The Investing Style of George Soros
" I´m only rich because I know when I´m wrong - I basically have survived by recognizing my mistakes." Quote by George Soros
George's Approach to Investing
The investing strategies used by George Soros are more varied than that of the other famous investors.
This is because George Soros is a hedge Fund manager and the typical hedge fund manager utilizes a wide range of investing and trading tactics rather than specializing in a few strategies.
George Soros has his reflexivity theory which he derived from social science.
The theory states that the behavior of individuals produces an outcome, and that outcome influences their behavior, which in turn reinforces the outcome.
This is in effect a self-fulfilling prophecy and George Soros applied this to the financial markets.
He was adamant that financial markets are always biased in one direction or another.
His reflexivity theory is that financial markets can influence the events that they anticipate which to him explained why financial markets appear to anticipate events correctly.
George Soros used this self-fulfilling prophecy to his advantage by influencing the market with his popularity.
He was a diplomat of financial affairs, he was politically active and would finance political change and he was well connected with policy makers and business elites.
In effect, one of George Soros' tactics is to attempt to influence governments, policy makers, the banking system and anything he could to drive his pre-selected market in that direction.
He would release information to the financial press and the small investors would then hop on board for the ride which fueled the directional trend.
For example, in 1993 George Soros announced that the price of gold should rise sharply as he had insider information that China was buying gold - George Soros in effect caused the additional demand to buy gold.
George Soros is renowned amongst investment professionals for attempting to influence markets but it does not always workout to his advantage.
While he was correct in calling the top to the 1990s technology bubble, he called it in 1999 and was one year early - he reportedly suffered a considerable loss.
George Soros' General Principles
Some of the general principles used by George Soros are outlined as follows:
- George Soros did nor confer with brokers or Wall Street analysts but instead talked to policy makers, government officials and high ranking businessmen. He has a macro-economic view and invested with broad economic trends and fundamentals.
- One of his tactics was if he liked a strategy, he would confer with people who do not share his view. George Soros reasoned that if he still thought that the strategy was a good one (even after all the criticism), then it must be a good strategy.
- He tested any new strategy with small positions first. If the strategy proved successful then he would add to his position.
- When George Soros believed he was right he would take extremely large positions.
- One of the reasons for his investing success is in knowing how to survive. There are times when George Soros would only invest and trade conservatively. At other times he would not invest or trade at all and would cut losses where necessary and keep the account balance in cash.
- If George Soros was doing poorly with a strategy, he would stop using the strategy, re-evaluate it and if he were to continue using the strategy with some modifications, he would start again with small positions.
- George Soros accepted that not all investments and trades are profitable. There are always losers.
While George Soros has an advantage over ordinary investors as he has connections which include the leadership of the international community, most of his tactics are essentially common sense which any investor can apply to their own investing or trading strategies.
George Soros and his Hedge Funds
George Soros actually runs two main hedge funds. One is U.S. based and the other is an offshore holding group consisting of several hedge funds.
- The first hedge fund is the Soros Management Fund LLC which is registered in the U.S. and is open to U.S. citizens. The fund files a form 13F Holdings Report with the U.S. Securities Exchange Commission (SEC) which details the funds current portfolio. Being public information as required by the SEC, everyone knows what the hedge fund has been buying and selling.
- The second is known as the Quantum Group of Funds and is actually a group of hedge funds. These funds are not registered in the U.S. Offshore hedge funds are not required to provide a holdings report to the SEC and as such their holdings are not known other than what the Quantum Group releases to the financial press.
The investing styles are quite different between the George Soros U.S. hedge fund and his offshore hedge fund group.
Soros Management Fund LLC
The portfolio and investing strategies of this hedge fund are fairly conservative compared to how aggressive hedge funds can be.
The portfolio largely resembles that of a well diversified mutual fund.
The fund holds several hundred securities of which most are U.S. stocks (with around 75% from the S&P 500 index) and holds a significant amount of corporate bonds. Foreign stocks may be held as American Depositary Receipts (ADRs).
A minor portion of the portfolio contains Call and Put options over stocks. Also there are some Exchange Traded Funds (ETFs) over the S&P 500 index, some industry group ETFs and even a Gold Trust ETF.
The portfolio even holds some of the same stocks as Warren Buffett's Berkshire Hathaway.
The investing strategies George Soros uses with this hedge fund are the conservative strategies (he reserves the aggressive strategies for the Quantum funds).
The fund makes good use of growth investing strategies where the companies are expected to accelerate their earnings growth. These are often bought with high PE ratios and the fund includes small-cap growth stocks.
This strategy is a favorite with hedge fund managers but these overvalued high growth stocks are usually hit hard when the next bear market comes along.
Fortunately for George Soros, he is an economist and though his Quantum group of funds is also a very good macro-economic speculator. This gives him an advantage as he is quite good at speculating at market tops.
George Soros likes to use a pyramiding entry technique similar to Jesse Livermore.
This is where a small position is initially taken and if the stock keeps moving in the right direction then additional shares are added to the position.
In other words, start small and then build up the position if the stock moves into profit.
Another tactic used by George Soros is to locate undervalued growth stocks, much the same strategy used by Warren Buffet.
However George Soros is not a long-term investor and will sell as soon as he feels the stock's growth prospects are no longer appealing or if there is a broad economic development that would affect investor confidence.
His strategies also include takeovers and mergers. When George Soros considers that a takeover is not good idea, he will buy stock in the company being acquired and short sell the takeover company.
George Soros will also short sells stocks when their earnings are expected to disappoint. He may short the stock or buy a put option.
George Soros makes good use of value investing tactics and can have a contrarian view.
His basic belief is that markets are wrong but will go with trend and is aware that it will end. His aim to get out before the trend ends by anticipating the market correction.
The strategies used with the Soros Investment Fund are essentially a combination of growth investing, value investing and speculative investing with stocks.
Combining these strategies makes good sense as it can help reduce the volatility of the returns.
The corporate bonds are held for the most part as an income source to further buffer the volatility of the returns. Even though any convertible bonds held could be converted to stock if the stock price were attractive.
Quantum Group of Funds
When the financial press reports on a Soros hedge fund they are usually referring to a hedge fund from the Quantum Group of Funds.
Hedge funds have a reputation for being aggressive and George Soros is certainly aggressive with his offshore funds, compared to the relatively conservative approach he uses with the U.S. based Soros Management Fund.
The famous currency trade involving the British Pound in 1992 was actually from one of his Quantum funds.
The types of financial instruments held include foreign stocks, bonds, options and futures contracts. He also includes currencies.
George Soros being an economist looks for broad economic, fundamental and political factors across the global markets for his investments and trades.
His time frame tends to be quite short and he is best described as being a speculative investor.
He could also be called a fundamental trader and some of the strategies he uses with his offshore hedge funds are considered to be high risk.
George Soros works the world financial markets and will speculate on anything from currencies, gold, oil and other commodities, foreign stocks and bonds.
George Soros can influence markets with his popularity in the financial world.
He bases his analysis on macro-economic and fundamental factors to locate assets which are incorrectly priced and will trade long and short if he can.
Aggressive growth strategies are used with stocks in developing economies which are expected to significantly accelerate their earnings growth. These stocks often have high PE ratios and might be small-cap.
He might buy or short futures contracts over foreign stock market indices, especially with developing economies.
George Soros might buy distressed foreign stocks selling well below their tangible book value with a re-organization plan.
He may even help finance the debt in exchange for a favorable stake in the re-organized company.
He also buys a stake in private foreign organizations such as football clubs. George Soros is also active with foreign company takeovers and mergers.
Basically George Soros is a master speculator who is willing to place financial bets on just about any economy or market which he feels could yield him a profit.
While he does have his fair share of losing investments and trades, he remains profitable by making more money when he is right than what he loses when he is wrong.
George Soros does however spread his risks across varies markets and financial instruments through all his funds and as such his general overall approach is extremely diversified.
Stock Analysis for Finance Students and Investors