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The Investor Who Challenged Warren Buffett And Got It Right

Being one of the most acclaimed investors of all-time means it rarely happens that someone has the courage to challenge your views on one stock or another. Considering Warren Buffett‘s track record, it is no wonder that most of the investment community tends to treat his stock picking acumen as gospel. However, there is one man who had no problem taking on the Oracle of Omaha, challenging his stance on International Business Machines Corp. (NYSE:IBM) back in 2013. Stanley Druckenmiller, the founder of Duquesne Capital, did not become one of the greatest hedge fund managers simply by going with the crowd or following trends. He has made his share of bold moves over the years, the most famous being his very own Big Short, when he broke the Bank of England in 1992. Druckenmiller heavily shorted the British Pound at that time and booked a fabulous $1 billion in profits for George Soros‘ Quantum Fund. Druckenmiller has said that he doesn’t like the idea of diversification and stated his belief that “its better to put all eggs in one basket, if you really like the basket”. Druckenmiller is against focusing on risk adjusted returns and diversification, and believes that taking on risk is the only way to generate high, constant returns.

The results of our own analysis has showed that the small-cap picks of a select group of hedge funds can generate much better returns than the broader market, with the 15 most popular small-cap stocks among these funds beating the market by an average of 95 basis points per month (read more details here).

Stanley Druckenmiller
Stanley Druckenmiller
Duquesne Capital

Back in November 2013, Mr. Druckenmiller questioned the logic behind Warren Buffett’s decision to hold on to his investment in International Business Machines Corp. (NYSE:IBM), the iconic technology giant. In an interview with Bloomberg’s Stephanie Ruhle, Druckenmiller shared his views on technology stocks and the economy, criticizing the direction IBM was heading in at that time. When asked about his opinion on the stock, he said it was “one of the more higher probabilities shorts I’ve seen in years.” The reason behind this assertion was that, in Druckenmiller’s opinion, IBM had failed to keep up with the progress in the technology sector. He went on to say that its old technology would inevitably be replaced by cloud services, a process that was already underway. Druckenmiller went on to criticize the management of IBM and the direction it had been steering the company. Rather than focus on research and development, its management was preoccupied with cutting costs and buying back its own stock to make its earnings look good. Druckenmiller also lamented IBM’s acquisitions, pointing to the fact that the company’s sales had been decreasing since 2009 despite the tech giant having completed 47 acquisitions between then and the time of the interview. Last but not least, the “truth-teller” in a company was also showing signs of trouble: IBM’s free cash flow had been consistently decreasing over the years.

Head to the next page to see how Mr. Druckenmiller’s bearish theory did against Mr. Buffett’s bullish one.

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