Investment Philosophy
Despite his generosity, Soros is a savvy investor and trader who seeks for opportunities at all times of the market cycle. Financial markets, he believes, are fundamentally chaotic. Humans buying and selling stocks, bonds, currencies, and real estate determine their pricing. Human emotions, rather than rationality, cause significant bias in the fundamentals linked with various asset classes.
As a result of this, he developed the General Theory of Reflexivity, which states:
- Investors don’t make decisions based on reality; rather, they make decisions based on their interpretation of reality.
- Their actions have an impact on reality and asset prices as a result of their perception.
- It causes prices to depart from equilibrium and become divorced from reality. This could result in the development of bubbles. He then applied this theory to identify asset-class bubbles, which he used as data to plan future investment and trading decisions.
Soros was also known for combining his investment decisions with political considerations. The best example is Soros’ $10 billion bet against the Bank of England’s decision to hike interest rates in 1992. The domino effect that followed resulted in a quick depreciation of the Sterling Pound, netting him a cool $1 billion. He’s been dubbed “The Man Who Broke the Bank of England” ever since.
what do we learn from this?
- Using scientific methods: Soros’ market moves are based on defined tactics that track multiple eventualities and effective pay-outs in each scenario, all based on the most recent market data. There is no room for error. These theories are then put to the test on a lesser scale to see what happens. The investment size gradually increases after the outcomes are favourable.
To succeed in the financial markets, you must have a well-defined investment strategy. Speculators rarely make it to the end of the game.
- Don’t be afraid to bet against the crowd: Real money is made when one bet against the crowd and understands the market’s signals. As a result, don’t be scared to trust their study and place a wager when the market gives an opportunity. “Money is made by discounting the obvious and betting on the unexpected in markets that are continuously in change.”
3. Learn and adapt: Soros maintains he doesn’t have a specific investment approach. His thoughts contain fundamental principles that guide his choices (reflexivity, chaos theory, irrationality of investors). However, throughout the last 70 years, his investment techniques have changed based on market conditions.
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