One way to understand the difference between “speculators” and “investors” in the markets is to consider a Las Vegas casino. In the casino, there are basically two kinds of people: the gamblers and the casino owners.
The gamblers are constantly betting on the next throw of the dice, the next turn of the cards, the next spin of the roulette wheel. Their focus is on right now and the immediate present.
The casino owners aren’t generally concerned with the next throw of the dice. They’re concerned with “fundamental” truth that, statistically, the casino has a 1.4% statistical advantage in the game of craps. That means that, in the long run, out of every 100,000 throws of the dice, the casino will win 51,400 throws and the gamblers will win 48,600 throws.
Yes, there’ll be the occasional sailor who makes seven consecutive passes and wins a small fortune—but, long-term, the casino’s seemingly small 1.4% advantage is enough to guarantee that, long-term, the casino owners will become fabulously wealthy and—if the gamblers play long enough, they’ll lose every cent they’ve got.
The speculators in the stock, bond and commodities markets are analogous to casino gamblers. They may get lucky from time to time in the short-term but, long-term, the odds are against them. They can only see and bet on the immediate moment. They’re so blinded by the thought of the next throw of the dice or next stock transaction, that they can’t peer into the future. They can’t see that, if they play long enough without considering the fundamentals/”odds,” they’ll lose everything they have.
Market investors are analogous to the casino owners. They take the long-term view, they seek and discover “fundamentals” that give them a statistical advantage—and they invest accordingly and wait to get rich. Unlike the speculators/gamblers, investors aren’t particularly interested in what happens in the very next throw of the dice or the next market report. They’re interested in what happens over the next million throws of dice or in the next million stock transactions because they know that, as investors focused on fundamentals (statistical odds) they’ll win more than they lose and, long-term, they’ll become rich.
Speculators = gamblers = short-term losers.
Investors = casino owners = long-term winners.
• Stanley Druckenmiller spent 25 years as a Wall Street hedge fund manager. During that time, his investments compounded money at an annualized rate of return of 30% and Durckenmiller didn’t suffer a single single down year. Mr. Druckenmiller’s investing acumen turned him into a billionaire.
Therefore, when Druckenmiller speaks, ordinary speculators/gamblers should listen—but not because Druckenmiller is some sort of Wall Street “god”. No doubt that he’s an intelligent man who knows more about markets than I will ever imagine.
But, Druckenmiller didn’t become a billionaire simply because he was a smart speculator. He became a billionaire because he took the long-term view and invested in the future rather than speculate on the near or immediate present.
Mr. Druckenmiller became a billionaire because he was a hedge fund manager. He owned one of the Wall Street “casinos”. He was therefore an investor/”casino-owner” in long-term trends while most speculators couldn’t see further into the future than the current DJIA or S&P 500 reports.
• Business Insider recently published on article on Mr. Druckenmiller’s incredible investing success entitled “Stanley Durckenmiller: ‘This is the most unsustainable situation I have ever seen in my career.” The article observed that Mr. Druckenmiller’s success was based on his uncanny ability to make accurate macroeconomic forecasts. They could’ve said the same thing about the Las Vegas casino owners: they get rich by making accurate long-term craps forecasts (the casino will will win 1.4% more than the gamblers/speculators).
Druckenmiller explained his success as follows:
“How did we do it? Very simple. While others were focusing on the present, we looked and focused on the future in terms of analyzing unsustainable situations.”
On the one hand, that’s a brilliant investment formula. On the other hand, it’s just common sense. Druckenmiller: 1) looked for long-term fundamentals (“odds”); and 2) owned a “casino” (hedge fund management firm). He became a billionaire because he was a long-term investor and a “casino owner” rather than a short-term speculator/gambler.
Druckenmiller’s not Wall Street’s only long-term investor. Warren Buffett explained his investment strategy saying, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Thus, Buffett also takes the long-term view. He’s an investor, not a speculator. As such, he’s reportedly worth about $67 billion.
Long-term investing can make you rich. Short-term speculating (gambling) will probably make you poor.
• Consider Mr. Druckenmiller’s success formula again:
“How did we do it? Very simple. While others were focusing on the present [speculating], we looked and focused on the future [investing] in terms of analyzing unsustainable situations.”
First, note that Druckenmiller didn’t usually speculate on what the price of a particular stock would do in the short term (the “present”). He invested in the future (long term) price moves of particular stocks, industries or bonds.
When you stop to think about it, long-term investment is a lot easier than short-term speculation. Short-term speculation requires you to pay attention to every change in the relevant news, every day, every week, every year. If something, somewhere, moves by 0.1% you must buy, sell or at least reconsider your speculative “bet”. Short-term peculation is incredibly volatile and therefore nerve-wracking.
Long-term investment, on the other hand, only requires that you identify one or more strong trends that might be volatile in the short term, but must be certain over the long term. Invest accordingly. Pay little attention to daily, weekly and even yearly volatility other than to buy on the “dips”. Hang on tight until that fundamental trend is recognized by all as true, predominant and profitable.
The problem with long-term investing is that it requires enormous patience and steady nerves as you wait, perhaps for years—before the fundamentals can assert themselves and generate huge profits for those who believed in them and invested “early”.
Second, Druckenmiller didn’t spend his time trying to deduce which, of a multitude of strong corporations, was currently the most powerful competitor and therefore most likely to produce a quick profit. Instead, Druckenmiller looked for those economic programs, policies and trends that were so irrational as to be unsustainable. Then, he looked for the programs, policies, or corporations which relied on a fundamental premise that was unsustainable. When that premise failed, it would rain down havoc for some and fantastic wealth for others.
For example, the Bank of International Settlements (BIS) reports that the current global oil and gas industry’s combined debt is about $3 trillion. A Deloitte Study indicates that 175 Oil and Gas Exploration Companies are at high risk for bankruptcy in A.D. 2016. A wave of oil company bankruptcies and credit defaults is coming. Those credit defaults should create a domino effect as credit counter-parties fail, and defaults spread to other sectors. For an investor like Stanley Druckenmiller, that’s exactly the kind of opportunity that he’s looking for. An economic “bubble” is “unsustainable” and about to burst. When it does, there’ll be sudden poverty for some and sudden wealth for others.
Mr. Druckenmiller became a billionaire by searching for economic “bubbles” that were popular and powerful—but irrational, unsustainable and certain to eventually burst. In the real world, the terms “economic bubble” and “unsustainable” are synonyms. Every time government creates a “bubble,” Druckenmiller presumably gets ready to add a few hundred million more to his fortune.
Third, once Druckenmiller identified an unsustainable premise/”bubble,” he calculated which corporations’ stocks, government bonds, or other investments would be most adversely affected when the premise failed. Druckenmiller then avoided or shorted the investments that were destined to fail, while he invested heavily in whichever investments would most benefit when the unsustainable, economic-bubble finally popped.
In a sense, Druckenmiller became a billionaire by betting against every “bubble” the government and/or Federal Reserve ever created. He probably knew that almost everything the government touched would turn to crapola and therefore bet against every government-made “bubble” as “unsustainable”.
• Druckenmiller recently applied his investment strategy to the federal government’s financial condition and concluded:
“When I look at today’s picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career.”
In essence, Druckenmiller sees tax revenues shrinking at the same time demand for promised retirement benefits is exploding. The irresistible force is colliding with the immovable object. That collision can’t be sustained. The result should be horrific.
“The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation.
“In 1940, entitlement payments amounted to just over 20% of annual government spending in the United States. Today, entitlement spending has swelled to nearly 70% of the annual federal budget.
“The 20-year baby boom that took place after World War II is now beginning to result in a [20-year] retiree boom. This demographic trend is going to create an entitlement spending catastrophe.”
Our “changing demographics” means there will soon be too many “chiefs” (retirees, welfare and subsidy recipients), and not enough “Indians” (workers able to produce enough income to feed all the “chiefs” in the style to which they’ve become accustomed).
Government won’t have enough currency to pay most of its debts and provide most of its promised entitlements.
People who feel entitled to subsidies, pensions and welfare from government will shout, scream and riot.
“The way the system works, the current workforce provides the tax revenue to support the current senior population. A huge rise in the retiree population relative to the number of people working results in a funding dilemma.”
First, we’re not approaching a genteel “funding dilemma” that will be debated and resolved by economists over tea. We’re approaching a time of starvation, reduced life expectancy, and riots that could precipitate violence unlike anything seen since the Civil War.
Second, Social Security entitlements won’t fail because of “demographics” (i.e., too many retirees and too few workers). Social Security will fail because the currency we’ve contributed to Social Security during our working years—the currency that should’ve been saved into our individual accounts—has been “borrowed” and “spent” by the Federal government to provide “entitlements” for people who were still young enough to work but would rather not. Government spent SS funds to create more dependents addicted to government entitlements.
As a result, our individual SS accounts are empty and the only way for government to make good on its promises to repay the money we “contributed” into SS, is to increase taxes on the workers who aren’t yet retired.
Now—after government has looted our SS accounts—demographics are coming into play as an excuse and justification for the missing SS funds. Retirees won’t retire into poverty because the government looted their accounts. No. They’ll retire into poverty because of unforeseen “demographics,” see?
In fact, if the government hadn’t looted our SS accounts, each of us would still have however much we’d contributed into SS (plus compounded interest) and, no matter how many retirees or workers we had, each retiree would still have exactly however much he personally contributed to support his retirement.
But, now—because government looted the SS accounts, there aren’t enough workers left to contribute enough to pay existing SS obligations. Therefore, we’re heading for a moment when government will have to admit that it’s insolvent and can’t repay all of its entitlement debts.
When that moment arrives, government will justify its default based on demographics, China, Muslims, an unexpected fall (or rise) in the price of crude oil and/or perhaps even WWIII. But the real reason for the coming SS entitlement default will be that government looted the SS accounts to benefit itself and special interests.
The retirement problem is not due to demographics. It’s due to theft—massive, institutionalized, government-sanctioned, theft.
I distinctly remember my step-father telling me about 60 years ago that, if people invested as much into a private savings account, as they contributed into their SS accounts, by the time they retired, they’d have over $1 million in the bank. And that was back when SS only cost us about 2%/year.
I didn’t really understand what he was talking about, but for some odd reason, it stuck in my mind. I don’t know that his math was correct, but the principle is still true: if you’d saved as much in a private saving account as you’ve contributed into SS, by the time you retired you’d be modestly wealthy.
Imagine retiring with a $1 million nest egg instead of a monthly SS annuity of $1,100. $1 million in the bank is equivalent to 909 monthly SS payments of $1,100. $1 million in the bank is equivalent to 75 years of SS monthly payments. Do you expect to live for 75 years after you retire? If not, even if government provides you with $1,100 per month for the rest of your life, government has still robbed you.
$1 million. It could’ve happened. Government could’ve collected SS contributions, deposited them into separate accounts, invested wisely, used compound interest and each of us could’ve retired with a small fortune. OK—maybe not $1 million, but more than likely, at least $500,000. Instead, those who rely on SS can now expect to retire with a monthly pittance—if they can even collect that.
• In A.D. 1980, there were five working-age Americans for each retiree. There were enough workers paying taxes to support the retirees. By A.D. 2030, that ratio will fall to 2.5-to-1.
“There’s just no way that the [A.D. 2030] workforce at that time is going to be able to fund the entitlements of these seniors. This is a problem because those are commitments that have been made and will have to be paid.“
Sorry, Stanley—that’s bunk. Those commitments will not “have to be paid”. Regardless of the government’s “commitments,” what can’t be paid, won’t be paid. These “commitments” can’t be paid. Therefore, they won’t.
The “commitments” made to retirees will be repudiated simply because they’re mathematically impossible to keep. Ultimately, retirees are less productive and therefore less important than workers. Retirees will be sacrificed in order to allow workers (the producers on whom we all depend) to keep enough of their own earnings to support themselves and their families.
“Corporations are required to disclose on their balance sheet all future defined pension obligations that their employees have earned. Those are very real liabilities for companies that are going to have to be paid, so they should be included.
“The balance sheet of the United States, meanwhile, doesn’t account for the future payments that it has promised to its senior citizens. Again, like [corporate] defined benefit pension payments, these are very real obligations. They should be recorded as liabilities of the United States.”
It seems like an absurd question, but, why should SS pensions be “recorded as liabilities [debts] of the United States” if government knows it can’t or won’t pay them? Could it be that government doesn’t report unfunded liabilities as part of the National Debt because it already knows that they’ll never be paid?
I don’t believe that’s true, but the remote possibility makes for interesting conjecture.
For example, government claims that its total financial liability is the “official” National Debt of $19 trillion. However, according to the Congressional Budget Office and economist Laurence Kotlikoff, if government included all of its unfunded-liabilities/promises (like SS retirement obligations) into the “official” National Debt, the government’s real liability would be over $200 trillion—about $625,000 for every man, woman and child in this country.
I’ve argued for at least five years years that government won’t be able to repay more than 10% (20% tops) of its existing debts. And now I notice that the “official” National Debt ($19 trillion) is about 10% of what may be the real National Debt ($200 trillion).
What an odd coincidence, hmm? Could it be that the “official” National Debt ($19 trillion) is all government intends to pay out of the real National Debt of $200 trillion?
Still, the possibility makes for interesting conjecture.
• OK—back to reality.
Q: Why aren’t future payments to retirees really included in the government’s balance sheet?
A: Probably, because, if included, any fool could see that there was no way those $200 trillion in promises could be kept; no way that government’s $200 trillion in debts could be repaid in full. If the size of the real National Debt were admitted, people would lose confidence in the U.S. dollar and government. No one would lend to government. The price of U.S. bonds would plummet and the whole fiscal system could collapse within weeks or months.
“This is a case of simple math. Either tax rates increase in a massive way or the payments to seniors have to be cut significantly.
“Druckenmiller is passionate about entitlements because they aren’t only a huge problem, there is no possible solution that will please American voters.“
There’s a third possibility that no one’s bothered to mention: government, itself, could collapse much like that of the former Soviet Union.
If you’re an investor looking for “bubbles” likely to pop, look for nations and governments who’ve embraced socialism and/or communism. They’re all going down the commode. The only question is When.
“Fixing this is going to require some real sacrifice by the American people.”
“Fixing this”?! How?
There isn’t going to be any “fixing” of this problem.
There’s going to be a massive debt default that will be achieved by either: 1) open repudiation (“Sorry, folks, we can’t pay.”); and/or, 2) hyperinflation which allows government to pay $1,100 month to each SS retiree—but the nominal $1,100 may have only $100 in purchasing power.
The problem will not require a “real sacrifice by the American people”—it will require a “real sacrifice of American retirees.” Many retirees aren’t going to get their SS retirement funds. They’ll be pushed into poverty and left to die. That’ll be the sacrifice. America will sacrifice its retirees.
The retirees won’t be alone.
What about all the people and communities that rely on their “entitlement” to welfare for support?
What about the rich who rely on their entitlement to government subsidies?
When the moment comes when government admits that it can’t pay its debts, the retirees, welfare recipients and rich subsidy recipients are all going to lose their entitlements and be “sacrificed” into poverty.
“The finances of the entire world are run by short-term thinkers [speculators]. To try to make the short term a little better, central bankers have been perfectly willing to roll the dice on the long term.
“It is crucial that you realize that your long-term financial well-being really needs to be taken care of by one person—you.”
Again, Druckenmiller indicates that his secret to profitable investing has been to engage in long-term investing rather than short-term speculation/gambling. He even implies that there’s a kind of “war” going on between the short-term speculators and the long-term investors. The speculators have had their day. Now, it’s time for the investors to win for a while.
“We [investors] have to make sure we protect our wealth diligently [from “short-term speculators] and invest in assets that will retain their value when the consequences of all of this short-term thinking arrive.
“Because—eventually, they will.”
I suspect that Mr. Druckermiller is deeply concerned about this “most unsustainable” conflict between tax revenues and entitlements because he knows that problem won’t appear “eventually” at some distant date, but rather “immediately” in the sense of within the next months or years.
More, what “assets will retain their value” over the coming years? Gold.
What did Warren Buffett say?
He said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
What have I said for the past several years?
I’ve said, “If the markets shut down for 10 years, what investment would you dare to hold—other than gold?”
Stop speculating. Start investing.
Get ready. Get gold.
• OK—the previous conclusion may sound a little like an infomercial, but get this:
If you wanted to try Mr. Druckenmiller’s investment strategy, you might start by looking for a “bubble” in the U.S. or even global economies. If it’s really a “bubble,” it is, by definition, “unsustainable”. That unsustainability is a fundamental on which you can base your long-term investment decisions.
What’s the biggest “bubble” in the world, right now?
I think it’s debt-based, fiat currency—especially fiat dollars.
If I’m right, the dollar’s gonna die, probably in the next few years.
If the fiat dollar is a really “bubble” that’s “unsustainable” and therefore destined to die in the foreseeable future, what alternative investment is most likely to rise as the dollar falls?
If Mr. Druckenmiller’s strategy (which made him a billionaire) is valid and if the fiat dollar is really an unsustainable “bubble,” then what’s smartest investment you can make?
Does that conclusion still sound like an infomercial?