Who Is: George Soros
Few investors invoke such strong emotions as George Soros, the man who famously made $1 billion short-selling the British pound in 1992. With an estimated wealth of around $11 billion, Soros is one of the richest people in the world, and is not shy about expressing his opinions.
Born in Budapest in 1930, Soros fled to England in 1947 and worked in a variety of manual jobs to fund his studies at the London School of Economics. In 1956 he moved to New York, where he climbed the corporate ladder at a series of investment banks before setting up the Quantum Fund with Jim Rogers in 1973.
The Quantum Fund
The Quantum Fund is a hedge fund that gained 4,200% during the 1970s, when the S&P 500 index rose less than 47%.
This stunning growth made Soros and others very wealthy, but he continued to take risks, effectively betting the farm on his short-selling of the British pound, and reportedly taking similarly risky positions against Asian currencies during the financial crisis in 1997.
According to one source, $1,000 invested in the Quantum Fund at its outset was worth $4 million by 2000, an annualised growth of 31%.
Much of Soros’ thinking is based around the concept of “reflexivity,” which he spelled out in his first and best known book, The Alchemy of Finance, published in 1988. Reflexivity is the idea of positive feedback loops and self-reinforcing mechanisms. To put it simply, rather than self-correcting and returning to the long-term average, prices have a tendency to feed on themselves, with overvalued assets — whether currencies, shares, or property — becoming more overvalued before the bubble finally bursts. Similar mechanisms exist on the way down.
He is a strong believer in the idea that markets are generally chaotic and driven by emotion. He’s asserted, “The more the theory of efficient markets is believed, the less efficient the markets become.”
Soros’ main competitive advantage in the investment arena has been his ability to stand apart from emotion and to invest rationally, or at least more rationally than most other investors. A key element of this is the fact that Soros acknowledges his own fallibility, and will change direction without any emotional attachment to his former opinions. As Nassim Nicholas Taleb put it: “What characterises real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate.”
Whether one regards him a hero or a bete noire, Soros’ success has been impressive and even in his later years, his influence continues to grow.