Stanley Druckenmiller: The other thing to me [that makes a good investor] is you have to know how and when to take a loss. I’ve been in business since 1976 as a money manager.
I’ve never used the stop loss. Not once. It’s the dumbest concept I’ve ever heard. [If a stock goes down 15%] I’m automatically out.
But I’ve also never hung onto a security if the reason I bought it has changed. That’s when you need to sell.
If I buy X security for A, B, C, and D reasons and those reasons are no longer valid, [I sell].
Whether I have a loss or a gain, that stock doesn’t know whether you have a loss or a gain.
You know, it is not important. Your ego is not what this is about. What this is about is you’re making money.
So, if I have a thesis and it doesn’t bear out — which happens often with me, I’m often wrong — just get out and move on.
Because I said earlier: if you’re using the most disciplined approach, you can find something else. There’s no reason to hang on to any security where you don’t have great conviction.
He has an interesting comment on stop-loss. It sounds like a stop-loss at 15% down. The differences is whether it is hard-coded in a model. He does not have an explicit model, but he does have a rule.
He makes the good point that if information changes for the negative so does the narrative, you exit. There is a no need for a stop-loss. However, it take a lot of self-discipline to make follow the Druckenmiller rules. You have to be true to your process and not live on the hope that you may be right.
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