While managing the Quantum Fund, Soros realized astronomical returns for decades (averaging over 30% a year).
Soros has authored numerous books on topics ranging from philosophy, government, globalization, and of course, trading. Soros on Soros is the second of his two written on trading. I refer to Soros on Soros as being TheAlchemy of Finance-lite.
The Alchemy of Finance is Soros’ first book — which is an absolute treasure trove for those willing to slog through it — and yet has never received the praise, nor attention I believe it rightfully deserves. The reason being that while the Palindrome’s mind is genius, and his trading near divine, his prose is sorely lacking. As a result, his brilliance comes across slightly muddled and his ideas too abstruse for many to grasp.
Soros on Soros avoids this problem with its interview format, resulting in a more digestible read. It contains many of the major points introduced in The Alchemy of Finance, without as much detail or digression into abstract philosophical musings. The interviewer keeps Soros on point, keeping the discussion fluid.
The book is composed of three parts: “Investing and Global Finance”, “Geopolitics, Philanthropy, and Global Change”, and “Philosophy”. For those primarily interested in Soros’ thoughts regarding trading and economics, reading just the first section will suffice. However the other two sections do offer additional insight into how the Palindrome’s mind works — which I personally believe makes them well worth a read.
Soros is often accused as being the liberal counterweight to the conservative fundraisers, the Koch brothers. I personally do not have an opinion one way or another about Soros’ politics. I may not agree with all of his conclusions, but really, I’m more interested in the logical process he uses to arrive at them. It’s his radically unique philosophical framework that makes this book worth it’s weight in gold. The foundation of his philosophy, which Soros first introduced in The Alchemy of Finance, is what he terms “Reflexivity”.
The Theory of Reflexivity, which Soros applies to all areas of human input (i.e. politics, economics, finance etc), is so sound in logic that it amazes me that it’s largely been ignored. Instead, the “Efficient Market Hypothesis” still somehow stands as the idea du-jour. Yet the concept is so glaringly evident that when I encountered it for the first time in this book — I realized its truth was axiomatic.
Those of you familiar with the ideas of Karl Popper and Friedrich Hayek will likely notice the influence of their work on Soros’ philosophy — he admits to greatly admiring these two renowned thinkers. Here is the theory of Reflexivity, as told by Soros himself:
“The main idea is that our understanding of the world in which we live is inherently imperfect. The situations we need to understand in order to reach our decisions are actually affected by those decisions. There is an innate divergence between the expectations of the people taking part in events and the actual outcome of those events. Sometimes the divergence is so small that it can be disregarded, but at other times it is so large that it becomes an important factor in determining the course of events.“
Take some time and let that idea marinate. It really is a radical notion isn’t it? That we, as participants, affect the fundamentals or reality of the situation we are attempting to understand… through just the process of trying to understand it. It essentially leaves us shooting at a moving target.
Variables that we once believed were isolated are in fact tied to us in a two way causative feedback loop — where the observer affects the observed and the observed in return affects the observer.
Using the lens of Reflexivity, we can start to see and understand instances of this two way interaction constantly occurring in our reality. Generally the divergence is very small and imperceptible between our understanding and reality. But, occasionally the divergence grows quite large and the disequilibrium will noticeably correct itself. Soros refers to this as the “boom/bust process”. A good example of this is the housing bubble and subsequent crash of 2008.
In addition to discussing Reflexivity, Soros on Soros also provides an interesting look at the man himself and what sets him apart as a trader, which is what I assume the majority of readers are most interested in.
The following are some of my favorite insights from the book as well as some of my thoughts on what makes Soros so exceptional.
“My peculiarity is that I don’t have a particular style of investing or, more exactly, I try to change my style to fit the conditions .”
Many traders pick a school of thought, be it purely technical analysis, fundamental, macro, value, trend following etc… They pigeonhole themselves into a single trading process which makes them extremely inflexible and unable to adapt to a changing market environment. They become fragile, as Nassim Taleb would say.
Soros, like many greats in their respective fields, transcended any single investment style. He was able to do this because spent a great deal of time developing a deeper understanding of markets and how they work.
“I insist on formulating a thesis before I take a position. But it takes time to discover a rationale for a perceived trend in the market; and sometimes the market will reverse the trend just when I manage to formulate a theory justifying it. If it happens repeatedly, it can be devastating. I am good at riding the tide, but not the ripples of a swimming pool.”
Soros, admittedly, was not adept at trading trendless markets. It just wasn’t a part of his bag of tricks. He searched out trades that offered the potential for huge tectonic shifts in the markets and an accompanying trend he could bet big on.
I appreciate the way in which Soros approached trades, testing his “hypothesis” in the markets as a scientist would test a theory in his labs. I think this is a novel way to approach trading, in that it helps to retain perspective and objectiveness.
“The prevailing wisdom is that markets are always right. I take the opposite position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis”
Soros is of a very independent mind and it’s his willingness to make radically differing assumptions about how the markets work that is the single greatest reason for his success. He could be starkly contrarian at times, and he could jump right in and run with the herd when he saw it fit. The key is, that Soros remained extremely flexible and able to act at key inflection points in the markets ahead of others, because of his original thought process.
“I feel the pain. I rely a great deal on animal instincts. When I was actively running the Fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong in my portfolio”
I personally use the signal of acute back pain as a sign that I’ve probably been sitting too long — not nearly as useful. Some may be inclined to believe that Soros is some kind of super-human trading god… and I admit… that quote is pretty ridiculous. But, I believe that it is just the natural result of a deeply ingrained and vast knowledge base. It’s the result of decades of intense experience, where internalized processes became instinctual and manifested themselves in the physical form of back ache.
When processes become internalized in our subconscious, our minds are able to continuously carry them out without any effort, or even any knowledge of doing so. This is why artists, scientists, or many top performers in their specific fields often come to realizations and inspirations while they sleep or when they focus on something entirely separate from their work.
“I entered this wild period with a store of knowledge that I could apply to practically any new opportunity that might surface. I remember looking at myself with awe, amazed at the speed with which I could react, the wealth of information I could draw on, and the analogies I could apply. I was on top of every situation, I was able to establish connections that were not readily visible to others”
Many people don’t realize this, but Soros didn’t begin managing the Quantum fund until he was in his early 40’s. The prior two decades he’d spent in various jobs as an arbitrage trader, a financial analyst, and in his own words, as a “failed philosopher”. By the time Soros entered the money management game he had already developed a wide breadth of understanding about markets and trading.
Soros’ internalized knowledge allowed him to operate on a superior conscious plane, where his own ability amazed even himself. I wouldn’t mind being a fly on the wall, watching the Palindrome operate in his prime — it must have been quite a sight.
“When you are a serious risk taker, you need to be disciplined. The discipline that I used was a profound sense of insecurity, which helped to alert me to problems before they got out of hand”
Combine an unmatched analytical mind and the instinct and cojones to go for the jugular, with a “profound sense of insecurity” and you have the makings of an elite trader. Those who know him say that Soros has the most detachment and least amount of regret over trades than anyone else in the game. He can pound the table with ironclad conviction one minute, and the next, completely liquidate that same position and not give it a second thought. This is largely attributable to a big component of his personal philosophy, which is the acceptance of his own fallibility.
Soros not only accepted the limits of his own knowledge, but wore his fallibility as a badge of honor and approached every trade with the absolute understanding that he could very well be wrong. That kind of mindset is invaluable to a speculator, not just in facilitating strong risk measures, but in opening the door for the trader to seek out absolute truth and to brutally and constantly test his own assumptions.
I could continue on and on about the invaluable information in Soros on Soros, but then this review would be as long as the book, and the ideas are much better coming from Soros himself.
This book is a great primer into understanding how the impressive mind of the Palindrome works. It should be followed up with Alchemy of Finance, which is required reading for any applicant looking to join Paul Tudor Jones’s firm.
It was after reading Alchemy of Finance, that a young trader by the name of Stanley Druckenmiller contacted Soros and asked for a job…
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