Source: Smart investors.

Stanley Druckenmiller is regarded as "the greatest money-making machine" in history, possessing Jim Rogers' analytical ability and George Soros' trading ability.

If you look at his performance record, you will find it well-deserved.

Over the past 30 years, Druckenmiller's average ROI has exceeded 30%, and there has never been a losing year. Only 5 out of 120 quarters have been losing, including the period when the peak management scale exceeded $20 billion.

In an interview, Druckenmiller said that his work for the past 30 years has been to predict economic trends that others have not anticipated through the market, which have not been fully reflected in stock prices. Therefore, for investment and trading, it is always important to focus on the future instead of living in the past.

So, for investment and trading, it is always important to focus on the future instead of living in the past.

He will use various methods, such as fundamental analysis, macro, technical analysis, and sentiment indicators, to greatly broaden his understanding of the financial markets.

In the eyes of many successful investors in China, Druckenmiller is a macroeconomic hero. When he talks about macro views, everyone listens carefully.

After the former mentor and ally Soros exited the stage, last year, the 70-year-old investment legend made a big splash by investing heavily in Nvidia and other AI stocks.

However, Druckenmiller's investment framework and personal style are different from those of the investment masters who smart investors (ID: Capital-nature) have been tracking and researching.

When you further understand his experience, you will be amazed at his flexibility in operation, independent thinking, strong competitiveness, and profound self-awareness.

1. Economics background, from dropout to first mentor.

Druckenmiller was born in Pittsburgh in 1953 and grew up in the suburbs of Philadelphia. When he was in elementary school, his parents divorced.

His sisters and mother lived together, while he lived with his father, who worked as a chemical engineer at DuPont.

Druckenmiller was fascinated with games, golf, gambling, and money at a young age. When he came to his mother's house from Virginia by train, his pockets were full of change won from playing cards with sailors.

Most of his childhood was spent building miniature golf courses in the woods of Richmond.

"I wasn't in the top 10% of my class in high school. I went to Bowdoin College because it was the only good school that didn't require the SAT exam, and it turned out to be a very lucky thing for me."

During his time at Bowdoin, he played poker and ran a hot dog stand with his classmate Larry Lindsey (later a Federal Reserve governor), earning more cash. He even briefly ran a casino in a fraternity clubhouse.

After his junior year, he took and fell in love with economics, taking 18 related courses in one breath.

But later, Druckenmiller found that theory couldn't satisfy him.

"I pursued an economics degree in graduate school. However, I found that the course was too quantitative and theoretical, with little emphasis on practical applications. I was very disappointed and dropped out in the second semester."

In 1977, after dropping out, he became a management trainee at Pittsburgh National Bank. There, his obsession with games found a new focus: the stock market.

He was invited to join the trust department and began to work as a research analyst, researching stocks in banks and chemical industry.

"There were eight of us. I was the only one without an MBA, and the only one under 32," said Speros Drelles, the department's investment director, who became his first mentor.

At first, Drew Kanemiller wrote research reports in great detail, covering all aspects of the stocks or industries.

"I remember specifically giving a report on banks to Drelles. I was pretty proud of it, but he looked at it and said, 'This is useless! What makes the stock move up or down?' It was a wake-up call for me."

Since then, Kanemiller has focused on finding factors closely related to stock price trends instead of studying all fundamentals. "To be honest, even today, many analysts don't know what causes specific stocks to rise or fall."

Although he dropped out of college, his background in economics allowed him to quickly connect individual stocks with the macro environment.

"Citigroup was aggressively issuing international loans, and I wrote an important put report that turned out to be right. Although I didn't study business courses, I was quite clear about economics, and my understanding of international capital flows may have left a good impression."

Soon, Kanemiller's life mentor proved his unorthodox ability by promoting him to director of stock research.

It should be noted that Kanemiller was only 25 years old and had just arrived in the department for about a year. The departing stock research director was about 50 years old and had worked in the bank for more than 25 years.

"Do you know why I did this?" Drelles asked.

"No," I replied.

"They also sent 18-year-old kids to the battlefield for the same reason."

"Why?" I asked.

"Because they only know how to charge forward at all costs. Stocks have been in a bear market for 10 years (note: this conversation took place in 1978), and I think there will be a huge, liquidity-driven bull market at some point in the next 10 years. Frankly, the past 10 years have left a lot of scars on me, and you don't have any. I think we will make a great team because you are young, inexperienced, and don't know not to try to buy everything. And that guy outside,"

He was referring to the departing one, "who is just as old-fashioned as I am."

This mentor also taught the young Kanemiller several important viewpoints that fundamental analysts in the department would reject.

"Never invest in now. You must imagine the situation 18 months from now, whatever that is, that is the price, not today's price. Many people often only see the present, and you must see the future. If you invest now, you will be crushed."

"Returns do not affect the entire market, the Fed does. What drives the market is liquidity."

From this 'eccentric' mentor, Kanemiller learned another discipline that helped him judge stock movements, namely technical analysis. "Drelles pays a lot of attention to technicals, and I may be more receptive to this than anyone else in the department. He saved a lot of chart books. I found technical analysis to be very effective."

Regarding the mentor's instruction that "fundamental analysis is just the first step," Druckenmiller has given specific examples, such as the retail sector, where he proposed a profit forecast for K-Mart.

Delris asked, "Yes, but why would the stocks rise?"

I said, "What do you mean?"

He said, "Everyone knows what you just told me. Keep looking."

Finally, I came back with new analysis.

"This may have changed already, but if you compare changes in food and energy prices to the retail index, you will find that they move like clockwork. As food and energy prices rise, retail stocks fall.

Key factors are often related to earnings, especially in bank stocks.

However, the performance of chemical stocks is completely different. In this industry, key factors seem to be related to production capacity. The ideal time to buy chemical stocks is after a large amount of production capacity has left the industry and you believe that a catalyst will trigger demand growth. Conversely, the ideal time to sell these stocks is when there are announcements of a large number of new factories, not when profits decline.

The reason for this behavior is that expansion plans imply that profits will decline two or three years later, and the stock market often predicts this development.

This also reminds people of Marathon Asset Management's "Capital Cycle Framework."

The key is not the specific indicators used, but the recognition that each industry operates at its own pace and has its own set of key indicators.

Finding a leading indicator is valuable, but it cannot be expected to be useful forever.

At the beginning of the 1978 Iranian Revolution, Druckenmiller plunged into an obvious trade.

"We put 70% of our funds into petroleum stocks, 30% into defense stocks, and then sold all of our bonds. There was a lot of luck involved, because, as Delris predicted, I was young and inexperienced at the time and ready to go."

"In my opinion, this approach was so logical that I didn't consider doing anything else. At the time, I didn't even know about diversification."

Druckenmiller later recalled, "Of course, I wouldn't dream of putting 70% of my investment portfolio in oil stocks now."

However, because of his beginner's luck, his performance was several times that of the market, and he was appointed as the new chief investment officer.

2. Founded his own Duquesne Capital at the age of 28.

In February 1981, Druckenmiller left the bank and founded Duquesne Capital, beginning his career as a fund manager.

In Druckenmiller's memory, when Chairman of the Federal Reserve Paul Volcker actively raised interest rates, small-cap stocks that "reached the top of the valuation range" experienced "one of the most obvious sell-offs in market history."

Although he correctly anticipated that Volcker's attempt to suppress inflation would lead to a market crash, he still operated with the mindset of a bank trust portfolio manager.

"You have to understand, in June 1981, I was an incredibly bearish person. My view was entirely correct, but we still lost 12% in the third quarter."

He told his partners, "This is criminal. We have never felt stronger about anything than we have about the bear market side of this market, and yet we wound up going down this quarter."

It was at that time that Druckenmiller changed his investment philosophy, saying "If we ever have a feeling about the market again—whether it's bearish, bullish, or whatever we'll just go 100% into cash."

His style also became more aggressive: he sold equities after a rebound in the stock market, then positioned 50% of the portfolio in cash and 50% in long-term bonds.

He successfully bet that Volcker's interest rate hikes would begin to curb inflation, leading to lower long-term interest rates.

"I put 50% of the money into 14% 30-year Treasury bonds, and nothing else. I could see that this guy wasn't going to let inflation go."

Druckenmiller has said that if he had known George Soros earlier, he might have put around 150% of his capital into bonds and made even more money.

Just as Druckenmiller was hitting his stride and managing assets of $7 million, his clients disappeared (and later went to jail).

Without consulting fees and annual management fees of $0.18 million, Duquesne Capital began to lose money.

According to Bloomberg, Pittsburgh surgeon, early investor in Duquesne University, and long-time golf partner Roger Entress allowed Druckenmiller to live rent-free in his apartment.

He believed that interest rates would fall, so he put all of the company's funds into government bond futures.

In just four days, his leveraged bet was wiped out.

A harsh turning point was that the interest rate peaked just one week later.

Druckenmiller's direction was right, but it was too early and too aggressive.

"That's when I learned that if you use too much leverage, you might be right about the market, but you'll still lose."

He was forced to trade 25% of the company's stock for capital, receiving $0.15 million from a client.

Fortunately, the bull market soon started, and within a year, Duquesne Capital's managed assets had risen to $40 million.

In 1986, Howard Stein, then manager of the Dreyfus Fund, came to him.

Druckenmiller began managing mutual funds for Dreyfus, one of which rose 40% in three months, earning him more publicity and fund mandates from Dreyfus.

Druckenmiller also borrowed $0.075 million from a friend to set up a hedge fund, which allowed him to collect 20% of profits in addition to management fees. With a solid business foundation, Druckenmiller can now focus on trading.

When talking about the philosophy of success at this time (persistence), he still remembers what his first mentor told him that 'self-evident ideas are always wrong'.

Third, at the age of 34, he met Soros and 'joined' him.

By 1987, Druckenmiller was already a cross-asset trader when he met Soros.

As Sebastian Mallaby writes in his book 'More Money Than God':

"His strength lies in combining different disciplines."

Before deciding that the ivory tower was not for him, he had already begun a PhD in economics. In addition to a solid understanding of stocks, he also had a strong sense of currency and interest rates.

Druckenmiller knows more about the stock market than economists and more about economics than stock pickers; this is a profitable combination.

By tracking the stock market and regularly communicating with company executives, he obtained early warnings of economic trends, which provided him with references for his views on bonds and currencies.

Druckenmiller hopes to find two ways to diversify his investments from stocks and market volatility, as these stock and market volatility are enough to earn him considerable profits.

In his speech at the Lost Tree Club, he said, "In the early to mid-1980s, there was a violent swing in commodities. I would rather bet big on multiple assets, especially when stocks are falling, many assets will rise."

(nota bene: Druckenmiller was invited by billionaire Ken Langone to speak at the Lost Tree Club annual forum in 2015.)

Ken and many members of the club are important investors in Druckenmiller; he not only introduced Druckenmiller's outstanding performance to the audience, but also focused on Druckenmiller and his wife's important achievements in charity.

In 1987, Soros published 'The Alchemy of Finance', a milestone for traders to integrate fundamental and technical methods into the developing global macro style.

Druckenmiller immediately realized that he was forming a similar style to Soros. 'I quickly understood that he had adopted an advanced version of the investment philosophy I used to manage funds.'

He took the initiative to contact the alchemy master.

On Friday, October 16, 1987, Stanley Druckenmiller arrived at his new investment idol George Soros's office.

Soros welcomed the young trader and showed him a series of charts obtained from Paul Tudor Jones.

One of them compared the markets of the 1980s with those of the 1920s. Another showed the degree to which the index deviated from its historical trend - a situation that historically ended in a crash.

"Research shows that each time the upward sloping parabolic curve is broken, the stock market accelerates its decline, which is a historical trend. This has recently happened. Analysis also shows that there is an extremely close correlation between the price trends of the stock markets in 1987 and 1929, with the implicit conclusion being that we are now on the brink of a crash."

This meeting with Druckenmiller is significant, and the future mentor pointed out the unconscious mistakes to him.

Interestingly, Druckenmiller was already mentally prepared for action.

The pool of money he manages is relatively small. Once he discovers a mistake, he corrects it immediately.

(Smart investment: Before the summer of 1987, Druckenmiller had been dominating the bull market.

However, by June, the uptrend seemed to be slowing down. His fund rose by "about 40% to 85%", and he turned to put options.

First, he evaluated the overall situation:

"Valuations have become extremely high: dividend yields have fallen to 2.6%, and the price-to-book value ratio has reached historical highs. In addition, the Federal Reserve has been tightening for some time.

Due to the severely overvalued market, it is expected that the bull market will dramatically end. Since January 1987, the Federal Reserve has been tightening monetary policy, while the dollar is falling, indicating that the Fed will further tighten monetary policy.

Next, he evaluated the technicals, which showed insufficient breadth. That is, the market's strength is mainly focused on high market cap stocks, with widespread stocks lagging far behind. This factor made the rebound look blown out.

But he was still a step ahead, struggling for two more months with the market until it hit its peak in August.

On Friday, October 16, when the market had fallen to 2200 points, he believed it was a solid resistance. That day, Druckenmiller switched his investment portfolio from a net short to 130% long.

Obviously, his timing couldn't have been worse. Just before the market crashed, Druckenmiller turned from short to aggressively long.

"I don't think the market will fall below 2200 points even if I'm wrong. My plan is to give the long position half an hour on Monday morning, and if the market doesn't rebound, I'll be out."

He was willing to exit shorts, do leveraged longs, and be ready to exit the next day, which fully demonstrated his trading style.

On Monday, October 19, Druckenmiller waited for a brief rebound before selling and going short.

That day, the Dow Jones Industrial Average plummeted by 22.6%, known as "Black Monday".

However, Druckenmiller not only survived but also quickly took advantage of the massacre.

Soros, however, lost his balance. He profited from the bull market and hedged his portfolio by shorting the Japanese market, which he believed was in an epic bubble.

Soros's Quantum Fund was larger, and although he sold positions, he could not exit as quickly as Druckenmiller.

The new automated hedging program known as portfolio insurance exacerbated the sell-off. When the portfolio began to decline, the hedging mechanism went short to prevent further losses. This accelerated the speed and severity of the sell-off.

However, once this technical selling pressure stops, Soros and Druckenmiller believe that the market will rebound. Therefore, they both increased their long positions on Tuesday.

Unfortunately, Soros shorted Japan through futures trading on the Hong Kong Exchange. After the stock market crash, the Hong Kong Stock Exchange briefly closed. He could only watch as the Nikkei index rebounded, but he couldn't exit his short position.

Based on the analysis of other crashes, Druckenmiller expected a two-day rebound followed by further weak trend. On Wednesday afternoon, he shifted from long to short again.

On Wednesday afternoon, he shifted from long to short again.

That afternoon, he called Soros and announced that he expected the market to fall again.

The next morning, Druckenmiller found that the European market was selling off again. He received an early call from the futures department of Solomon Brothers, informing him that a big speculator was selling his position at a 25% discount to Wednesday's closing price.

Druckenmiller was grateful to close his short at this price.

As selling pressure eased, the market stabilized. Druckenmiller went long again.

He called his mentor and told him the news of his successful trade and predicted that it might be the "bottom after some crazy guy sold this thing."

Soros just responded that he was licking his wounds.

Soros' poor performance drew widespread attention from the media. Because Barron's detailed the incident, Soros was unable to exit his Japanese shorts when the Tokyo market rebounded.

Both his long and short positions were losing money. Given the leverage of his fund, he found himself in a precarious situation.

When the market was weak in early trading on Thursday, Soros chose to survive and sold at all costs.

This mistake reversed Quantum Fund's 60% gain for the year to a 10% loss, and "$0.84 billion became nothing."

Of course, Soros' survival instincts, his confidence in finding the next profitable trade, and his ability to emerge from his mistakes without leaving scars have always been his key success factors.

A few weeks later, he found an opportunity to short the U.S. dollar and "bravely use leverage, as if nothing had happened." Despite the bloodbath in October, Quantum Fund still rose 13% by the end of 1987.

As 1987 ended, the alchemist had proven himself not invincible. And the young apprentice had proven that he could play at the highest level of the game.

(Cong Investment: In this experience, in addition to admiring Druckenmiller's flexibility and Soros' spirit of keeping green hills without fear of not having firewood, there is one thing worth noting, that is, Druckenmiller's hot iron principle highlights the understanding of their own emotions and state as traders.

His reason for shorting in the summer of 1987 was not enough to be overvalued.

"I never use valuations to capture the market opportunity. I use liquidity and technical analysis to capture the opportunity. Valuations can only tell me how far the market can go once a catalyst appears that changes the market direction, which is liquidity. Hope my technical analysis can capture it. "

Druckenmiller believes that when he is in line with the market and it is rising, he will make larger bets.

That's why, even when the market went against him in the summer of '87, he insisted on shorting: "I was playing from a position of strength because I was profitable from my long positions from the beginning of the year."

This approach allows for taking more risk at the right time and limiting risks and losses when disconnected from the market. However, it must be viewed from the trader's perspective, who may need to change his mind in a single day to minimize losses.

IV. The Glorious Years Following Soros

In 1989, Druckenmiller received an invitation from Soros to join the Quantum Fund.

Druckenmiller openly admits that he learned a lot from Soros, the most important of which was: It isn't about being right or wrong, it's about how much you make when you're right and how much you lose when you're wrong.

Shortly after Druckenmiller joined the Quantum Fund, there were dramatic changes in Eastern Europe and the Berlin Wall fell.

"In August 1992, a real estate analyst in England called me and said that it looked like their economy was going into a recession because the increase in interest rates that they were experiencing was causing a housing market slump."

And Germany, just after its reunification, was raising interest rates like crazy because of its disastrous experience with inflation in the 1930s. That sounds normal, except that the German mark was pegged to the British pound, and you couldn't have two currencies with two completely different economic prospects."

He believed that West Germany would expand its fiscal budget to rebuild East Germany, so he positioned himself heavily short the German mark against the US dollar.

In September, Bundesbank President Helmut Schlesinger published an op-ed in The Financial Times stating that the pound was garbage and they did not want to be associated with it.

Druckenmiller thought his chance had come.

As luck would have it, Soros was in the office that day and Druckenmiller walked in and said, "George, I'm going to sell 5.5 billion pounds tonight and buy Deutschmarks, which means that we'll be all-in on this trade."

Druckenmiller laid out his investment logic and Soros responded, "That's the most ridiculous investment idea I've ever heard. You're describing an incredible one-way bet! We should put 200% of our net worth in this trade, not 100%. Does that kind of thing happen often? Every 15 or 20 years."

Encouraged by Soros, Druckenmiller increased his position to 200%, and over the following year, the mark appreciated against the dollar, making the trade extremely profitable.

In 1999, Druckenmiller tried to predict the market top and shorted high-priced tech stocks worth 0.2 billion dollars.

His Quantum Fund portfolio quickly lost 0.6 billion dollars and fell 18% at the beginning of the year. To climb out of this hole, a massive effort was required.

Looking for faith, Druckenmiller attended Allen & Co.'s Sun Valley Conference (yes, the same one where Buffet made his famous market prediction).

Afterwards, he hired two young stock pickers who weren't afraid to buy "all of these fucking things I don't know how to spell." This showed great flexibility of mind, and his annual performance increased by 35%.

However, Druckenmiller was still not reassured. By the beginning of 2000, he was worried that the bubble would burst at any moment. Finally, he walked into George Soros's office: "I want to sell all of the technology stocks, sell everything. This is too crazy."

Meanwhile, The Wall Street Journal pointed out that Druckenmiller's bet on the euro over the past two years has lost more than $1 billion. He also missed a new macro theme: rising oil prices.

Meanwhile, as the dot-com bubble continued, his two young "guns" traded a smaller portfolio at Quantum Corporation. It had already risen 50% that year. As he later recalled, it drove him crazy.

"I wanted in on the game. I couldn't help myself...Six weeks later, I was down $3 billion and I left Soros's office."

(Conjecture by Cong. Famous Ping pong player Ma Long lost to Japanese player once. Liu Guoliang used the rule to bring him out to change his clothes and tell him to treat it as a loss. Ma Long later returned to the court to reverse the situation.)

After two years of fighting the market, Druckenmiller was feeling low. It was only because he took a real vacation by choice that he was able to get back on track through trading.

Perhaps several years of good performance would end here. More investors redeemed the fund. Would he close the fund out of frustration? Instead, when he came back, he saw the trend of economic recession, bear market and bond rebound.

He was clear-headed and confident.

"I said I was taking a vacation. I may come back or I may not. I'm a mess right now. If you want your money, here's the phone number. Call me. I lied to you. I said you could take your money out. But I may not let you back in."

"I went to Africa with my children. I didn't let myself watch TV or read financial newspapers."

This was a real rest. I suggest traders do the same. If you want to rest, take a break. Don't sit there fooling around like trading your own account.

Druckenmiller returned to the market on Labor Day.

He opened the newspaper and could hardly believe it. The Nasdaq was recovering 70% or 80% of its loss. The S&P was almost back to its high point. But oil was up, interest rates were up, and the dollar was up.

"I visited my former clients, who are all businessmen. They all told me business was bad. Ed sent me a comeback report two days later, which showed that if oil rose, interest rates rose and the dollar appreciated to this level, according to historical data, next year's returns would fall by 35%. The average expected return of Wall Street insiders, on the other hand, was a growth of 18%."

"I fell. One of my trading rules is not to trade heavily when you're down. But I had rested for a while. My mind was clear. I just liked that idea. So I put 350% of my capital into U.S. bonds, betting on Greenspan's reversal and that we would fall into recession."

As a result, Druckenmiller made 40% in the fourth quarter of that year.

V. Investment logic: Macro perspective, contrarian thinking

We have understood that Druckenmiller's top-down, industry-driven methodology is markedly different from bottom-up approach.

He does not seek long-term holding and compound interest, but needs the market to recognize his views on the changes in the industry's fundamentals for the next 1-3 years.

This is more similar to the capital cycle framework theory of Marathon Asset Management Company:

"High returns often attract capital, while low returns will repel capital. This process is not static, but cyclical and constantly changing."

"Inflow of capital will bring new investments, and over time will increase industry capacity, ultimately pushing down returns. Conversely, when returns are low, capital will withdraw and capacity will decrease. Over time, profitability will recover."

"The resulting fluctuations in capital affect the competitive environment of the industry in a predictable way. We call it capital cycle."

"Regarding the current media's hot discussion about Druckenmiller's concerns about risks such as deficits, this has been around for a long time, and can be seen in deep interviews with Barron's and Fortune in 1988 and 2018."

"If I'm right, the stock market retested the lows of the stock crash, and if the economy really enters a recession... the bond market's initial reaction will be an increase. The biggest irony may be... economic decline will increase the deficit."

"In terms of people's willingness to buy, we will see a fairly chaotic investment world...in the situation of soaring deficits and chaotic financial markets, the second-order reaction of the bond market...may be the US government has to pay astonishingly high yields."

Druckenmiller usually selects stocks from top-down industry observation or based on macro variables (such as the impact of currency movements).

"He focuses on the mid-term trend of the company's fundamentals, especially the comparison of profit margins with market expectations."

"We are very concentrated on betting on global sectors...if you observe our investment portfolio in the long-term, four to five global sectors often constitute 90% of our holdings, whether long or short."

"When choosing these global sectors, we will try to buy companies that we believe will have higher profit margins within one to three years, and sell companies that we believe will have lower profit margins within one to three years."

"If we think a company's profitability will increase significantly in the next 12-24 months, we will buy its stock."

"When we short a stock, our expectations are just the opposite. The stocks you should short are also the ones that people are very bullish about. Perhaps this company has high profit margins, and people have already calculated these profit margins in the future."

"Bull markets earn more than bear markets. Keeping optimistic about life is a major characteristic of investors. You can't be too ambitious, naive, or overly optimistic. You must be a bit skeptical and have some contrarian thinking."

"A 1988 interview also shows how he makes micro choices based on macro frameworks and maintains an open-minded attitude."

"We are very bullish on the agriculture sector. We believe that even in an economic downturn, consumption of agricultural products will remain good. A weak dollar will help export agricultural equipment and commodities. After the currency bottoms out, you will have a honeymoon period of about a year, because sales are still growing."

"Look at West Germany a few years ago. The mark stopped falling in February 1985, but German industrial stocks continued to rise until June 1986."

"In the case of a bear market on the verge of collapse, Druckenmiller looks for ways to benefit from shorting companies that benefit from high-end consumption or market activity, such as brokerages, whose cost structures have exploded."

"His favorite company is Primerica, which carried out acquisitions in the late stage of the cycle and leveraged its balance sheet."

"It's common sense that if you leverage buying in an industry at the top and then the industry will explode, your stock will not be as attractive."

Six, three-dimensional market view: valuation, liquidity, technical analysis

Overall, Druckenmiller's market view can be summarized in three dimensions: valuation, liquidity and technical analysis. In particular, his explanation of the relationship between the Federal Reserve and the business cycle is very insightful. "Once the economy develops at an accelerated pace, not only will the Fed no longer be with you, but three very bad things will also begin to happen. The Fed will no longer try to promote economic growth, but will instead, like their Central Bank Governor counterparts, start to worry about inflation and overheating. As a result, the Fed tries to cool the economy, which draws funds from financial assets and reduces liquidity. Then, businesses begin to have to build up inventory, which again draws funds from financial assets and transfers them to the physical sector. Finally, if the situation becomes very tight, businesses will begin to engage in capital expenditures. All three of these things usually occur in the context of a booming economy, with high profits and a buoyant stock market. They tend to reduce the total amount of funds available for investing in stocks, thereby leading to a decline in stock prices. This creates an anomalous situation. When things are not going well, some events usually occur that shift funds from physical assets to financial assets. Then when things start to improve, the opposite usually happens. This approach to capital cycles links his views on industries and the overall market."

In particular, his explanation of the relationship between the Federal Reserve and the business cycle is very insightful.

"Once the economy develops at an accelerated pace, not only will the Fed no longer be with you, but three very bad things will also begin to happen.

The Fed will no longer try to promote economic growth, but will instead, like their Central Bank Governor counterparts, start to worry about inflation and overheating. As a result, the Fed tries to cool the economy, which draws funds from financial assets and reduces liquidity.

Then, businesses begin to have to build up inventory, which again draws funds from financial assets and transfers them to the physical sector. Finally, if the situation becomes very tight, businesses will begin to engage in capital expenditures.

All three of these things usually occur in the context of a booming economy, with high profits and a buoyant stock market. They tend to reduce the total amount of funds available for investing in stocks, thereby leading to a decline in stock prices.

This creates an anomalous situation. When things are not going well, some events usually occur that shift funds from physical assets to financial assets. Then when things start to improve, the opposite usually happens.

This approach to capital cycles links his views on industries and the overall market."

For an interpretation of the three dimensions of market views, we excerpted some of his classic expressions:

1. Valuation is the market risk level you must remember;

2. At the end of 1927, market valuations became very high, but if you were short at that time, you would have gone bankrupt by mid-1929;

3. Valuation did not tell him anything about timing, but once the trend changes, valuation will tell us about the downside risk.

4. The degree to which the market deviates from its fair value determines the killing power of valuation.

5. Our main concern is liquidity, that is, how macroeconomic and the Federal Reserve will respond to the economic situation.

6. When American companies operate at extremely high speeds, they will begin to build capacity, which will draw away liquidity; at the same time, it will also reduce the profit margin of the enterprise two years later. This is exactly the opposite of when the bull market began.

7. When the economy is booming, the Fed and businesses' use of cash flows are both headwinds. The Fed tries to cool the economy, and business's investment in capacity will affect profit margins.

8. Stocks will not fall until the economy reaches a certain acceleration, and the Fed's response (determined by the momentum of the money supply) reaches a certain acceleration. Although we had valuation problems as early as January 1987... But the liquidity background at that time was very favorable."

9. When I was in school, I learned that technical analysis was a lot of flattery. But when I entered the investment industry, I found that these strange people who look at charts in secret rooms have a lot of valuable opinions.

10. The beauty of our industry lies in the strong liquidity of positions. I can clear all positions on any given day. As long as I can still control the situation, and as long as there is tomorrow, I will close the position. There is no need to panic.

Druckenmiller researched momentum indicators and historical patterns of the market, and almost everything about sentiment. At the same time, he is skeptical of breadth data.

It must be said that his technique and methods have a strong "customization" feature, requiring personal artistic skills to feel the strength, weakness, and turning point among various data relationships.

So it is reasonable to call him the "Stock Market Wizard." You can seriously listen to his analysis, but it is difficult to learn the last crucial step.

Editor / jayden