George Soros’ Philosophy
George Soros is a short-term speculator. He makes massive, highly-leveraged bets on the direction of the financial markets. His famous hedge fund is known for its global macro strategy, a philosophy centered around making massive, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives and other assets based on macroeconomic analysis.
Simply put, Soros bets that the value of these investments will either rise or fall. This is “seat of the pants” trading, based on research and executed on instinct. Soros studies his targets, letting the movements of the various financial markets and their participants dictate his trades. He refers to the philosophy behind his trading strategy as reflexivity. The theory eschews traditional ideas of an equilibrium-based market environment where all information is known to all market participants and thereby factored into prices. Instead, Soros believes that market participants themselves directly influence market fundamentals, and that their irrational behavior leads to booms and busts that present investment opportunities.
Housing prices provide an interesting example of his theory in action. When lenders make it easy to get loans, more people borrow money. With money in hand, these people buy homes, which results in a rise in demand for homes. Rising demand results in rising prices. Higher prices encourage lenders to lend more money. More money in the hands of borrowers results in rising demand for homes, and an upward spiraling cycle that results in housing prices that have been bid up way past where economic fundamentals would suggest is reasonable. The actions of the lenders and buyers have had a direct influence on the price of the commodity.
An investment based on the idea that the housing market will crash would reflect a classic Soros bet. Short-selling the shares of luxury home builders or shorting the shares of major housing lenders would be two potential investments seeking to profit when the housing boom goes bust.
George Soros came of age in Hungary at a time when it was a battleground in the decades-long conflict between fascism and communism, the two great totalitarian ideologies of the 20th century. A personal experience of this conflict—including the violence, foreign occupation, anti-Semitism, and other forms of intolerance that went with it—as well as a personal fascination with philosophy shaped Soros’s thinking in later years and influenced his successful strategies in both finance and philanthropy.
Born in Budapest in 1930, Soros survived the Nazi occupation of Hungary during World War II as well as the postwar imposition of Stalinism in his homeland. Soros fled Communist-dominated Hungary in 1947 and made his way to England. Before graduating from the London School of Economics in 1952, Soros studied Karl Popper’s work in the philosophy of science as well as his critique of totalitarianism, The Open Society and Its Enemies, which maintains that no philosophy or ideology has the final word on the truth and that societies can only flourish when they allow for democratic governance, freedom of expression, a diverse range of opinion, and respect for individual rights.
Later, while working as a financial analyst and trader in New York, Soros adapted Popper’s thinking in developing his own application of the social theory of “reflexivity,” a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market. After concluding that he had more talent for trading than for philosophy, Soros began to apply his ideas on reflexivity to investing, using it to predict, among other things, the emergence of financial bubbles. In 1967, he helped establish an offshore investment fund. In 1973, he set up a private investment firm that eventually evolved into the Quantum Fund, one of the first hedge funds.
Soros’s memories of anti-Semitism in wartime Hungary prompted him, in 1979, to begin providing financial support for black students at the University of Cape Town in apartheid South Africa. In 1984, Soros created an education and culture foundation in Hungary. He later supported dissident movements in Eastern Europe’s other Communist countries, helping people to organize themselves at a time when popular organizations were banned, to voice their opinions when dissonant opinions were considered anti-state propaganda, and to promote tolerance, democratic governance, human rights, and the rule of law when a one-party dictatorship exercised a monopoly on power.
As the East bloc crumbled during the late 1980s and the Soviet empire collapsed in the early 1990s, Soros expanded his funding in an effort to help create open societies in all of the region’s countries. He demonstrated his commitment to critical thinking and democratic political development by establishing Central European University in 1991. In 1993, he founded the Open Society Institute. Over the past three decades, Soros’s philanthropy has spawned a network of foundations dedicated to promoting development of open societies in Africa, Asia, Europe, Latin America, and the United States. To date, Soros has given over $8 billion to support human rights, freedom of expression, and access to public health and education in 70 countries.
Soros’s most recent book is Financial Turmoil in Europe and the United States (2012). His other books include The Soros Lectures: At the Central European University (2010), The Crash of 2008 and What it Means: The New Paradigm for Finance Markets (2009); The Age of Fallibility: Consequences of The War on Terror (2006); The Bubble of American Supremacy (2005); George Soros on Globalization (2002); Open Society: Reforming Global Capitalism (2000); The Crisis of Global Capitalism: Open Society Endangered (1998); Soros on Soros: Staying Ahead of the Curve (1995); Underwriting Democracy (1991); Opening the Soviet System (1990); and The Alchemy of Finance (1987). His essays on politics, society, and economics appear frequently in major periodicals around the world.
George Soros will always be remembered as “the man who broke the Bank of England.” A well-known currency speculator, Soros does not limit his efforts to a particular geographic area, instead considering the entire world when seeking opportunities. In September of 1992, he borrowed billions of dollars worth of British pounds and converted them to German marks.
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When the pound crashed, Soros repaid his lenders based on the new, lower value of the pound, pocketing in excess of $1 billion in the difference between the value of the pound and the value of the mark during a single day’s trading. He made nearly $2 billion in total after unwinding his position.
He made a similar move with Asian currencies during the 1997 Asian Financial Crisis, participating in a speculative frenzy that resulted in the collapse of the baht (Thailand’s currency). These trades were so effective because the national currencies the speculators bet against were pegged to other currencies, meaning that agreements were in place to “prop up” the currencies in order to make sure that they traded in a specific ratio against the currency to which they were pegged.
When the speculators placed their bets, the currency issuers were forced to attempt to maintain the ratios by buying their currencies on the open market. When the governments ran out of money and were forced to abandon that effort, the currency values plummeted.
Governments lived in fear that Soros would take an interest in their currencies. When he did, other speculators joined the fray in what’s been described as a pack of wolves descending on a herd of elk. The massive amounts of money the speculators could borrow and leverage made it impossible for the governments to withstand the assault.
Despite his masterful successes, not every bet George Soros made worked in his favor. In 1987, he predicted that the U.S. markets would continue to rise. His fund lost $300 million during the crash, although it still delivered low double-digit returns for the year.
He also took a $2 billion hit during the Russian debt crisis in 1998 and lost $700 million in 1999 during the tech bubble when he bet on a decline. Stung by the loss, he bought big in anticipation of a rise. He lost nearly $3 billion when the market finally crashed.
Trading like George Soros is not for the faint of heart or the light of wallet. The downside of betting big and winning big is betting big and losing big. If you can’t afford to take the loss, you can’t afford to bet like Soros. While most global macro hedge fund traders are relatively quiet types, avoiding the spotlight while they earn their fortunes, Soros has taken very public stances on a host of economic and political issues.
His public stance and spectacular success put Soros largely in a class by himself. Over the course of more than three decades, he made the right moves nearly every time, generating legions of fans among traders and investors, and legions of detractors among those on the losing end of his speculative activities.
George Soros is well known as “The Man Who Broke the Bank of England.” He earned this title in 1992, when he (famously) made more than a billion dollars selling-short the pound sterling. He is the co-founder and manager of the Quantum Endowment Fund, an international hedge fund with more than $27 billion in assets under management. Soros survived as a young jew, living in Nazi-occupied Hungary in 1944. He then immigrated to England to attend the London School of Economics, and moved to the US in 1956 to work as a stock broker. Today, Soros is a passionate investor, philanthropist, and democratic idealist who could teach us a lot about investing and philosophy. Here are ten very insightful quotes from him:
1. “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – As I discussed in this article, personal emotions have no place in investing. If you want to be successful in the long-run, base your investment decisions on rationality and discipline.
2. “I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.” – Almost every successful investor that I’ve written about knows this. That is, you must recognize and admit your mistakes when you make them, cut your losses short, and move on to the next logical step.
3. “The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” – Successful traders abide by this philosophy by heart. Markets truly are random and no one knows where, when, and how prices will move. The key is to be ready for every scenario that can happen so that you can take advantage of the opportunities that lay ahead.
4. “Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” – Since markets are random, anything can happen, even the “unexpected.” The biggest opportunities lie in those unexpected events because most people are betting on the obvious, and in the market, most people are wrong.
5. “The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.” – This is true in life as well as in investing. When you hit rock-bottom, every inch of improvement feels so much better and powerful. If you bought Goldman Sachs (GS) in the midst of the subprime crisis in 2009, you could’ve made more than thrice your money just a year after.
6. “Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – Stock market bubbles start with good corporate or economic fundamentals. Things just go out of hand when people’s misguided greed comes into play.
7. “I contend that financial markets never reflect the underlying reality accurately; they always distort it in some way or another and the distortions find expression in market prices.” – Just like Warren Buffett, Soros also looks at value over price. They both know that price is just noise made by human emotions in the markets. Value, on the other hand, is the intrinsic worth of an asset.
8. “Unfortunately, the more complex the system, the greater the room for error.” – Obviously, when it comes to investing, Soros like to KISS (keep it simple, silly). He built a financial empire by adhering to this basic principle, and so should you. A simple but effective investing system will always beat the crap out of a complex system that doesn’t work.
9. “Making an investment decision is like formulating a scientific hypothesis and submitting it to a practical test. The main difference is that the hypothesis that underlies an investment decision is intended to make money and not to establish a universally valid generalization.” – The simple goal of investing is to make money, not to be right all the time. As a trader, I abide by this mantra and it makes it easy for me to accept losses easily and to stick to my investing plan.
10. “We try to catch new trends early and in later stages we try to catch trend reversals. Therefore, we tend to stabilize rather than destabilize the market. We are not doing this as a public service. It is our style of making money.” – Again, like Warren Buffet, Soros enters markets based on valuations. He buys when prices are “low” and sells when they are “high,” thereby effectively catching trend reversals.
If you look at these quotes, you can see that Soros has very similar investment philosophies with Warren Buffet. I guess great minds really do think alike, so let’s adapt these principles into our own investing to get some kick-ass results.