August 2006 – a reporter for the Financial Times walks into a former Presbyterian church-turned-dining club with George Soros. The place is deserted, save for the pair and some staffers who will serve them a quiet lunch. The reporter asks the famed investor about the infamous day in 1992 when he “broke the British pound” with his bet against the UK’s government and its currency. Soros can’t recall which day it was, despite the fact that his masterpiece trade netted him a billion-dollar profit.
“Was it a Wednesday? A Thursday?”
It was Wednesday. They still call it “Black Wednesday” to this day.
George Soros, according to people in the know, is apparently shorting global and US stocks and loading up on gold right now. Gregory Zuckerman has the whole story over at the Wall Street Journal but the money shot is…
After a long hiatus, George Soros has returned to trading, lured by opportunities to profit from what he sees as coming economic troubles.
Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.
Soros Fund Management LLC, which manages $30 billion for Mr. Soros and his family, sold stocks and bought gold and shares of gold miners, anticipating weakness in various markets.
Josh here – basically, he’s worried about all of the same issues everyone else is: China’s economy and the political mismanagement of it, #BREXIT, the migration crisis, the rise of right-wing separatist movements throughout Europe (and here, LOL), etc. All worthy things to be concerned with for a rational person, of course.
Soros is said to have bought a lot of Barrick Gold and Silver Wheaton and adopted derivative positions that will benefit from a decline in the S&P 500. Many people, myself included, regard Soros as perhaps the greatest living trader. If he’s not the G.O.A.T., it would be hard to say who else might be.
Soros has a reputation for prescience at key market turning points, and, as such, the media is going absolutely fucking bonkers with this story. It’s clickable as hell, why wouldn’t they run with it?
Which is fine.
But I think it’s worth mentioning some things about Soros that are not being said to investors being urged to panic, follow his lead or otherwise rend their garments in distress.
So I’ll do it.
Here’s the first thing: Soros doesn’t need to be right. I’ll go ahead and make the assumption the he really wants to be right, but it’s not going to break him or anything he cares about if the market goes in a different direction than his instinct tells him it will. Soros runs a family office – essentially managing his own enormous fortune and the wealth of his employees. There is no OPM involved.
What this means is that he can, at a whim, change his mind, change the directional leaning of his trades and even completely rework his portfolio to bet the other way. This is hard to do when one is answering to outside investors or LPs. Actually, it’s probably no longer possible for 99% of fund managers in the modern age. Consultants need the narrative sold to them so they can pass it on to their clients. Schizophrenia works for people operating at Soros’s level, but it doesn’t sell well.
Speaking of schizophrenia, like all of the greatest traders, Soros doesn’t have a process. I mean, I’m sure he does, but it is his instincts that have made him wealthy, not a checklist. He’s got a highly sophisticated way of viewing the world and more wisdom and experience than anyone else, but in the end, he pulls the trigger on gut. Don’t be shocked, this is true of all the greats: Tudor Jones, Stevie, Tepper, etc.
You’ve heard of Smart Beta? This isn’t that. This is called Brass Balls Beta. It won’t work for most people, but it works for them.
Here’s Soros’s own son, explaining for the The Irish Times, which profiled George Soros on his 84th birthday in 2014:
According to his son, Robert, Soros’s trading was always influenced by more than reflexivity. “My father will sit down and give you theories to explain why he does this or that”, he once said, “but I remember seeing it as a kid and thinking, ‘Jesus Christ, at least half of this is bullshit’.
“I mean, you know [that] the reason he changes his position on 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 this early warning sign.”
Soros has admitted to relying greatly on “animal instincts”, saying the onset of acute pain was often “a signal that there was something wrong in my portfolio”.
His decisions, then, “are really made using a combination of theory and instinct”.
I’m going to go out on a ledge and suggest that your “combination of theory and instinct” is probably not up to par with George’s. Mine either. Shocking, I know. It’s important to consider this before throwing your investment plan in the trash and running off to join the macro circus.
Another thing – it’s hard to discern an investment thesis from Soros’s comments and concerns about the state of the world. He will always be concerned about the state of the world given all of the charities and political causes he funds around the globe.
Here’s the last thing you’re not hearing, but you should know: the Soros family office is a black box. Anyone who’s ever worked there will tell you that. There are analysts working on ideas and concepts there, who then send their work into the central brain and have no idea whether they were used or not, or if they were used, what the trades were or whether or not they were profitable. Attempting to analyze a shop like Soros through the lens of a 13G that gets filed 45 days after the end of the quarter is like trying to count the shells on the sea floor from the deck of an ocean liner.
Zuckerman is a good reporter and probably has the right information, but it tells you nothing about whether these positions are leveraged bets or hedges, or whether they’re short-term trades or long-term investments. You don’t know when the master’s back will hurt and they’ll be taken off or reversed. You don’t know how meaningful they are as a standalone trade or whether or not they’re a part of something bigger, or an offset.
The lunch goes on and the reporter gets the investor to discuss his childhood escape from the Nazis in Hungary. Soros, the boy, is tasked with serving the deportation notices for thousands of Jews in 1944, while his father stealthily works to create the fake documents that will save his family’s lives and the lives of many others.
“I was very close to my father and he imparted his entire wisdom in a practical demonstration in what you have to do to survive. I learned that there are times when the normal rules don’t apply. Also, the fact that it might be more dangerous to be passive – it can be less risky to take risk.”
George credits this idea as the framework for all of the speculation and “financial adventures” which will make him a wealthy man. He’s coming from a place that normal people cannot understand and certainly shouldn’t attempt to emulate. The idea that a mortal investor is going to make a windfall from betting against the 98.6 million trades that are placed globally each day and the $447 billion that changes hands every 24 hours is ludicrous.
Finally, it’s true that George Soros made a billion-dollar windfall on Black Wednesday when the pound came crashing down. But it’s also true, and much less reported, that Soros risked $10 billion in potential losses in order to do it. He bet it all and it worked.
Would you know his name if it didn’t?
Are you ready to play that game alongside him?