George Soros rest in peace. That’s what the news agency Thomson Reuters wanted us to believe when it released a 1,122 word long pre-written obituary of the famed hedge fund manager at 5.41pm eastern standard time in the United States, yesterday evening (or a little after 4 am Indian Standard Time (IST) today morning).
What gave away the mistake was the following paragraph: “George Soros, who died XXX at age XXX, was a predatory and hugely successful financier and investor, who argued paradoxically for years against the same sort of free-wheeling capitalism that made him billions.”
The dummy triple X’s made it clear that Thomson Reuters had put out the obituary by mistake. It is normal for news agencies to keep obituaries prepared in advance, but on the rarest occasions like this one they get released before the death of the person.
The obituary as can be made out from the paragraph reproduced above wasn’t kind to Soros. Someone like Soros, who has made the kind of money that he has, doing what he does best i.e. bet against countries and big bubbles, as and when he does die, isn’t going to inspire obituary writers to write nostalgia infused pieces, anyway.
The pre-written obituary did manage to list out some of Soros’ big achievements. “He was known as ‘the man who broke the Bank of England’ for selling short the British pound in 1992,” the second paragraph of the obituary read.
In fact this was the trade that made Soros famous. The story behind the trade is very interesting. On October 24, 1992, Soros was in London and was leaving his house to play tennis. As soon as he got out of his house, he was besieged by a slew of journalists and photographs. All they wanted to know was whether he had made a billion by betting against a pound. Earlier in the day The Daily Mail had carried a story on Soros with the headline “I Made a Billion as the Pound Crashed.” Soros soon found out about the newspaper report.
What is not very well known is the fact that the idea of betting against the pound wasn’t Soros’. Though once he came to know of it and was convinced about it, he went full tilt with the trade. The idea for the trade essentially came from Stanley Druckenmiller who was the chief trader and strategist of George Soros’ Quantum Fund.
As Michael Kaufman writes in Soros – The Life and Times of a Messianic Billionaire “In 1992 Druckenmiller calculated that, despite public assurances to the contrary, the Bank of England would not be able to avoid devaluating the pound. He called Soros to discuss his thinking. “I told him why I thought the pound could collapse and the reasons I had and I told him the amount I was going to do. I did not get a scolding, but I got something close to a scolding, which was, well, if you believe all that, why are you betting only two or three billion.” With Soros’ encouragement, Druckenmiller more than tripled his original stake.”
So Soros bet big on the pound being devalued and had a position of $10 billion on the British pound. The trade essentially involved short selling the British pound and later buying it back once it was devalued. And that is what happened. He eventually ended up making $1 billion on the entire trade. Soros later stated that he wanted to execute an even bigger trade and borrow and sell British pounds worth around $15 billion.
Kaufman made a very important conclusion about Soros on the basis of this trade. “There are thousands of people who are good at analysis and hundreds who re good at predicting trends, but when you get down to using that information, pulling the trigger, putting it on the line to make what you are supposed to make, you are down less than a handful…You know, the ugly way to describe it would be ‘balls.’ To be willing at the right moment in time put it all on the line. That is not something, in my opinion, that can be learned. It is totally intuitive, and it is an art, not in any way a science,” he writes. So while everyone might do the right analysis, it takes a man with balls like Soros to get up and trade big on it.
Soros is great at making big macro-economic calls. Other than betting against the British pound, he also is said to have short sold the Thai baht and the Malaysian ringitt in 1997, and made a killing in the process. Both the baht and the ringitt were then pegged against the dollar. The baht was fixed at 25 to a dollar and 2.5 ringitt made a dollar.
Soros is said to have successfully bet against these currencies by short selling them. Short selling essentially involves borrowing a particular asset, selling it in the hope that its price falls, buying it at a lower price and thus making a profit out of the whole trade.
When Soros supposedly short sold the baht, the Thai baht central bank would have initially bought the baht by selling dollars. This helped maintain the peg between the dollar and the baht. The trouble was that the Thai central bank had only a limited number of dollars to sell. And once they ran out of dollars they had to let the baht fall in value against the dollar, which is what Soros wanted, and thus he made a killing. The same logic would have worked in case of the Malaysian Ringitt as well.
As the third paragraph of the Reuters obituary pointed out “His Soros Fund Management was widely blamed for helping trigger the Asian financial crisis of 1997.”
Soros has the ability to make big macro-economic calls. But he never a good stock picker. As Aswath Damodaran professor of finance at the New York University’s Stern School of Business,told me in an interview sometime back “Soros has never been a great micro investor. He has made his money on macro bets. He has never been a great stock picker. For him it has got to be massive macro bubbles, an asset class that gets overpriced or underpriced.”
In that sense Soros is different from the class of investors who believe in buying financial assets which are supposedly underpriced and then holding onto it in the time to come. Soros works in the opposite way. He either likes entering a bubble early or shorting them once they have got on for too long. As he writes in The New Paradigm for Financial Markets “Nothing is quite as profitable as investing in an early-stage bubble.” In fact one his favourite quips is “when I see a bubble, I invest”.
What works in Soros’ case is that he is able to exit just before the tide turns. As he has honestly admitted to in the past: “I don’t have a particular style of investing, or, more exactly, I try to change my style to fit the conditions…I assume that markets are always wrong…Most of the time we are punished if we go against the trend. Only at inflection point are we rewarded.”
And his ability to exit just before the tide turns or what he calls an inflection point, was most recently at play in case of gold. Soros is said to have made a lot of money by betting correctly on gold in the last ten years. He is recently said to have cut his gold holdings before the price of the yellow metal started to fall and now there are even rumors that he is shorting gold big-time and making a killing doing the same.
In his latest interview he was very vague on gold as any good trader would expected to be. As he told South China Morning Post when asked what was his view on gold “That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.”
In recent times Soros has tried to set his legacy right by projecting himself as not just a ‘greedy’ hedge fund manager who has made tonnes of money but as a thought leader. As he told the US Congress a few years back: “The main difference between me and other people who have amassed this kind of money is that I am primarily interested in ideas, and I don’t have much personal use for money. But I hate to think what would have happened if I hadn’t made money: My ideas would not have gotten much play. I wish I could write a book that will be read as long as our civilization lasts…I would value it much more highly than business success.”
Soros has written several books in which he has fancied himself as a philosopher who is a firm believer in the Theory of Reflexivity, originally proposed by Karl Popper. Soros has explained this theory in great detail in some of his books and has even gone into some detail on how it helps him make investment decisions.
As he writes in The New Paradigm for Financial Markets “People are participants, not just observers, and the knowledge they can acquire is not sufficient to guide their actions. They cannot base their decisions on knowledge alone…People’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole…One must put oneself in the position of a detached observer. The human mind has worked wonders in trying to reach that position, but in the end it cannot fully comprehend the fact that it is part of the situation it seeks to comprehend.”
And this understanding Soros feels helps him make the investment decisions that he does. But that is something that his eldest son Robert, doesn’t agree with. As he puts it “My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s his early warning sign.”
So much for all the philosophy of investing. It’s the back pain which gets Soros going.
The article originally appeared on www.firstpost.com on April 19,2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)