Soros

Robert Slater, “Soros (The World’s Greatest Investor), McGraw-Hill, 2009, 317 Pages

I did not have any real knowledge about George Soros until I read this book. I found the book extremely informative. However, I believe the author is too uncritical of Soros and some items left out are puzzling. Soros has two sons and they are now running the business but they are hardly mentioned in the book. If that is puzzling, how about the fact that I found no mention that he has/had a wife or any female contacts. This is certainly no book like “Snowball” which shows that Buffet effectively had two wives at the same time but one did not have the title.

George Soros was born in Hungary and spent his early years hiding from the Nazis as he was Jewish. He, like Buffet, never accepted the efficient market theory upon which the entire Modern Portfolio theory is based on. He is convinced that mathematics do not govern financial markets—psychology does. The herd instinct rules: You have to determine how the herd is going to get behind a certain stock, currency, or commodity, and then profit from the opportunities that knowledge gives you. Soros has always fancied himself as a philosopher and has sought the reputation of a John Maynard Keynes, if possible. The philosopher, Karl Popper, had a great influence on him.

Soros is one of the world’s leading philanthropists as well as one of the world’s leading George Bush/Cheney haters. Soros devoted most of his philanthropic efforts at creating “Open Societies” in Europe and Russia. It was this commitment to open societies that he felt Bush was threatening when he declared that you are either with us or with the terrorists.

My Notes:
Pg. 7: In the summer of 1992 the British continued to insist that they would not abandon the Exchange Rate Mechanism (ERM). Soros thought this was nonsense and bet heavily against the British pound. So Soros sold $10 billion worth of sterling around Sept. 15th; on September 16th the British pulled the pound out of the ERM. Soros made $958 million and ensured his reputation forever. All in all Soros would make close to $2 billion, $1 billion from the pound and another $1 billion out of the further chaos in the Italian and Swedish currencies and in the Tokyo stock market.

(Pg. 179: Armed with a theory that perceptions count for everything and that faulty perceptions can trigger reflexive behavior in the markets, Soros had been able to identify a key misapprehension on the eve of the ERM crisis: the false expectation that the Bundesbank would support the pound under any circumstances. When the Bundesbank had demonstrated sufficiently that it was not going to bend to the wishes of the Bank of England and cut interest rates, Soros made his bet.


Pg. 10: In 1969 Soros launched the Quantum Fund. Quantum was one of the first offshore funds freely available to non-American investors. This was a hedge fund that sold short, used complex financial instruments, and borrowed large quantities of money (leverage).

Pg. 50: Reflexivity. This is the term Soros uses to describe his investing process. He maintains that there is a two-way feedback between perception and reality. It is not the efficient market hypotheses that explains the behavior of financial markets, it is the reflexive relationship that exists between the biases of investors and what he calls the ‘actual course of events,’ which is another phrase for the economic fundamentals of firms. (I believe today this is part of what we call: Neuroeconomics).

Pg. 55: Soros stated: “I believed that the participants’ bias is the key to an understanding of all historical processes that have thinking participants, just as genetic mutation is the key to biological evolution.”

Pg. 60: Comparison between Buffet and Soros: While Buffett specialized in one thing and one thing only—buying solid companies at low prices—Soros was more flexible, moving in and out of financial markets according to the shifting financial winds, trying to catch swings in the markets at just the right time. Buffett purchased and sold stocks; Soros dealt with currencies and interest rates. Buffett focused on individual firms; Soros followed broad trends in the global financial markets.

Pg. 148: Soros stated: Much of the discussion about liquidity or its lack is misplaced; what matters is the balance between buyers and sellers. Trend following speculation (such as indexing, performance measure, and technical analysis) and trend-following devices (such as portfolio insurance and option-writing) disrupt the balance. Financial markets need a measure of liquidity to permit execution of buy and sell orders without excessive transaction costs; but beyond a certain point, liquidity, or its illusion, can be harmful because it encourages trend-following behavior.

Pg. 150: Soros stock trading philosophy: hold a core group of socks long and a core group of stocks short and then to use leverage to trade S&P futures, bonds, and currencies.

PG. 228: Soros maintains that it is trend-following behavior that creates the boom and bust cycles. So the main question is what generates trend-following behavior. His answer was that hedge funds play a part but it is the mutual funds and institutional managers that are the main culprits. When money is pouring in, they tend to maintain less-than-normal cash balances because they anticipate further inflows. When money is pouring out, they need to raise cash to take care of redemptions.

Pg. 306: It was time, said Soros, to bring back some of the regulations that were put in place after the Depression but had eroded over the next few decades. Leverage and credit creation needed to be reined in. Regulators had to begin controlling asset bubbles as they managed an economy for the more conventional goals of full employment and price stability.