachs, or that he owes $1 billion in loans

As a Jewish teenager in Hungary in 1944-45, Soros and his family survived Nazi occupation using false identity papers prepared by his father.

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Clik here to view.

Source: Open Society Foundations

Later he fled Hungary for England and studied philosophy at the London School of Economics under Karl Popper while working as a railway porter and night-club waiter.

Image may be NSFW.
Clik here to view.

Source: Open Society Foundations

After graduating, Soros wrote 'to every managing director in every merchant bank in London' asking for an interview but got 'just one or two replies.'

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Clik here to view.

Source: Los Angeles World Affairs Council

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Clik here to view.The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.

I’m here to tell you I was a pig.

And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully. -Stan Druckenmiller

This quote comes from a speech Druck gave at the Lost Tree Club back in January. I’ve read the speech twice now and I’m sure I’ll read it many more times (and recommend you do the same – here’s the link). For those who don’t know, Druck generated 30% average annual returns at his hedge fund over a period of 30 years and never had a single down year – possibly the best track record ever.

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Clik here to view.I’m sharing this quote with you here because I think it’s central to what we are trying to accomplish. I want to help you close the gap between being an average investor and being a phenomenal investor. That’s my whole purpose with this thing.

But there’s one huge road block we run into. Being a “pig” isn’t easy. For many people, it may not be possible. As Druck explains in his speech, when he and Soros famously shorted the British pound they put 200% of the fund into that one trade. 200%! They put every penny into the trade and then borrowed against every penny to lever up their returns. That’s what he means by ‘being a pig.’ How many people could put this trade on and still sleep at night? This also goes against everything we are taught when learning how to invest. Step one is to diversify, right? What they don’t tell you is the greatest investors of all time look at step one and call, “bullshit.”

The reason phenomenal investors are able to forego diversification like this is because their skill set is different. They are capable of doing the research such that they can have a high level of confidence in an idea. And when they are very, very confident about an idea they can afford to swing for the fences because their batting average with high confidence ideas is very, very good (and, probably even more important, they’re also willing to admit when they’re wrong and get out quickly). And why put any money into anything else when you have one really, really good idea?

Most investors can’t do this simply because they just don’t have very good batting averages. So bridging the gap between being an average investor and being a phenomenal one is first raising your batting average. This requires both knowledge and experience. The second step is trusting your knowledge and experience when you find a high confidence idea (while also limiting the damage when you’re wrong). And when I say, “high confidence idea,” I’m thinking of a quote from another Soros disciple, Jim Rogers:

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Clik here to view.One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do… I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up… I wait for a situation that is like the proverbial “shooting fish in a barrel.” -Jim Rogers

You have so much confidence in an idea that it feels like a “sure thing” or as sure of a thing as there possibly can be in the financial markets. This is how I felt about Herbalife back in January and that’s exactly what I did. I put about half of my own personal liquid assets into that one trade. That’s what “being a pig” meant to me.

Bridging the gap between being an average investor and phenomenal investor is a process. The average investor should be diversified in order to protect them from their own lack of investing skill. But the phenomenal investor throws it out the window and says “I’ll just be in cash until there’s a trade opportunity so compelling that I simply can’t resist. Then I’ll back up the truck.” (This is probably why guys like Jeff Gundlach and Mohamed El-Erian are mostly in cash right now in their personal accounts – they’re waiting for a compelling opportunity and don’t feel compelled to hold anything just to stay invested.)

It’s up to each individual to determine where they are in the process and how their personal risk tolerance should dictate how they implement these ideas in their own investments. A broad ETF portfolio, like any of the models presented in Meb Faber’s new book, is ideal for a beginning investor or one with a very low tolerance for risk. Just via the cost savings versus traditional investment methods this will vault her performance far ahead of most other individual investors. More advanced and aggressive investors, however, should focus more on the most attractive individual risk/reward opportunities they can find based upon their own analysis because that’s where I believe the Druck/Soros/Rogers-type returns lie.

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