I had misplaced my copy of Robert Slater’s 1996 biography of George Soros, so I welcomed the opportunity to get my hands on Slater’s recently released second edition entitled, Soros: The Life, Ideas, and Impact of the World’s Most Influential Investor. It also seemed worth adding to the library since it had several new chapters updating the billionaire speculator’s life story to 2008.
Unfortunately, the new chapters weren’t particularly captivating from an investor’s point of view. I wasn’t aware of how Soros’ life since 1996 has been more about philanthropy and political causes – all very worthy pastimes but not the kind of material to inspire and instruct an active investor seeking more alpha.
There was no disappointment, however, in reading the chapters covering the younger, hedge-fund manager Soros — essentially the chapters in the first edition that I had read some 10 years ago. Slater is a fine writer with a breezy style and he did some good digging to serve up some substantive fare.
Like Warren Buffett, legendary hedge fund manager George Soros has long been an anomaly — an exception to the efficient market thesis that it’s futile to try and beat the market. Indeed, Soros not only beat the market over a span of several decades but ended up as one of the wealthiest persons in the world.
Another reason we might be interested in Soros is that he made much of his fortune trading volatility arising from monetary and financial shocks during the 20 years to 1992. We seem to be in a similar kind of era of volatility, so perhaps his approach holds some lessons for today.
Soros first wanted to be a philosopher, someone who made a contribution to human knowledge like Sigmund Freud or John Maynard Keynes. But he didn’t impress his professors enough at the London School of Economics and after graduation had to settle for a career in the investment industry.
His capacity and penchant for deep thinking was one thing that distinguished him as a speculator. Specifically, he believed his theory of reflexivity gave him an edge. It postulated that the market had an inherent tendency toward disequilibrium — not equilibrium as economists’ models assumed.
Markets weren’t efficient but subject to self-reinforcing boom/bust sequences brought on by the interaction of perceptions and real-world developments. Basically, they fed on each other and produced long swings in economies and financial markets that ultimately reached unsustainable junctures. His job as an investor was to ride the boom up, spot the turning point, and go short the bust.
As I went along in the book, I took note of passages that shed some insight into Soros’ trading approach. Here is a list of eleven.
- Some people spend all day talking to their brokers. Soros “prefers to talk to a select few people who can be really helpful ….” Then you need to think and read and reflect.
- To be successful, you need leisure. You need time hanging heavily on your hands [to talk to people, read, and think].
- If you have an investment thesis you like, run it by people who support the other side of the argument. See if you still like the thesis afterward.
- Basically, the way Soros operates is to have a thesis and then he tests it in the market. If the market goes against his position and he feels uneasy (e.g. gets a backache), he cuts his losses.
- What he took was basic information from various sources and kind of mulched it in his mind. Then he would come up with a thesis that most of the time was valid.
- When Soros believed he was right … no investment position was too large. Holding back was for wimps. The worst error in Soros’ book was not being too bold.
- The key to investing is knowing how to survive. That means at times playing conservatively, cutting losses when necessary and keeping a large portion of one’s portfolio out of play.
- If you are doing poorly, retrench. Don’t try to recoup. And when you start again, start small.
- To be in the game, you have to be willing to endure the pain.
- Perhaps Soros’ most distinctive feature, the trait that explained his investment talents the best, was his ability to gain membership in a very ‘exclusive ‘ club that included the leadership of the international community…. Such encounters clearly gave Soros an advantage over other investors.
- Invest first and then investigate … form a hypothesis, take a toehold position to test the hypothesis, and wait for the market to prove you are right or wrong.