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- Are You Prepared For A Lost Decade?
Are You Prepared For A Lost Decade?
“I like darkness.”
When Stanley Druckenmiller (nickname “Druck”) speaks… you should pay attention.
Druckenmiller is one of the best investors of all time. His hedge fund — Duquesne Capital returned 30% annually from 1986 to 2010.
Him and George Soros became well known for “breaking the pound” in 1992. They bet directly against the Bank of England by betting the British pound would go down. And pocketed $1.5 billion the month they broke the central bank, as it was trying to prop up the currency.
Druckenmiller was an outspoken critic of the Federal Reserve printing trillions of dollars the past couple years. And warned there would be high inflation as a result of it.
You may think that was an obvious call. That everyone knew printing trillions was a bad idea. And you may be right. But most people didn’t do anything about it. They didn’t reposition their portfolios accordingly. Druck did.
The point being, Druckenmiller knows what he’s doing.
And if you don’t at least try to understand his point of view… you’re burying your head in the sand.
Here’s what Druck said in a recent interview with Alex Karp, CEO of software and A.I. firm Palantir:
“There’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ’66 to ’82 time period.”
Stocks don’t do well during long periods of high inflation. You can see stocks did, in fact, go nowhere, during that time period.
Central banks distorted the world of finance with 0% interest rates.
Central banks wanted inflation. They’ve got it. They’re now panicking to bring it back down by raising interest rates. They won’t stop either… and don’t care how much wealth of yours they destroy to combat inflation.
The policy changes by all central banks are why Druckenmiller thinks stocks won’t do well. From Fortune (emphasis added):
“The response after the global financial crisis to disinflation was zero rates, and a lot of money printing, quantitative easing. That created an asset bubble in everything,” he said.
Central bank officials around the world are now moving away from the near-zero interest rates and quantitative easing — a policy of buying mortgage-backed securities and government bonds in hopes of spurring lending and investment —that have bolstered financial assets over the past few decades.
“They’re like reformed smokers,” Druckenmiller said. “They’ve gone from printing a bunch of money, like driving a Porsche at 200 miles an hour, to not only taking the foot off the gas, but just slamming the brakes on.”
Predictions are unreliable. No one can make them accurately.
So it doesn’t make sense to make an all-or-nothing decision based on one person’s forecast. (If you want an incredible writeup on why you should discount forecasts, you should read Howard Marks’s recent blog post: The Illusion of Knowledge.)
Economist and historian Peter Bernstein said “Forecasts create the mirage that the future is knowable.”
The future is anything but. And trying to predict it — on a macro level — isn’t the best use of your time or your money.
We use history as our analog to make those predictions about the future. But the future is always different. The variables change. Which is why forecasters always get it so wrong.
But the weight of Druck’s words need to be taken seriously.
The decade of no returns Druckenmiller is talking about assumes you’re buying companies today. And just one time.
However, through the carnage comes incredible buying opportunities.
You can buy Trophy Asset companies for pennies on the dollar.
Companies like Disney, Home Depot, Apple, and Microsoft were all 60%+ off their highs during the Great Recession in ’08-’09.
A decade of no returns isn’t necessarily a bad thing if those companies pay dividends.
You can reinvest those dividends to buy more shares — accumulating a bigger ownership stake in the company.
And if the company pays increasing dividends — like Zoetis — then your ownership stake grows even faster.
You can think of this as a period of accumulation.
Today’s market environment seems more uncertain than it’s ever been. Which is why there’s so much volatility.
We’ve been telling longtime readers and clients the market has been in a state of a falling knife since November 2021. And have beat the drum tirelessly since to avoid getting your hands bloodied by trying to buy the dip.
Things can get worse. The knife is still falling — as we’ve been telling readers for almost a year now. Stocks are still looking like they’re headed lower.
But we will get through this. So the primary thing you need to worry about is sleeping well at night. Here’s what we said on April 26th:
“Would you panic if your portfolio dropped another 30%? If so, you’re overexposed.
It doesn’t matter if you’re sitting on losses in some of your positions… It’s not too late. You just admitted you can’t withstand more pullback psychologically. (Don’t worry, 99% of us can’t either.)
If the rest of these Generals get shot, you can guarantee the rest of tech will get slaughtered. (Yes, they can go down further. Remember, a stock that falls 90% first, falls 80%… then it gets cut in half).
Irrational selling or not. This is the market we’re in. You have to adapt to the market. It won’t adapt to you.
That’s where having an allocation to cash may help you sleep well at night. Capital now allows you to weather the storm. It’s purely psychological.
Because, truth is, you can’t time the market. Even if you can predict what’s going to happen, you can’t predict the real probabilities. Or the second or third order consequences. (Think: The markets booming because of COVID in 2020.)
Historical data suggests you shouldn’t touch your portfolio. Interrupting the effects of compounding crushes your long-term returns. So doing nothing is often the best move. Meaning stop looking at your stock performance everyday and potentially doing something stupid (i.e. selling).
But you need to do what’s best for you.
Anything to control your emotional level during times of high volatility. If that means raising cash and reducing your potential future returns. So be it.
Whatever you need to do to sleep well at night.”
The S&P 500 and Nasdaq are down 11.5% and 13% since that post.
One of the smartest investors of all time is continuing to warn investors of what may come.
We’ve been raising cash for the past 12 months. Mighty clients are holding between 30-35% cash. And also have a couple of hedges on.
It’s okay to nibble on stocks at these levels because history says that returns are positive from here. But you don’t need to be a hero.
We’ll repeat ourselves again. The knife is still falling. So we will wait for the knife to hit the ground and form a base.
Good investing,
Lance