George Soros was never a conventional Investor & he produced returns that were not conventional either.
“We have an average performance of something like 35% over the last 26 years. But it’s comprised of years that are 5% or 8% & years that are 60% or 100%. That’s how you get the average.”
George Soros
How George Soros Achieved a 35% Return per Year
- The general rule taught by economists, textbooks & universities is that the market is efficient. Share prices already reflect all relevant information & investors accurately use this information to price stocks.
- The stock market is always fairly valued. But Soros never bought this idea. To him, it just didn’t make sense. Humans aren’t rational. Especially not with money. There’s no way the market could be efficiently priced or else it would be impossible to beat the market.
- He came up with a theory that prices are not efficient, instead most of the time they are distorted from reality ranging from negligible to significant.
“My interpretation of financial markets directly contradicts the efficient market hypothesis which has been the prevailing theory about financial markets. That theory claims that markets tend toward equilibrium deviations that occur randomly & can be attributed to extraneous shocks. If that theory is valid mine is false.”
George Soros
- Soros knew that these economists were teaching something seriously wrong. You can’t practically say that investors are always right, always unbiased & always unemotional with the way they interrupt information. Most investors are very emotional & very biased to their own ways of thinking not necessarily the truth. Soros decided that it was time that he developed his theory to explain how the market works. Something more practical.
- He used his theory & made a lot of money in the ups & downs in the markets. His fund was started around 1969 when he returned $12 million in seed funding into well over $20 billion 36 years later.
Soro’s Philosophy
- Soros was an investor who exploited the booms & the busts of the market. He would look for situations where investors were getting overly optimistic or too pessimistic on a certain asset. But to accurately predict these patterns he would develop a philosophy for how the market works. Soro’s philosophy revolves around two key ideas.
Fallibility & Reflexivity
“I’ve developed a philosophy which is the basis of my actions in the stock market & my philanthropy & that is a recognition that we are all fallible that it’s not only that the other fellow is wrong but that you are wrong too.”
George Soros
- Fallibility is the simple principle that all investors are not perfect. In situations where you have thinking participants the views of the world only partially correspond to the actual state of affairs. People can gain knowledge of individual facts & truth. But when it comes to forming an overall view their perspective is bound to be either biased or inconsistent or both. Investors & their opinions are fallible.
- Reflexivity states that these fallible views impact the situation to which they relate. For example, an investor’s imperfect views directly impact the market which in turn reflects its impact on the investor which again the investor reflects its impact on the market.
“You are one of the actors & your decisions are one of the things that changed the situation. So it’s a self-developing, self-evolving world in which our valuability of our mistakes is an important element in shaping history.”
George Soros
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