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2 minute read / Mar 7, 2021 /

This is the Most Ridiculous Use of Money Management I've Ever Heard. What is Wrong with You?

I’ve been following many public market investors on Twitter over the past few weeks to understand how they view the vacillation of the public markets. One of the tweets linked to a speech Stanley Druckenmiller gave in 2015 about Black Wednesday.

At the time, Druckenmiller worked for George Soros at a hedge fund.

“George, I’m going to sell $5.5 billion worth of British pounds tonight and buy deutsche marks. Here’s why I’m going to do it, that means we’ll have 100% of the fund in this one trade”.

As I’m talking, he starts wincing like what is wrong with this kid, and I think he’s about to blow my thesis away and he says, “That is the most ridiculous use of money management I’ve ever heard. What you describe is an incredible one-way bet.

We should 200% of our net worth in this trade, not 100%. Do you know how often something like this comes around? Like once every 20 years. What is wrong with you?”

The trade turned out to be a massive success for both of them.

The anecdote made me laugh just as much for its delivery with the twist, as for the familiarity of unexpected turns in investment decision-making.

This conversation, or some form of it, is played out across the financial ecosystem every day: one person pitching another an idea. Most of the time, the thesis doesn’t land. But every once in a while, the pitch evokes a reaction like Soros’ in this story.

When I started in venture capital, I didn’t realize this happened. It took me a long time to figure it out.

VCs are market-makers in a sense. On the sell-side of the market, they convince entrepreneurs to work with them as board members and investors. And on the buy-side of the transaction, VCs convince their firm’s investment team to partner with a founding team. Bringing those two parties together is at the heart of successful deal-making in venture firms.

Every once in a while, when hearing pitching an idea, the investment team will roar with excitement and it’s a lot of fun, especially when resonates unexpectedly.

When it happens next at Redpoint, I’ll be thinking of this exchange between Druckenmiller and Soros.

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