Mr. Charlie Ellis has explained to the book Winning the Loser’s Game – professional players force others to make an error which helps the professional player to win whereas amateur players play a faulty shot. This is similar to the investing field. And the main difference between an amateur and a professional investor. We have to keep on defending ourselves and wait for others to make errors. We need to stay on the pitch and wait for the loose ball for hitting it outside of the boundary.
Return of the investment instruments and our return having a gap which is known as a behavioral gap, which tells that investors’ behavior affects their own returns.
Amateur investors do not focus on risk management. Generally, they focus on the risk after they meet to the risk. It is similar to wearing a helmet after facing a road accident as a precaution. Whereas professional investors do things in a different manner, they buy things which others do not want to buy and they sell things which everyone wants to buy. Mr. Howard Marks are given this technique as a second level thinking.
Howard Marks – Second Level Thinking
During the year 2015, Stanley Druckenmiller was getting an introduction as –
During the year 1981, a 28 years old Mr. Druckenmiller has started with Duquesne Capital Management. During the year 1987, Mr. Druckenmiller had buildup long position as he felt that 2200 level supported zone for the Dow Jones but on Monday, Dow goes down to 1738 level which known for “Black Monday”. On Monday, after lunchtime, Stocks got to bounce back and Mr. Druckenmiller has covered all his position. Mr.Drukenmiller has left his job to join George Soros. In the year 1989, Mr.Drukenmiller has shorted Japan Index Nikkei which is still down from the top of the year 1989.
In the year 1992, Mr.Drukenmiller has shorted the pound currency and he turns out to be a winner. Mr.Drukermiller has a track record of generating a return of 31.50%, 29.60%, 53.40%, 68.80% and 63.20% in the year 1989, 1990, 1991, 1992 and 1993 respectively.
But during the year 1994, Fund lost in a bet against the yen and 1998, Quantum fund had lost $2 billion in Russia. The worst is about to come. Mr.Drukenmiller has invested in the IT stocks and he was uncomfortable with his positions so that he booked and took gained. But he had hired new young employees in the year 1999 and they kept on making money by investing in the IT stocks.
He had double his position at the top to the tech stocks and when IT bubble got burst, Quantum fund had lost 21% or $7.60 billion since their peak value.
Mr.Drukenmiller cannot able to see others making money and he can’t. So that he also makes an emotional error. Mr.Drukenmiller was known that what he is doing but he cannot able to stop his emotion and he has occurred an error. Sometimes it is important to see others making money. And we need to stay with not making money.
Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick