How Stan Druckenmiller missed market top by an hour and lost half his fund

Key Markets report for Tuesday, 3 Jun 2025

In spite of a great deal of uncertainty, gathering economic headwinds and rising interest rates, equity markets are again nearing their all time highs. Stock markets, it seems, are as safe as houses and investors have not a worry in the world. Buy in May and go away! And every other month too! But as we know, asset bubbles ultimately burst, without exception and the currently expanding bubble will do the same - only, we don’t know when. As a result, navigating the bull market and its ultimate reversal is largely a matter of taking risk in the face of uncertainty.

In this sense, the most instructive and most spectacular story must be that of Stanley Druckenmiller. Druckenmiller’s performance earned him the distinction of being a market wizard in Jack Schwagger’s bestselling book. But even a wizard can have a bad day at the office. This story is 25 years old but it is as relevant as ever, as it sheds light on one of the key problems in investment speculation: human psychology.

Predictions vs. uncertainty

Regardless of how diligently you study markets, large-scale price events are simply unpredictable. A few weeks ago, I mentioned here Jeremy Grantham who, in January 2021, warned investors that "Bursting Of This "Great, Epic Bubble" would be the "Most Important Investing Event Of Your Lives," and warned explicitly about the "Spectacular" crash In "The Next Few Months." In July 2023, John Hussman called for a 64% correction in the S&P 500. Last December, Henrik Zeberg (The Zeberg Report) predicted a 50% decline (or worse) for this year.

Also, who could forget the 1990s Nasdaq boom? Already in 1996 many observers thought that the markets succumbed to a frenzy of irrational exuberance, but the stocks continued rolling higher for another three years. During the last five months of that bubble, the Nasdaq added fully 110% before finally peaking in the early 2000.

These large-scale price events (LSPEs) represent the greatest risk, but also as the greatest opportunity in investment trading. However, even the smartest among the smart investors can’t predict them and navigating the roller-coaster is extremely challenging. We’ll focus on Druckenmiller’s case: during the Dot-Com boom, he understood that the technology stocks were dramatically overvalued and he accumulated a large short position in many internet ventures well ahead of the market crash. But as stock prices advanced over the following months, his positions generated large losses.

At the same time, Druckenmiller’s younger peers had aggressively piled into the tech stocks. For a while the markets rewarded them with spectacular returns, each month reaffirming the prevailing groupthink that, “this time it’s different.” Eventually, Druckenmiller could take no more of the humiliation: he closed out his short positions and went long the tech stocks, literally hours before the Nasdaq peaked. What followed was an epic bust during which 75% of Druckenmiller’s original shorts went bankrupt while the rest sustained losses of between 90% and 99%. But instead of having a banner year, Druckenmiller lost half of the $6 billion fund in only a few weeks’ time. Here’s the story of the way captain Druckenmiller navigated that market storm.

How Nasdaq crushed Druckenmiller

At a 2015 event^[1] where he gave a keynote speech, Druckenmiller was asked what he thought the biggest mistake of his career was and what he’d learned from it. His remarks are highly illuminating:

“… in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-March the 200 million short I had lost $600 million on, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished.

So the next thing that happens is I can’t remember whether I went to Silicon Valley or I talked to some 22-year old with Asperger’s. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gun slingers because we only knew about IBM and Hewlett-Packard. I needed Veritas and Verisign. … So, we hired this guy and we end up on the year – we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq’s gone up 400 percent.

So I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy. [unintelligible] This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year.

I think Quantum was up seven. It’s just sitting there. So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks and in six weeks I had left Soros and I had lost $3 billion in that one play.

You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.”

For years, Druckenmiller delivered remarkable investment returns and built up a personal fortune of over $4 billion. But during the dotcom bubble he slipped up. Day after day, Druckenmiller watched the tech stocks skyrocket and his younger and much less experienced colleagues make huge returns while his fund languished. What they were doing seemed to be working, and what he was doing wasn’t.

Day after day the markets were telling him that his “gunslingers” were right and he was wrong; that they were smart and he stupid. Eventually he abandoned his discipline and joined the herd even though in his rational judgment he knew he was doing the wrong thing. “I was just an emotional basket case and I couldn’t help myself,” says Druckenmiller. Every investor should ponder those words, because what happened to Stanley Druckenmiller can happen to anyone. This could be highly relevant today for stock (or Bitcoin) investors.

Trend following protects you from yourself

For indeed, the investor’s chief problem – and even his worst enemy – is likely to be himself.

Benjamin Graham

The one group of market participants who don’t run the risk of being their own worst enemy are the trend followers. Rather than trying to outsmart the markets and guess what tomorrow might bring, trend followers simply sail with the prevailing trends. As a result, they tend to be on the right side of large-scale price events when and as they unfold.

As another one of Schwagger’s market wizards, Paul Tudor Jones came to the same conclusion: “One thing I have learned over time is that the best thing to do is let market price action guide your decision-making. … Quite often, how the markets respond will be at odds with your priors…” This is why my work as market analyst and the frustrations I encountered with it led me to embrace trend following as perhaps the best answer to the problem of uncertainty.

To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page. For U.S. investors: an investable, fully managed portfolio based on I-System TrendFollowing is available from our partner advisory (more about it here).

Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: