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How George soros made his billions

  • #1
  • First Post: Apr 17, 2009 12:54pm Apr 17, 2009 12:54pm
We all know bigG is the worlds best currency trader and one of the great investors of all time. Most think the secret to his astonding success can be found in his "alchemy of finance" (well thought of name huh?) Anyway I found an article about his trading secret at the globalguru.com thought I'd paste it in here for everyone to read.

Quote
George Soros's #1 Investment Secret Revealed

George Soros -- alongside Warren Buffett -- is considered to be one of the greatest investors of all time. In 1994, George Soros wrote a book about his investment philosophy called the The Alchemy of Finance in which he proposes his "Theory of Reflexivity." Soros gave his theory such a grand-sounding name so that it would sound like Einstein's "General Theory Of Relativity." Soros thought it would be that important.

Because of Soros's status in the investment world, The Alchemy of Finance turned out to be one of those books that every Wall Street professional said they had read -- but I doubt any of them got through it, let alone understood it. That did not keep high-profile, Wall Street strategists like Barton Biggs from calling it "a seminal investment book... it should be read, thought about, underlined page by page, concept-by-idea... (Soros) is the best pure investor ever... probably the finest analyst of our world in our time."

GEORGE SOROS'S #1 INVESTMENT SECRET: TACKLING "THE ALCHEMY OF FINANCE"

When I was managing my first investment fund about 12 years ago, I decided that I really wanted to get inside Soros's head. So I picked up The Alchemy of Finance, and took Barton Biggs's advice.

I read it once… I didn't get it…
I read it again…I still didn't get it…
Now, keep in mind that I had been through Harvard Law School…
…So I was used to stirring concrete with my eyelashes…
...And getting through more turgid and bombastic doublespeak than you could shake a stick at…
But Soros made federal court cases seem like nursery rhymes.
Then one day I ran across a quote from Soros's own son. It made everything crystal clear, but not in the way that I expected.
"My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bulls**t, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning sign."

—George Soros's son, Robert, on his father's Theory of Reflexivity.

Soros himself essentially went on to criticize his own theory in the next edition of the book -- admitting that it was essentially incomprehensible. Those who had claimed to have understood it in the first place were just fooling themselves.

GEORGE SOROS'S #1 INVESTMENT SECRET: CORRECTING FALSE PREDICTIONS

So if no one has a theory to explain the market -- not even George Soros -- what chance do you have to make money consistently in the markets? It turns out there is a secret to George Soros's success. But it's not one that you will find in books that discuss Soros's investment philosophy -- and certainly not in The Alchemy of Finance. But once you understand and apply this secret, it will make your trading life much easier -- and certainly less stressful.
The "secret" to Soros's success is not the ability of the "Theory of Reflexivity" to explain or predict the market. In fact, the secret to Soros's success is quite the opposite. I found it buried in an interview with Soros in John Train's The New Money Masters, in what was almost a throwaway comment:

"My approach works not by making valid predictions but by allowing me to correct false ones."

—George Soros

Now I could get into how this all has to do with Soros's admiration for the philosopher Karl Popper and the limits of human understanding, but there is no room for that here. Comments from traders who have worked with Soros are more relevant.
From James Marquez, a former Soros Chief Investment Officer (CIO):
"Soros would be the first one to tell you that sometimes his actions… look like the most rookie, odd-lot, wrong-way kind of thing, selling at the lows, and buying at the highs. But it's much easier to understand in light of his avowed mission: to be able to come and fight another day. He says: "I don't want to wake up broke."
And then, Alan Raphael, yet another Soros CIO:
"When George is wrong, he gets the hell out. He doesn't say, ‘I'm right, they're wrong.' He says, ‘I'm wrong,' and he gets out, because if you have a bad position on, it eats you away. All you do is think about it -- at night, at your home. It consumes you. Your eye is off the ball completely. This is a tough business. If it were easy, meter maids would be doing it."
Contrast that with how most of us think of trading or investing:

  1. We develop an opinion on a stock.
  2. We take a position.
  3. We convince ourselves that we made the right decision. This is when a bad investment turns into a "long-term investment."
  4. And the "smarter" we are, the worse it is. We "know" we're right. We "know" our investments will eventually "come back."

Now, let's examine how Soros would look at the same situation. Here's my take on what Soros believes.
"The secret to my success is that I know that I will be wrong. I consider it a strength to admit my mistakes. That allows me to stay in the game and fight another day."

GEORGE SOROS'S #1 INVESTMENT SECRET: HOW TO APPLY IT IN YOUR OWN TRADING

So how can you apply this approach in your own trading and investing? Understand that making money in the markets has much more to do with having proper exits and position-sizing (bet size) than it does the "Theory of Reflexivity" or any other hypothesis that claims to explain the market.
So the next time you come across a "can't fail" investment idea, here's what you should do:

  1. Listen carefully and see if it "makes sense" to you.
  2. If it reflects your own beliefs, then consider taking a position in it.
  3. But no matter how terrific sounding the pick, make sure that you have your exits and position-sizing strategies in place.

If the position goes against you -- which some inevitably will -- reframe in your mind the idea that taking a loss is a strength. Make sure you cut your losses. And like George Soros, this will keep you from "waking up broke."

  • #2
  • Apr 18, 2009 12:19pm Apr 18, 2009 12:19pm
as often happens with those who make an earthshaking move that becomes history, georges books are filled with philosophical hoopla of the grandest sort, as a simple disguise to the fact that he applies common sense to certain situations and is a "hunter" by nature, on constant look out for "something" to win against.

his greatest claim to fame was the bank of england situation, which may also have been his ONLY claim to fame, as his results AFTER that were "not so great"

he estimated correctly on what the bank would HAVE to do and capialized on it with a tremendous money play of his own, UNREACHABLE by most any of us "simple people"

the bottom line of "his" thoughts cannot be argued with, although MANY a very successful financial deal has been pulled off by taking the opposite tack, which is how WARREN BUFFET invests, as what has been said of warren is "he never met a stock he didnt like"

therein, with two of the most famous, lies a quandry --- make a decision, find out if youre right or wrong within a limited timespan like george, or make a decision, put your money where your mouth is, and wait for your decision to bear fruit, as in warrens case ?

Personally, I believe sorros to be a highly overrated investor, who had ONE extremely lucrative and sensational win, but I personally think of him as a "one trick pony" simply because he has not repeated (even on a smaller basis) that one trick, while buffett just slowly continues making what appears to be the correct choices !

my opinions, of course

enjoy and trade well

mp
  • #3
  • Edited 2:01pm Apr 18, 2009 1:50pm | Edited 2:01pm
Excellent article.
Soros is a gut-instinct trader, then, and left his Holy-Grail chasing to philosophy (Popper ( http://plato.stanford.edu/entries/popper/ )).
  • #4
  • Edited 10:53pm Apr 18, 2009 10:24pm | Edited 10:53pm
Fugly,

I have a lot of respect for your posts. I noticed another post you'd made that referenced my above post, and If I offended you in any way, I apologize. A more-complete version of above post:


I had gotten an impression of Soros several years ago about, having read about it in an article, a trade he'd made that was a pinnacle of his career that earned (I recall) hundreds of millions for him. That impression was somewhat unstated, before now.

Soros: "My approach works not by making valid predictions but by allowing me to correct false ones."
The author interprets this, and other facts provided, differently than I would.

One must compromise and trust others over one's own skills, the author suggests. An interpretation of the author's conclusion is that most people don't have the skill to follow in Soros's footsteps and instead must use "sense" and stops/limits (legitimate in themselves) and other items, including others' opinion, to get over having an accurate gut instinct before, during and after the trade.
I disagree with this. You can and must get a clear, strong signal from there that is fed decent information (which, after one already knows an area, is surprisingly easy in trading). Just sitting there in front of the moving charts and thinking about it is enough to create a base level of understanding about trading and thus get a gut instinct, even if it takes a little more, such as lots of realtime trading (me: losses; stocks, 5 1/2 y daytrade, more yrs other trade) to feel involved with an area of a chart.
A definition of this gut instinct can be had from the article. A floor trader I'd read about on ff who did something similar to Soros, so I took it to be an actual trading method. Soros's use:
" He doesn't say, ‘I'm right, they're wrong.' He says, ‘I'm wrong,' and he gets out, because if you have a bad position on, it eats you away. All you do is think about it -- at night, at your home. It consumes you. Your eye is off the ball completely "
" I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning sign. "

Also, a shortsightedness can be found in how the author put in the conclusion and on the same level gut instinct with MM devices, and checking the facts oneself with trusting someone else's opinion. Common knowledge says you're not going to ever get a good-enough understanding of a trade thru a proxy belief (conviction, habit or general acceptance of a fact and/or the source of a fact) in someone (or something) else's opinion, thus distinguishing belief, in trading, from 'gut instinct' for one's own (interpretation of) a trade. I would have preferred the author take the braver step of summarizing Soros's method, as I somewhat did, and suggest practical approaches to capturing one's own gut instinct, with the help and rewriting (thus, philosophy) of a few devices one uses, and then include others' opinions for consideration when one can break them down.
  • #5
  • Apr 20, 2009 4:23am Apr 20, 2009 4:23am
Anyone who peruses my public profile will know I've fallen under the spell
of the book Fooled by Randomness by Nassim Nicholas Taleb. It's not
all about trading, but those chapters that are about trading are invaluable.
And he praises Soros and his spiritual mentor Karl Popper for being able
to cope with probabilities without being stubborn.

The basic concept is that successful traders, using survivorship bias,
tend to formulate irrational reasons for their success simply because they
survived. They then apply these philosophies consistently and make
money for a while, gradually assuming they are the best in the world...
until the market shifts and they have a "blow up", and leave trading
forever. They may be the right trader at the right time, but they
are not the best traders.

Taleb cites as one example a bond trader who bought some Russian bonds
when they were going up, and over a period of years he'd made over
$250 million for his company...but he lost over $600 million in 7 days
because he didn't change his approach or his opinions about the
bond market....he was a "dip buyer," and he bought during liquidations...
but when Russia didn't have enough money to pay its soldiers,
the value of the bonds went through the floor and this trader
refused to sell because he thought it was "just a liquidation"...
those bonds became worthless, and he left the markets for good.

Such men burn out because they refused to change their approach.
They became married to their ideas.

Quote
Contrast that with how most of us think of trading or investing:

  1. We develop an opinion on a stock.
  2. We take a position.
  3. We convince ourselves that we made the right decision. This is when a bad investment turns into a "long-term investment."
  4. And the "smarter" we are, the worse it is. We "know" we're right. We "know" our investments will eventually "come back."

We live in a society in the west where people who "stick by their guns" are
prized and considered admirable. (Think of the famous quotes by
Churchill: "We shall never surrender..." "never give in... Never yield to force;
never yield to the apparently overwhelming might of the enemy.")
We admire those who refuse to budge; even though Churchill also
praised pragmatism ("Never stand so tall upon a principle that you
cannot stoop to suit the circumstances"), that quote is never bandied about,
as it suggests wavering.

In the markets, we cannot afford such Churchillian resolve in the face
of a bad position. You must look at your previous assessment,
say, "I was wrong, I've changed my mind" and close that position.
Be like the protestors in Paris of 1968, who spraypainted on walls,

"We demand the right to contradict ourselves!"
http://s2.thisnext.com/media/230x230...e_6170AD66.jpg
HELL IS EMPTY, ALL THE DEVILS ARE HERE. -- Shakespeare
  • #6
  • Apr 20, 2009 4:46am Apr 20, 2009 4:46am
Hahahaha

I have Alchemy of Finance. There are good elements to it, but yes... to get to the good parts you have to wade thru hours of un-ending egotistical drivel.

But as always, yes, cut your losses short. I'm amazing how many times people have to repeat that phrase before they get it, and how so many people can make it seem so complex.

Trading is not complex. It's really simple. It's just that people seem to want it to be complex, so they keep searching for ways to make it harder than it has to be.
  • #7
  • Apr 20, 2009 5:47am Apr 20, 2009 5:47am
Quoting mparker
his greatest claim to fame was the bank of england situation, which may also have been his ONLY claim to fame, as his results AFTER that were "not so great"

Personally, I believe sorros to be a highly overrated investor, who had ONE extremely lucrative and sensational win, but I personally think of him as a "one trick pony" simply because he has not repeated (even on a smaller basis) that one trick, while buffett just slowly continues making what appears to be the correct choices !

my opinions, of course

enjoy and trade well...
Hmmmmm... But apart from what's listed below, what has George Soros, the investor, actually achieved?

"George Soros is known for the unmatched success of his Quantum Fund. A hedge fund guru, he is recognized for having the best performance record of any investment fund in the world over its 26-year history. A mere $1000 invested in 1969 when Soros established the Quantum Fund would have been worth $4 million by the year 2000. During that time he achieved a cumulative 32% annual return."

http://www.gurufocus.com/ListGuru.ph...e=George+Soros
  • #8
  • Apr 23, 2009 2:05pm Apr 23, 2009 2:05pm
There is an interview with George Soros at youtube:
Inserted Video

George Soros appears in conversation with Google CEO Eric Schmidt discussing his new book “The Age of Fallibility: Consequence of the War on Terror” as part of the Authors@Google series. This event took place on Auguest 9, 2006, at Google’s headquarters in Mountain View, CA.
One person in the audience asked George Soros what the real secret was to his success in the markets. The person had a father who was a speculator also, and after having red all Soros books, he was still not able to make any money. People laughed. Where Soros explained his real secret in the markets, that he was always wrong. He also commented about LTCM blow up, where he says that they had great models, but the model had flaws. When such a model is used over time the flaw will come to the surface.
The clip is worth while if you can stand a little George W. Bush bashing.
  • #9
  • Apr 25, 2009 6:29pm Apr 25, 2009 6:29pm
Thank you Fugly, for beginning this post. Soros is the poster-child for global macro and it's helpful to know how he approached the markets. I did not start becoming profitable in the FX market until I internalized a perspective that Soros had: I believe he once said something like, "I don't play the game by a certain set of rules; I look for changes in the rules of the game."

I live by that concept every day, because it's impossible to predict what will happen next, but investment flows change when there is a complete shift in psychology that happens when the rules change. Any readers further interested in this should read about heuristics and behavioral finance.

Kris
  • #10
  • Apr 25, 2009 8:50pm Apr 25, 2009 8:50pm
Quoting gammase1
Hmmmmm......
I wonder why Soros is the one who gets all the credit. It seems people forget that Jim Rogers was his partner at the Quantum Fund.
  • #11
  • Apr 25, 2009 9:26pm Apr 25, 2009 9:26pm
That trade was Stanley Druckenmiller's idea, CIO for Soros firm. But Soros get all the credit. The only thing Soros did was get Druckenmiller to increase the leverage.
The future depends on what we do in the present.
  • #12
  • Apr 25, 2009 11:03pm Apr 25, 2009 11:03pm
I read his biography. He had a very real understanding of currency fundamentals as a result of having lived in Europe, England, and America during the formative years of their post-WWII recovery. He trades off what we would call "weekly and monthly" chart time frames, where it is fairly easy to project direction. Risking 10-20% per trade and rarely losing, its easy to see how he got to the billionaire level. I don't think he does as well in today's markets though. He took a huge hit speculating on the rupee and the ringgit in the late 90's. Imagine being stuck in a multi-billion dollar position in an illiquid market like that. ever since he has dropped the leverage a lot, aiming for 20%ish returns per year rather than 80-100%. He still makes good macro predictions, like the credit crisis and the euro and pound drop, but he isn't that involved in day-to-day trading.
  • #13
  • Apr 26, 2009 12:13am Apr 26, 2009 12:13am
Quoting clockwork71
I wonder why Soros is the one who gets all the credit. It seems people forget that Jim Rogers was his partner at the Quantum Fund.

I was just going to pop that in. Jim Rogers has *in my opinion* more to do with Soro's success than Soros. LOL
The trend always ends.
  • #14
  • May 1, 2009 4:34am May 1, 2009 4:34am
Quoting ha-pattern
Fugly,

If I offended you in any way, I apologize. A more-complete version of above post:

Sorry missed this para ...... offended ?? dunno what ur talking about anyway I always love your threads and input.
  • #15
  • May 1, 2009 4:38am May 1, 2009 4:38am
Quoting hxcjf
He trades off what we would call "weekly and monthly" chart time frames, where it is fairly easy to project direction.
Oh well , I was under the impression he never uses charts he doesn't even look at them, its strictly all fundies just like Jim rogers.

Hx are you sure he uses charts?

Lol guess I was under the wrong impression I thought his whole group didn't use charts.

Thanks
  • #16
  • Edited 8:16am May 1, 2009 7:57am | Edited 8:16am
Quoting hxcjf
I read his biography. He had a very real understanding of currency fundamentals as a result of having lived in Europe, England, and America during the formative years of their post-WWII recovery. He trades off what we would call "weekly and monthly" chart time frames, where it is fairly easy to project direction. Risking 10-20% per trade and rarely losing, its easy to see how he got to the billionaire level. I don't think he does as well in today's markets though. He took a huge hit speculating on the rupee and the ringgit in the late 90's. Imagine...
Soros got involved in actively managing the fund towards the end of last year, when he achieved a return just shy of 10% for 2008.
  • #17
  • May 1, 2009 8:00am May 1, 2009 8:00am
Quoting ShamusFamous
I was just going to pop that in. Jim Rogers has *in my opinion* more to do with Soro's success than Soros. LOL
Seriously? But Soros achieved great success before, during and after his association with Jim Rogers. Not that i am downplaying the great investment record of Jim Rogers.

For anyone to be as consistent as Soros, after decades in this tough business, through all the economic peaks and troughs is just incredible.
  • #18
  • Edited 8:30am May 1, 2009 8:04am | Edited 8:30am
Quoting compro99
That trade was Stanley Druckenmiller's idea, CIO for Soros firm. But Soros get all the credit. The only thing Soros did was get Druckenmiller to increase the leverage.
It was both their ideas. I think that has been acknowledged by both Soros and the publicity shy Druckenmiller. Also, as we all know, it's not just the idea that counts; as important, if not more so, is the timing and having the stomach to stand firm and aggressively lever the balance sheet of the fund.
  • #19
  • May 1, 2009 8:09am May 1, 2009 8:09am
Quoting clockwork71
I wonder why Soros is the one who gets all the credit. It seems people forget that Jim Rogers was his partner at the Quantum Fund.
Only for 10 years he was, between 1970-80.
  • #20
  • May 1, 2009 8:46am May 1, 2009 8:46am
Quoting gammase1
Only for 10 years he was, between 1970-80.

Yes and in that time the fund grew by something like 4000% Jim cofounded the fund and he retired in 1980. George still works lol

Quote
In 1970 he co-founded the Quantum Fund with Jim Rogers, which created the bulk of the Soros fortune.

They are both great investors. I'm just living up to the standards set by my hair and being a goofball.
The trend always ends.
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