On the morning of 16 September 1992, the Bank of England was fighting for the life of the pound.

And Stanley Druckenmiller was betting against it.

At the time, Britain was part of the European Exchange Rate Mechanism – the ERM – which required the pound to trade within a narrow range against other European currencies.

But the economics weren’t cooperating.

Britain was struggling through recession.

Interest rates were painfully high.

Germany, meanwhile, was dealing with the economic consequences of reunification and needed high rates to contain inflation.

And the pound was caught in the middle.

The British government insisted it would defend sterling.

Druckenmiller didn’t believe it could.

So he began building a short position against the pound for George Soros’s Quantum Fund.

Eventually he went to Soros with what most fund managers would have considered an enormous bet. He wanted to short sterling with the equivalent of 100% of the fund’s capital.

Soros listened to the argument. Then, according to Druckenmiller’s later recollection, he looked at him almost with disdain.

Not because Soros thought the idea was ridiculous or that the proposed position was too big…

Quite the opposite.

Why was he betting so little?

If Druckenmiller really believed this was a once-in-a-generation opportunity, Soros thought he should be thinking about 200% of the fund.

The Bank of England threw everything it could at defending sterling. Interest rates were raised from 10% to 12%.

Then the government announced it would raise rates again to 15%.

None of it worked.

By that evening, Britain had surrendered. The second rate rise was cancelled. The UK withdrew from the ERM. The pound plunged.

And the Quantum Fund walked away with one of the most famous profits in investing history.

George Soros became known as “the man who broke the Bank of England.”

But it was all thanks to Druckenmiller’s bet.

That’s a great story. But it’s even more extraordinary because of the other preparation Druckenmiller made…

What happens if I’m wrong?

Druckenmiller has a rather unusual philosophy about investing. Not only is he extraordinarily aggressive when he finds an exceptional opportunity, but he’s also obsessive about protecting his money.

As he says,

The way to build long-term returns is through preservation of capital and home runs.

Druckenmiller learned much of that philosophy working alongside Soros. He also learned that it’s not whether you’re right or wrong that matters.

It’s how much money you make when you’re right and how much you lose when you’re wrong.

(It’s a question Sean Allison asks every time he places a trade, and he’s hosting a training session about this and the ultimate risk reversal strategy next Wednesday, 16 September at 6 pm GMT. Click here to sign up. Attendance is free.)

Imagine two investors…

Investor A makes 10 investments.

He’s right about eight of them.

Every time he’s right, he makes £100.

But when he’s wrong, he loses £1,000.

Eight winners give him £800.

Two losers cost him £2,000.

Investor A might have been right 80% of the time but he lost £1,200.

Investor B also makes 10 investments, but she’s dreadful at picking winners. She only gets three right.

But, every loser costs her £100, while every winner makes her £1,000.

The seven mistakes cost her £700.

Her three winners make her £3,000.

She’s wrong 70% of the time… and still £2,300 richer.

That’s the strange mathematics of investing and something Druckenmiller and Soros respected.

Years later, Druckenmiller described the sterling trade as essentially a “one-way bet.”

From his perspective, if Britain somehow managed to maintain the currency regime, he expected sterling to remain roughly where it was.

But if Britain couldn’t…

He believed the pound could fall 15% or 20%.

Druckenmiller wasn’t merely asking: “Do I think sterling will fall?”

He was asking, “What happens if I’m wrong… or right?”

The answers were so lopsided that when Soros saw the same thing, his response wasn’t to reduce the risk. It was to increase the size of the opportunity.

That’s asymmetry.

And once you start looking for it, investing begins to look rather different.

Risk isn’t the enemy

We spend an awful lot of time talking about eliminating risk.

It’s understandable.

Nobody enjoys losing money.

But eliminating investment risk altogether creates another problem. The opportunities disappear as well.

Druckenmiller’s approach is different.

He doesn’t ask how to avoid risk.

He asks whether the risk is worth accepting.

Which brings me back to Warren Buffett…

Yesterday, I told you how Buffett built one of Berkshire Hathaway’s great advantages by accepting insurance risk.

Customers paid Berkshire premiums.

Berkshire accepted an obligation in return.

And when Buffett and his insurance managers priced that obligation correctly, Berkshire could effectively be paid for access to capital it could then invest.

Druckenmiller’s lesson adds another piece to the puzzle.

It’s not enough simply to ask: Can I make money from this? You must also ask: How much can I lose?

If that risk is too rich for you, give it a pass.

What makes great investors different

Great investors don’t necessarily avoid risk better than everybody else. They structure their exposure to it differently.

They look for situations where the scales aren’t balanced.

Where they’re comfortable with what happens if things don’t go according to plan… because what can happen if they do go according to plan is considerably more interesting.

That’s why Druckenmiller – who was 39 years old when he made the Black Wednesday bet with Soros – doesn’t need to be right every time.

And tomorrow, I’ll introduce you to another billionaire investor who takes this idea even further.

Because he worked out something that sounds almost absurd:

You can be wrong far more often than you’re right – and still make a fortune.

Until next time,


Elizabeth Cox
Associate Publisher, Southbank Research

PS Druckenmiller’s lesson bears repeating: you don’t need to be right all the time. You just need to structure your investments so that what you stand to make when you’re right dramatically outweighs what you stand to lose when you’re wrong. That same idea – asymmetry – sits at the heart of the strategy Sean Allison from Reliable Trading Circle is putting the finishing touches on now.

He calls it “The $0 Trade Loophole” and, during a free presentation, he’ll show you how he uses it to structure his own trades – including what happens when the share price rises, falls, or goes nowhere at all.

You can sign up here. We’ll share a few extra details with those who are registered between now and then… and send you a reminder before the event starts.