Stanley Druckenmiller’s No. 1 piece of advice for novice investors

On Oct 23, 2022

A version of this post was originally published on TKer.co.

Stocks rallied last week. The S&P 500 surged 4.7% in what was the biggest weekly gain since June. The index is now up 4.9% from its October 12 closing low of 3,577.03. However, it’s still down 21.8% from its January 3 closing high of 4,796.56.

When markets are as volatile as they have been, it’s easy to get caught up in all the things that are going right or wrong at the moment.

And while there’s nothing wrong with keeping current on the present, this is not the right mindset for long-term investors in stocks.

“Do not invest in the present,” Stanley Druckenmiller, the legendary hedge fund manager currently running Duquesne Family Office, said. “The present is not what moves stock prices.”

Druckenmiller noted that this is his No. 1 piece of advice for new investors.

In a Sept. 22 episode of the “How Leaders Lead” podcast, Druckenmiller expanded on this (via The Transcript):

“I learned this way back in the 70s from my mentor [Speros] Drelles. I was a chemical analyst. When should you buy chemical companies? Traditional Wall Street is when earnings are great. Well, you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.”

This is theoretically sound as theory says the value of a stock should reflect the present value of a company’s future cash flows.

Druckenmiller is talking about picking stocks. But I think his still serves as a good framework for broadly diversified investors processing macro information coming from economic data and earnings announcements.

The labor market is strong 💪

One big theme of late has been the strength of the labor market. Specifically, the elevated level of job openings signals the need to hire, and the depressed level of layoff activity signals the desire to hang on to employees.

Consider these quotes from recent earnings calls (via The Transcript and RBC Capital Markets):

“I would note at this point, based on our Q3 performance, we have seen net hiring among our customers. So, we have not yet seen an emergence of recessionary impact in our commercial book of business.” – UnitedHealth Group
“We’re seeing positive staffing trends with 11 straight weeks of net pharmacist head count increases.” – Walgreens Boots Alliance
“We are not making major cutbacks across the plant…We don’t see any…