George Soros gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion. As a result, he is famously known as the “the man who broke the Bank of England.”
Soros went off on his own in 1973, founding the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%.
“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
Understanding that he was not always right enabled him to cut losses short and position size right.
“My approach works not by making valid predictions but by allowing me to correct false ones.”
Soros’ is flexible in his trades, he changes his mind and reverses positions when needed. He does not marry his trades.
“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.”
George Soros knows that the key to profitability for him is more about big wins and small losses than his winning percentage.
“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,”
Market trends are caused more by the extremes of investors emotions than fundamental reasons.
“Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.”
The problem is not in a losing trade but in failing to cut the loss or add to a losing position.
“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”
The more extended a trend gets from its average the greater the odds of a snap back and reversion to that mean.
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Systematic and profitable trading based on math and probabilities is usually not exciting and fun. Good trading is boring in almost all instances.
“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.”
The obvious trade is usually not the profitable one. Profitable trades tend to be the one that is not expected and counter intuitive.
“We try to catch new trends early and in later stages we try to catch trend reversals. Therefore, we tend to stabilize rather than destabilize the market. We are not doing this as a public service. It is our style of making money.”
George Soros trades with the trend until the end when it starts to bend.
“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”
George Soros likely uses some form of reactive analysis to tell him in which direction to take a trade based on how a scenario or price action unfolds. He may have multiple possibilities on what could happen and trades in the direction of the one that plays out.