George Soros on Trading

Discussion in 'Trading' started by BCE, Jan 5, 2011.

  1. BCE


    Here's a story and quotes from George Soros. Probably a lot of you have seen this. But just wanted to share this in regard to maximizing your profits on your trades. I know he's a controversial guy, but this post is about trading. So those of you who don't agree with his politics, etc. spare us from your bashing comments on what a jerk he is...........blah, blah, blah. Save those for the Religion and Politics forum. Posts relating to the trading aspects are welcome. :)

    "You call that a position?"

    Q: What else have you learned from Soros?

    A: I've learned many things from him, but perhaps most significant is that 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. The few times that Soros has ever criticized me was when I was really right on the market and didn't maximize the opportunity.

    As an example, shortly after I had started working for Soros, I was bearish on the dollar and put on a large short position against the Deutsche mark. The position had started going in my favor and I felt rather proud of myself. Soros came into my office, and we talked about the trade.

    'How big a position do you have?' he asked.
    'One billion dollars,' I answered.
    'You call that a position?' he said dismissingly. He encouraged me to double my position. I did, and the trade went dramatically further in our favor.

    Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you're right on something, you can't own enough.

    Although I was not at Soros Management at the time, I've heard that prior to the Plaza Accord meeting in the fall of 1985, other traders in the office had been piggybacking George and hence were long the yen going into the meeting. When the yen opened 800 points higher on Monday morning, these traders couldn't believe the size of their gains and anxiously started taking profits. Supposedly, George came bolting out of the door, directing the other traders to stop selling the yen, telling them that he would assume their position. While these other traders were congratulating themselves for having taken the biggest profit in their lives, Soros was looking at the big picture: The government has just told him that the dollar was going to go down the next year, so why shouldn't he be a pig and buy more?

    Soros is also the best loss taker I've ever seen. He doesn't care whether he wins or loses on a trade. If a trade doesn't work he's confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you're extremely confident, taking a loss doesn't bother you."

    We shall not cease from exploration
    And the end of all our exploring
    Will be to arrive where we started
    And know the place for the first time
    - T.S. Eliot -
  2. BCE


    Here's another article on George.

    George Soros: The Philosophy Of An Elite Investor

    by Lisa Smith

    Did you know that a $1,000 investment with George Soros in 1969, would have been worth about $4 million by the year 2000? For more than three decades, this maverick hedge fund manager generated 30.5% average annual returns, after management fees. His flagship Quantum Fund is revered by investors. Despite the animosity generated by his trading tactics and the controversy surrounding his investment philosophy, George Soros spent decades at the head of the class among the world's elite investors. In 1981, Institutional Investor magazine named him "the world's greatest money manager."

    Soros' Philosophy
    George Soros is a short-term speculator. He makes massive, highly-leveraged bets on the direction of the financial markets. His famous hedge fund is known for its global macro strategy, a philosophy centered around making massive, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives and other assets based on macroeconomic analysis.

    Simply put, Soros bets that the value of these investments will either rise or fall. This is "seat of the pants" trading, based on research and executed on instinct. Soros studies his targets, letting the movements of the various financial markets and their participants dictate his trades. He refers to the philosophy behind his trading strategy as reflexivity. The theory eschews traditional ideas of an equilibrium-based market environment where all information is known to all market participants and thereby factored into prices. Instead, Soros believes that market participants themselves directly influence market fundamentals, and that their irrational behavior leads to booms and busts that present investment opportunities.

    Housing prices provide an interesting example of his theory in action. When lenders make it easy to get loans, more people borrow money. With money in hand, these people buy homes, which results in a rise in demand for homes. Rising demand results in rising prices. Higher prices encourage lenders to lend more money. More money in the hands of borrowers results in rising demand for homes, and an upward spiraling cycle that results in housing prices that have been bid up way past where economic fundamentals would suggest is reasonable. The actions of the lenders and buyers have had a direct influence on the price of the commodity.

    An investment based on the idea that the housing market will crash would reflect a classic Soros bet. Short-selling the shares of luxury home builders or shorting the shares of major housing lenders would be two potential investments seeking to profit when the housing boom goes bust. (For more insight into housing bubbles, read Why Housing Bubbles Pop.)

    Major Trades
    George Soros will always be remembered as "the man who broke the Bank of England." A well-known currency speculator, Soros does not limit his efforts to a particular geographic area, instead considering the entire world when seeking opportunities. In September of 1992, he borrowed billions of dollars worth of British pounds and converted them to German marks.

    When the pound crashed, Soros repaid his lenders based on the new, lower value of the pound, pocketing in excess of $1 billion in the difference between the value of the pound and the value of the mark during a single day's trading. He made nearly $2 billion in total after unwinding his position.

    He made a similar move with Asian currencies during the 1997 Asian Financial Crisis, participating in a speculative frenzy that resulted in the collapse of the baht (Thailand's currency). These trades were so effective because the national currencies the speculators bet against were pegged to other currencies, meaning that agreements were in place to "prop up" the currencies in order to make sure that they traded in a specific ratio against the currency to which they were pegged.

    When the speculators placed their bets, the currency issuers were forced to attempt to maintain the ratios by buying their currencies on the open market. When the governments ran out of money and were forced to abandon that effort, the currency values plummeted. (Learn about the catalysts of a currency crisis in What Causes A Currency Crisis?)

    Governments lived in fear that Soros would take an interest in their currencies. When he did, other speculators joined the fray in what's been described as a pack of wolves descending on a herd of elk. The massive amounts of money the speculators could borrow and leverage made it impossible for the governments to withstand the assault.

    Despite his masterful successes, not every bet George Soros made worked in his favor. In 1987, he predicted that the U.S. markets would continue to rise. His fund lost $300 million during the crash, although it still delivered low double-digit returns for the year.

    He also took a $2 billion hit during the Russian debt crisis in 1998 and lost $700 million in 1999 during the tech bubble when he bet on a decline. Stung by the loss, he bought big in anticipation of a rise. He lost nearly $3 billion when the market finally crashed.

    Trading like George Soros is not for the faint of heart or the light of wallet. The downside of betting big and winning big is betting big and losing big. If you can't afford to take the loss, you can't afford to bet like Soros. While most global macro hedge fund traders are relatively quiet types, avoiding the spotlight while they earn their fortunes, Soros has taken very public stances on a host of economic and political issues.

    His public stance and spectacular success put Soros largely in a class by himself. Over the course of more than three decades, he made the right moves nearly every time, generating legions of fans among traders and investors, and legions of detractors among those on the losing end of his speculative activities.

    We shall not cease from exploration
    And the end of all our exploring
    Will be to arrive where we started
    And know the place for the first time
    - T.S. Eliot -
  3. thanks for the good read.

    This reminds me of a trader I once knew. He would only trade during lunch time and would use massive buying power to push the market around, normally high priced low volume stock. 5 digit PnL swings was normal for this guy. In and Out in about 20 mins.
    Supply and Demand moves Price, generate enough demand you can move the price up, likewise for Supply. Level 2 and Time and Sales shows this.

    Also im sure people are familiar with local muscle in the SP Pit. that dude alone would hold the bid or offer and literally defend his position as the market went against him. His conviction was enough that he would hold the market for that quick rebound then cover either in the pit or in the emini.

    Dont let anyone tell you different. with enough capital and leverage anyone can control the market, albiet for a short time only though.

    The lesson here is that sometimes you have to go max size and push it.
  4. One of the best traders ever. This is a huge point. :) Thanks for posting
  5. seconded
  6. The other side of the coin...

    "Nobody ever lost money taking a profit." - Bernard Baruch
  7. TraDaToR


    That was perhaps the case in the 80's. I doubt he would be able to hold anything more than a tenth of a second nowadays.
  8. Revenge trading, LOL. It shows how everybody goes through the steps.
  9. Visaria


    I recall reading a few years ago his biography. If memory serves, he actually busted his own personal acct when he was around about 38 years old. His meteoric ascent really started when he started the Double Eagle Fund (assets of $2m) with Jim Rogers when he was 40 years old.
  10. BCE


    Some basic Soros' trading principles:

    * Some people spend all day talking to their brokers. Soros “prefers to talk to a select few people who can be really helpful ….” Then you need to think and read and reflect.
    * To be successful, you need leisure. You need time hanging heavily on your hands [to talk to people, read, and think].
    * If you have an investment thesis you like, run it by people who support the other side of the argument. See if you still like the thesis afterward.
    * Basically, the way Soros operates is to have a thesis and then he tests it in the market. If the market goes against his position and he feels uneasy (e.g. gets a backache), he cuts his losses.
    * What he took was basic information from various sources and kind of mulched it in his mind. Then he would come up with a thesis that most of the time was valid.
    * When Soros believed he was right … no investment position was too large. Holding back was for wimps. The worst error in Soros’ book was not being too bold.
    * The key to investing is knowing how to survive. That means at times playing conservatively, cutting losses when necessary and keeping a large portion of one’s portfolio out of play.
    * If you are doing poorly, retrench. Don’t try to recoup. And when you start again, start small.
    * To be in the game, you have to be willing to endure the pain.
    * Perhaps Soros’ most distinctive feature, the trait that explained his investment talents the best, was his ability to gain membership in a very ‘exclusive ‘ club that included the leadership of the international community…. Such encounters clearly gave Soros an advantage over other investors.
    * Invest first and then investigate … form a hypothesis, take a toehold position to test the hypothesis, and wait for the market to prove you are right or wrong.
    #10     Jan 6, 2011