How Druckenmiller Lost $600 Million In 3 Weeks

Stanley Druckenmiller is one of the most famous investors of all time and when you hear his returns you’ll know why.

What is Stan Druckenmiller’s track record? In the 30 years he operated his firm, Duquesne Capital Management, he never had a down year. He achieved average annual returns of roughly 30 percent during the three decades he was in business, and by the time he closed the firm and moved on to other ventures, he managed approximately $12 billion in assets.

Running a successful capital management firm requires dedication, and for most professionals, there is no time for side projects. That was not the case for Stanley Druckenmiller. In addition to managing his firm, Druckenmiller was hired by billionaire investor George Soros’s Quantum Fund.

Together, the two “broke the Bank of England” in 1992. On the date that came to be known as Black Wednesday, their large short position in the British pound sterling contributed to the currency’s collapse. The British government lost £3.14 billion, and Soros walked away from the transaction with $1 billion. As a result of this dramatic short sale, both Soros and Druckenmiller cemented their reputations as two of the best investors of all time.

The trouble is that short selling is a high-risk strategy, and stories like these are few and far between. Even the best investors can lose huge amounts – and often do – when they miscalculate the timing of short trades.

In a recent interview, Druckenmiller shared the saga behind one of his biggest short selling disasters – a stunning $600 million loss in just three weeks.

How Does Short Selling Work?

Taking a long position in a stock is the most common method of investing. It’s simply buying a stock. If all goes well, the stock appreciates in value, and the investor can sell at a profit. In other words, investors with long positions are betting the stock price will go up.

Taking a short position or short selling is just the opposite. Short sellers bet that a stock price will go down. They borrow shares from their brokerage firm at today’s price, then sell them on the open market.

When the stock price drops, they buy the shares back at the lower price and return them to the brokerage firm. The difference between the original price and the lower price is their profit. In other words, short sellers profit when the stock price goes down.

For example, take a stock that is currently selling at $100 per share. The investor borrows 100 shares and sells them for $10,000. Then the price drops to $50 per share. The investor buys 100 shares for $5,000, returns them to the brokerage firm, and pockets $5,000 in profits.

What Are The Risks Of Short Selling?

Long positions carry inherent risk. The stock price could, in theory, drop to $0, and the entire investment would be lost. Fortunately, 100 percent is the most that can be lost in this scenario. That’s not the case with short sales.

The risk of short positions is much higher. If the stock goes up, the short seller must still buy the shares at the higher price to close out their loan. In theory, the stock could go up an infinite amount, and short sellers are on the hook for that higher price – no matter how high it is. The potential risk is much higher than 100 percent of the initial investment – the risk is theoretically infinite.

Timing is everything with short sales, and that gets tricky. Even the world’s most successful investors don’t get the timing of their trades right every time. An investor in a short position might be right that the stock will drop long-term, but if it goes way up and the loan must be repaid before the price drops, it might be too late. The entire portfolio could be bankrupted by the time the price drop occurs.

How Did Druckenmiller Lose $600 Million In 3 Weeks?

Stanley Druckenmiller and George Soros are by no means bankrupt, but they certainly felt the pain of a $600 million loss. Druckenmiller told the story of one of the most expensive mistakes he ever made to Bloomberg Live in an interview with Sonali Basak.

Druckenmiller said that in March 1999, while he was working for George Soros’s Quantum Fund, he shorted $200 million in internet stocks. Three weeks later, he covered those stocks at a $600 million loss.

Eventually, all 12 of the companies he invested in went bankrupt, but it was too late. Through the Quantum Fund, Druckenmiller had to replace the borrowed shares at the market price, and the Fund realized a substantial loss.

During the interview, Druckenmiller said that he has never had a down year, but he noted that he isn’t sure he has ever made much money with shorts.

Druckenmiller said that shorting can be “fun,” but ultimately, “you can get your head handed to you” because “the math is against you.” The bottom line, according to Druckenmiller, is that shorting stock is best left to professionals – and even then, it’s a high-risk bet.

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