7/31/2024 - technology-and-innovation

Legendary Investors: GEORGE SOROS

By gustavo neffa

Legendary Investors: GEORGE SOROS

George Soros, speculator and great investor

Unlike Warren Buffet, who defines himself as “the” long-term investor, George Soros is synonymous with financial speculation. And boy did he do well, having been one of the world’s most successful investors with an average annual return of 20% since 1969 managing investments through various hedge funds of his management company, Soros Fund Management LLC.

He now has a personal fortune valued at USD 6.7 billion (Forbes, 2024).

Soros was born in 1930 in Hungary, but the wave of anti-Semitism and the war between the Nazis and the Soviets made him leave the country at the age of 17 for England. In London, he lived with his uncle and studied philosophy at the London School of Economics, where he began to study liberal ideas and the economy in general in depth. It was there that he came into contact with the Austrian thinker Karl Popper. In 1956, he moved to New York, where he would work for various financial entities linked to the world of investment.

After a successful career, in 1969, he founded his first hedge fund: Quantum. He partnered with Jim Rogers, another well-known and successful investor. Over the next 10 years, the portfolio increased 4,200%, while Standard and Poor's grew 47%. In 1973, he founded Soros Fund Management as an advisor to Quantum, due to financial regulation, with an offshore domicile.

The Soros Fund Management firm managed six hedge funds with total investments of more than 70 billion dollars.

He earned the fame of being "the man who broke the Bank of England". The blow that gave him worldwide fame was his massive speculative attack against the British pound on Wednesday, September 16, 1992: he ordered the sale of 10 billion pounds and forced the Bank of England to devalue the currency, earning about 1 billion dollars in that day alone.

In 1999, he predicted in his book “The Crisis of Global Capitalism” the structural economic problems that materialized in 2008 and were described in more detail in his recent book published in May 2008 (“The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means”).

He perfectly describes the contradictions of a global capitalist system, being one of its main beneficiaries. He defines them as “fertile fallacies”, that is, “defective constructions”. He said that the deficiencies of dominant ideas and institutional organizations only became evident over time. He has dared to look for market failures in all situations and, when he found them, took advantage of the situation.

This earned him strong criticism and accusations about his actions on more than one occasion. For example, in November of that year, George Soros and four other well-known hedge fund managers went to testify before the United States Congress to share their views on the influence of hedge funds in the most recent financial crisis which, in my opinion, while it is true that they deepened the fall, they also stimulated the subsequent rebound. As influential market agents, I believe hedge funds can be accused of increasing volatility, but price arbitrage is done at their own risk.

The following quote is very illustrative, in which Soros clearly exposes, in my opinion, his dichotomy between the investor and the citizen: “As a market actor, I try to maximize my profits. As a citizen, I am concerned with social values: peace, justice, freedom, or whatever. I cannot express these values as a market actor. Suppose the rules that govern financial markets are to be changed. I cannot change them unilaterally. If I impose the rules on myself but not on others, they would affect my own performance in the market but not affect what happens in the markets because no actor alone is supposed to be able to influence the outcome.”

In the year 2000, Quantum radically changed its way of operating, focusing on preserving existing capital instead of pursuing large gains as before. It was then that the Quantum Endowment Fund was created.

 

In July 2011, George Soros closed the doors of Quantum to third-party money (which represented about 25 billion under management), becoming a “family office”, that is, a company dedicated to managing the family’s money. The reason was the new regulation that would come into force in the United States to give more transparency to certain investment vehicles. The new regulation that began to be applied in March 2012 in the United States states that offshore funds would have to provide data on their foreign investors, among other transparency measures.

Although he is always associated with being the great “market speculator”, Soros has always supported controls and what he believed had to be done to live in a safer world, even if it harmed his personal business.

 

Soros is skilled at perceiving market “momentum”: in 2000, during the dot-com bubble, Soros had 90% in liquidity, thus avoiding the heavy losses of the following years.

George Soros advocates investing in markets that are far from efficient and that markets often make mistakes, so investors should take advantage of those situations by eliminating the noise or distortions of that market by buying or selling as the occasion warrants. One of his maxims is “find a trend whose premise is false, and bet your money against it.”

His initial career strengthened his hobby: philosophical research. To date, he has published eight books and countless articles and essays. Among the top 10 finance books, “The Alchemy of Finance” should not be missing, where he explains how the market tends towards equilibrium, develops the idea of imperfect knowledge of participants and how this affects investment decisions.

Additionally, he dedicated a good part of his fortune to philanthropy: Soros chairs the Open Society Institute, an organization inspired by Popper's ideas in defense of democracy. In 2001, he donated 250 million dollars to the “Central European University” of Budapest, which he himself founded in 1991 for students from all over Eastern Europe and to which he annually supports with about 20 million dollars.

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gustavo neffa

gustavo neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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