The World’s Greatest Investors – George Soros
After moving to England in nineteen forty seven, George began his career selling souvenirs in a beach hut. But, realising it wasn’t for him, he wrote to every merchant bank in London telling them that flogging tourist tat was not really his bag. This go-getting attitude landed him his first role at Singer & Friedlander and he quickly rose through the ranks of merchant banks and trading floors across the world. By nineteen sixty three he had become vice-president of a large New York investment bank. But that wasn’t enough. George had itchy feet and it was only a matter of time before he left the shackles of employment to make a name for himself in his own right.
And so Soros Fund Management was born in nineteen seventy. The fund takes positions in forex, commodities, private equity and venture capital. It’s also the primary advisor for the stellar Quantum Fund, a partnership between Soros and the legendary investor Jim Rogers that was set up in nineteen seventy three. His fund has achieved staggering growth having generated forty billion dollars in profit since it began. A jaw-dropping five point five billion dollars came in two thousand and thirteen alone and he has returned his investors an average of twenty percent growth per annum for over forty years. I’d be amazed if you can find a modern day fund manager who can return those levels of growth over four years, let alone forty.
So what can we learn from this great investor? Well George doesn’t do penny share tips. You’re not likely to get much out of him if you ask who is going to dominate the high street in five years’ time either. Instead he looks at macroeconomics. That’s the performance, structure, behaviour and decision-making of an economy as a whole rather than focusing in on specific markets. Soros is a master at this and places enormous bets. His most famous trade was selling short ten billion dollars worth of UK sterling in 1992.
Let’s put that into context. Ten billion dollars is more than the GDP of Namibia or the Bahamas today and was equivalent to the Gross Domestic Product of Bulgaria at the time. George bet ten billion dollars that the pound was overvalued and, despite attempts by the British Government to prop up the currency’s value, he was right. The move netted him over one billion dollars in profit.
Unlike many investors that trade in currency, Soros is not a day trader. He makes his money in time windows lasting from 6 months to 3 years. Within that period, he bets that something is either massively overvalued or undervalued. He then takes a position. If he thinks an asset is undervalued he’ll take a long position, then wait for it to reach its fair value before selling. But the biggest, fastest money often comes from finding assets that are overvalued and selling them short. When you short a stock, you effectively borrow the shares and immediately sell them on at the higher value. You then wait for the price to go down before purchasing the shares back to return them to the original lender. The difference between what they were sold at versus what they were bought back at is your profit on the trade. Of course, if they’ve gone up since you sold them you lose money if you have to buy them back at the higher price.
But how does Soros know what’s under or overpriced you’re probably asking? Soros believes in something called reflexivity. He believes markets are irrational, even when the maximum information needed to make sound investments is available. So, if something is shooting up in price faster than something against which it is measured, he will want to short sell it. A prime example of this is the UK housing market which has risen in price far beyond the rise in wages for years. It’s only a matter of time before we have a major market correction to revert to the historical average. The impending drop in house prices will impact on house builders, DIY retailers and even banks and you can bet Soros will have short positions on many of these when he believes the time is right.
So what about if you want to emulate George Soros’s success, even in a small way? Well, you’ll be pleased to know he’s not shy about giving his opinion and you’ll find his views on investment opportunities across the financial media. George is another high profile investor who thinks the EU is on its last legs and that China is a debt-ridden basket case. He reckons there’ll be riots on the streets of America prior to a full-blown financial meltdown so choose which bits of advice you want to follow carefully!
When Soros wins, he wins big. The trouble is, he doesn’t always win. So if you plan on using George’s advice as a template for your investment strategy, be very careful out there.