Tuesday, March 31, 2009

George Soros: Hero for the Active Investor

There is ample evidence that the average active investor gets lower returns than passive investors, but that doesn’t preclude a minority of active investors from outperforming passive indexes. The great investor and hedge fund manager, George Soros, serves as a hero for the active investor who dreams of outsmarting the market.

In his book Soros: The World’s Most Influential Investor, Robert Slater looks at Soros’s life, investing record, philanthropy, and politics. Soros is best known for his 1992 bet against the British pound when the Bank of England was forced to abandon the exchange rate mechanism designed to keep currency values within certain ranges.

Soros made about a billion dollars in this high-stakes gamble against the pound and another billion dollars in simultaneous bets on other currencies. Some viewed Soros’s actions as stealing from the British people, but Soros sees himself as a “critic” of financial markets who backs his opinions about the value of stocks and currencies with big financial moves.

Soros’s investing record is legendary. From 1969 to 1993, an investment in his Quantum Fund rose over 2000-fold! His investing approach is mainly to use macroeconomic information to predict boom-bust cycles, invest early to catch the boom, and sell short before the bust comes.

Soros calls his investing theory “refexivity”. At times investor behaviour significantly deviates from the predictions of efficient market theory, and market activity starts to affect fundamentals rather than just reflecting them. This reinforcing feedback leads to a bubble that must eventually burst. The key is to predict where and when the booms and busts will occur.

Critics claim that Soros’s success came from access to information from powerful people in government and business. There may be some truth to this, but it seems likely that most of his success came from making accurate predictions a high fraction of the time.

Soros found it more difficult to give money away than to make it. His early experiences of hiding from Nazis in Budapest jails made him believe strongly in open societies, and he spent billions in efforts to open societies in Eastern Europe and the former Soviet Union.

He also spent some money in an effort to defeat Bush in 2004. It’s not that Soros has any great love for the Democratic Party. He just saw the policies of the Bush administration as running counter to the U.S. ideals of an open society. Bush statements reminded him of Nazi propaganda. However, when challenged he said “I would not call Bush a Nazi, exactly because I know the difference.”

Overall, I enjoyed this book mainly for the accounts of Soros’s high-stakes investing successes, but also for his interesting philanthropic efforts.

1 comment:

  1. Thanks for doing the review, it sounds like an interesting read.