Professional Documents
Culture Documents
A Dozen Things About Investing I've Learned From George Soros
A Dozen Things About Investing I've Learned From George Soros
Soros
25iq.com/2013/07/30/a-dozen-things-about-investing-ive-learned-from-george-soros
July 30,
2013
2. “The financial markets *generally* are unpredictable. So that one has to have
different scenarios.” [emphasis added] Just because markets are *often* predictable
does not means that they are *always* unpredictable. If an investor is patient and waits
for the rare instance when he or she successfully spots a mispriced bet, they can beat
the market and generate alpha.
3. “The hardest thing to judge is what level of risk is safe.” Risk is the possibility that
you may suffer harm or loss. Three situations must be faced: (1) sometimes you know
the nature of the risky event and the probability (as in a coin flip); (2) sometimes you
know the nature of the event, but don’t know the probability (which is uncertainty as in
the price of a given stock in 20 years); and (3) sometimes you don’t even know the nature
of what future states might hurt you (as in a negative Black Swan). These decisions are
made, says Soros, in an environment where: “there are myriads of feedback loops at
work, some of which are positive, others negative. They interact with each other,
producing the irregular price patterns that prevail most of the time; but on the rare
occasions that bubbles develop to their full potential they tend to overshadow all other
influences.” The best thing you can do to be “safe” given risk, uncertainty and ignorance
is to have a “margin of safety.”
4. “It’s not whether you’re right or wrong that’s important, but how much money
you make when you’re right and how much you lose when you’re wrong.” It is
“magnitude of correctness” that matters for an investor not “frequency of correctness.”
1/3
This is the “Babe Ruth” effect at work (strike outs in baseball and in investing can be
acceptable as long as you hit enough home runs).
5. “There is no point in being confident and having a small position.” If the odds are
substantially in your favor on a given wager, bet big. Few investor bet bigger than Soros
when he thinks he is right.
6. “I only go to work on the days that make sense to go to work. And I really do
something on that day.” Staying busy trading mostly generates fees and mistakes.
Being inactive can often be the very best thing an investor can do.
7. “If investing is entertaining, if you’re having fun, you’re probably not making any
money. Good investing is boring.” If you are getting big dopamine hits from investing
you are very likely engaged in gambling and not investing. It is best to “be the house”
rather than the gambling customer. The best way to “be the house” is to bet only when
the odds are substantially in your favor.
8. “Market prices are always wrong in the sense that they present a biased view of
the future.” Soros is clearly not a believer in the efficient market hypothesis. This is not
surprising since if markets were always efficient he would not be rich. Soros: “[My view is]
diametrically opposed to the efficient market hypothesis and rational expectations. It is
built on the twin pillars of fallibility and reflexivity.”
9. “Markets can influence the events that they anticipate.” This sentence is one
attempt to put the theory of “reflexivity” into a a few words. Unfortunately, Soros is not a
gifted communicator on this very complex topic. In his opinion, markets and the views of
people about markets interact dynamically in their effect on each other. Soros: “There is
a two-way reflexive connection between perception and reality which can give rise to
initially self-reinforcing but eventually self-defeating boom-bust processes, or bubbles.
Every bubble consists of a trend and a misconception that interact in a reflexive manner.”
10. “Equilibrium itself has rarely been observed in real life — market prices have a
notorious habit of fluctuating.” Equilibrium is a bedrock assumption of most
macroeconomists and Soros is of the view that equilibrium is a delusional fantasy.
Equilibrium as an assumption makes the math beautiful but it does not jibe with reality.
Soros has said: “Economic thinking needs to begin addressing real-world policy questions
2/3
rather than simply creating more mathematical equations.” Soros does not adopt a
rational agent thesis in formulating his views. For example, “When a long-term trend
loses its momentum, short-term volatility tends to rise. It is easy to see why that should
be so: the trend-following crowd is disoriented.” Soros also believes: “Boom-bust
processes are asymmetric in shape: a long, gradually accelerating boom is followed by a
short and sharp bust.”
12. “I’m only rich because I know when I’m wrong…. I basically have survived by
recognizing my mistakes.” and “Once we realize that imperfect understanding is
the human condition there is no shame in being wrong, only in failing to correct
our mistakes.” This speaks for itself.
Categories: Uncategorized
3/3