Let me start with a confession. There are some people I will pay not to listen to, and one of them is George Soros. First, let's dispense with the myth that this guy is a great investor. I don't know Buffett, but if I did, I would tell you that Soros is no Buffett. George Soros is a speculator who got lucky at two levels. The first was timing.. betting against the British pound in the early 1990s was perfect. The second was that he has made his big score betting against central banks that refused to face the facts.
There are many investors who mistake luck for skill and I would not blame Soros for doing the same, if it were his only fault. There are two things about the man that I find distasteful:
1. Moral high ground: I find it hard to listen to lectures on morality and ethics from Mr. Soros, A speculator who made his money on a few big bets should not be telling the rest of the world what constitutes good or moral behavior and why hard work should be rewarded.
2. False expertise: The Financial Times has been publishing a series of articles by Soros on how banking can be fixed in developed markets. A few years ago, Soros also told us what was wrong with the derivatives markets and why options and futures should be restricted, regulated or banned because they could be misused. Unfortunately, the man knows little about either. But, he made a lot of money on derivatives, you say... True! But we don't consider a guy who hits the jackpot on a slot machine in a casino to be an expert on probabilities, do we?
My point is a larger one. We assume that people who have been successful in investing know a great deal more about investing than we do. We buy their books, we listen to them on television and radio and worst of all, we entrust our savings to them at substantial cost. While this may be true in a few cases, it is not true in most. Most successful investors and traders are successful because they are lucky and not because of their intellectual prowess or investing smarts... it is better to be lucky than smart. A few of these investors (like Soros) let success get to their heads and start believing their own hype. They should be ignored!
20 comments:
Great post. I have great disdain for this man and his hypocrisy.
Wonderful post. But might you be implying that only those who invest on a bottom-up basis are considered true investors?
But according to the linear model, an market participant can achieve excess return in two ways: a) securities selection to generate alpha b)timing factor exposures by adjusting beta.
If you only recognize securities selection as a valid way to invest, then yes, majority of hedge funds are indeed not investors at all.
The strangest thing in this post is the clear flaw in your thinking. You rant, and I do say rant about Soros yet you praise Warren Buffett. Well, you sir are no Jack Kennedy! You are dressing an ad hominem attack in academic garb and it is rather disappointing considering your body of work.
While Mr. Soros is a rather vocal citizen and writes some of the most convoluted texts on the planet, his theory of reflexivity is remarkably useful in understanding market behavior. It was useful in the run up of the housing market and even more so on the way down. It certainly served him well when breaking the British Pound in '92.
While there may be significant differences between the strategies employed by the two there are also remarkable similarities. Furthermore, I would suggest that the differences are primarily in the management of risk. Quoting Archilochus: "The fox knows many things, but the hedgehog knows one big thing." Both men are focus investors, making concentrated bets on highly probable outcomes. Sure their time horizons are certainly different but that is more a function of their differing styles of risk management. Buffett excels in understanding and capitalizing on corporate strategy and using superior business models to compound his investments. Time becomes Buffett's ally. Soros's focus is more structural (market/economy/whatever) and he uses significant leverage when he has conviction because he is looking for what might be called "snowballing" scenarios. These two investors are and are not comparable. But they are either BOTH false experts or experts. I would contend that Buffett is by far the greatest student of corporate strategy ever. And Soros is, without question, the dean of market structure.
As for your ad hominem attacks, they are distasteful and unbecoming of an acknowledged expert in corporate finance. Perhaps you should delve a little deeper into the heart of America. In this nation, we have always been speculators, our first president Mr. Washington was a rabid land speculator. Our western lands were settled by speculators under the guise of Manifest Destiny. Speculators and crooks built our railroads connecting our continent. You seem to have considerable disdain for the speculator but I must point out the absurd levels of uncertainty that exists in each of your DCFs, models and valuations. Are those not estimates, guesses, even conjecture?
As for Mr. Soros' moral high ground, why do you find it so high? Here is a man that escaped the holocaust, was a witness to fascism and a hyperinflation and, oh yeah, he broke the Bank of England. I kinda wanna hear what he has to say. In the end, I would say he, Soros, was "lucky enough to be in a field where a little knowledge and a dose of common sense goes a long way, and achieving guru status seems relatively simple. What he does know is neither profound nor earth shattering, but he would like to share it." - A. Damodaran - 1
1.http://pages.stern.nyu.edu/~adamodar/
Thought provoking post. Still, I think it was Pasteur who said something like "luck favors the prepared mind". Soros may know much about derivatives but it looks like many of the "masters of the universe"/"quant jocks" did not know much either. Looks like they were relying a lot on simplified models that didn't factor many complexities. Even many PhD economists were not in agreement with people like Nouriel Roubini...some made statements like a "broken watch is right twice a day". So Soros may be clueless but so are many other "qualified" people it appears....and despite his pontificating, Soros has a better batting average than others.
Good points from Todd and Sudeep, although I don't think the professor would respond to us.
My interpretation of this post is that anybody who uses a pure top-down approach to allocate capital is considered by the professor as "false" and "lucky". In fact, the professor would be unintentionally implying that the great John Maynard Keynes was false and lucky because he used almost identical methods as Soros.
The professor would definitely find it distasteful that similarities has been drawn between Buffett and Keyenes despite their night-and-day investing styles.
See hereand here
I enjoy your blog and have spent many days reading the material you generously publish at your site.
However, I think this post displays considerable lack of perspective and arrogance. It says a fundamental intellectually driven approach is the only true investing approach and any other way is pure luck.
Have you considered that there are many paths to success in the markets and not all rely on bottom up fundamental detailed analysis? Soros has not been lucky, he has used the skills and intelligence he was born with to outperform the markets over thirty plus years in a style that is right for him. Just because those skills do not align with your own is a poor reason to dismiss them.
My kind and generous sir, I encourage you not to box in your thinking or try to limit the thinking of your students. The one thing Wall St doesn't need is an army of grads who all think the same.
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The last paragraph is well said. But most of the time, people don't care whether those successful investors really have the knowledge or not. All that they care if they can make money as fast as those lucky investors.
some how my blogger want working so am a little delayed in writing on this .. anyways:
Todd... i guess you might be absolutely right about the differnet investment styles ect but i think i missed the larger point in the Post i.e.
"We assume that people who have been successful in investing know a great deal more about investing than we do. We buy their books, we listen to them on television and radio and worst of all, we entrust our savings to them at substantial cost. While this may be true in a few cases, it is not true in most."
Also people like Soros and Taleb would not really have much to provide for value investors... since these are speculators who look for distrcutive oppurtunities (crisis) in the markets to make profits..that is exactly why you hear of them once in 8-10 years ... when the economy is on the downward spiral... now you could follow them and make money once in 7-8 years....Soros tried making money during 2007 end by buying equities in BRIC nations ..and obviously those returns were never published...
Also on morol ground .. i see no moral in shorting companies, speculating in CDS using the destructive environment and bringing down companies... Lehman being a primary example.
Market has all kinds of people and for every Buffet there is a Soros... so i guess rathen than following any of these blindly ... do what makes u feel comfortable.. and if it makes money for you ... you've got the game right.. else keep trying.. !
Todd... i guess you might be absolutely right about the different investment styles ect but i think U missed the larger point in the Post i.e.
i hope this makes it clear :)
Did anyone read his FT article?
http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html
The last paragraph.... "Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red."
Does anyone buy this? If you look at the dollar's decline in late 2008....
http://www.fxstreet.com/rates-charts/usdollar-index/
While I see the sharp decline, I don't see how he could have spent most of the year in red, and gained it all back on trades made within a few days.
This guy should be investigated for either a. running a Bernie Madoff style shop, or b. manipulating markets.
Re: Gpatt, have you heard of leverage? Soros is a masters of derivatives and I'm sure he knows how to bet when he has a conviction on something. :)
Nmouse :(,
A little more thought please. Your argument was a pretty weak on top of grammatically incorrect.
Obviously, I know that Soros understands leverage and derivatives. Not sure what "masters" means though.
With that, do you think he would bet the entire year's portfolio on a small downward hitch in the continuous upward movement of the dollar?
Furthermore, now pay attention, do you think he (i) exited the short-dollar position (ii) made substantial "fast money", however (iii)the rest of his positions were still underwater at year-end, and therefore (iv) rationalized his 8% return on closed out positions?
His comments in the article are suspect and you haven't convinced me otherwise. Thanks.
Ashwath I have read and learnt from your books during my MBA. I must congratulate you on your conceptual clarity.
However I disagree on your view on Soros. I myself am a fund manager who manages different asset classes including Commodities, Equities and mostly into currency markets. I sometime, when feasible, do disclose my trades at my site: GA Alpha Fund. Having invested into all these 3 markets I can assure you timing of the trade is critical. My position varies from 1-day to 6 months. Even with lengthy periods, investing into different asset classes require exceptional talent, timing, skill and super fit mind to move in fast when you see an opportunity.
All these qualities were displayed by Soros in the 3 or 4 times he has made money esp. on pound devaluation and attacks on the Malaysian currencies included. The Pound trade was a huge position which alone brought down the BoE to say “...massive speculative flows have forced us to devalue...” This is a central banker speaking recognising the role that a small time guy like Soros played in bringing down the world’s leading currency. In my books that is not luck nor a one off trade as he repeated that 3 more times. The trade showed Soros conviction of his position. I don’t think buffet or Jim rogers can be placed in the same bucket as Soros. Buffet has made all his money in the “The Great Bull Run” of 1987 to 2008. I am not sure if he really has the ability to even match index returns leave alone create alpha in a downturn. Anyways time will tell that. Soros is probably the only guy out there swinging in all market conditions. I think he is a super smart chap. But I don’t know whether he is as well read as many of us on derivatives and the newer species of instruments and may not be elgible to lecture us. But really does it matter? The guy knew enough about it to not touch them even while bank after bank were rolling them out.
But in my books Soros has shown some brilliant aptitude seen only in very few money managers most of whom stay away from limelight once they have made their money unlike Buffet and Rogers.
George Soros has a 20 year history of success that proves your claim of him winning only 2 bets is false many times over.
The moral high ground that he occupies was built on the back of his Open Society Foundation that has promoted democracy and the reduction of suffering in Eastern Europe and in the US recently. He has donated over $500 Million a year for decades.
Lastly, his strength is similar to those of Nick Talib, he knows that there is more to markets than the math, and that much of the math is wrong.
I for one am glad that finance professors continue to worship Buffett and hate Soros. Please continue to do so for a few more years.
"I don't know Buffett, but if I did, I would tell you that Soros is no Buffett."
I don't think anyone would disagree with that including both Buffett and Soros. Why should they be comparable?
I would probably agree that his books are not very useful (I haven't read them) - he is not very good at articulating his points anyway and yes, he probably won't be a good policy maker - who knows and care? Its a lot more interesting to look at what he does (13F filings). You can choose to not read a word by him but I think there is value in looking at his 13Fs.
And, to correct one of your points, it was someone else - Stan Druckenmiller who made the GBP trade, not Soros himself.
I truly do not believe that speculation is a shameful activity, nor should it be. It takes smarts and courage to be able to be one and survive. Soros's long history gives him enough credibility to be able to give his perspective on anything that is related to the financial markets.
Regarding his moral grounds, I am one of the persons that benefited greatly because of his philanthropic activities through the Open Society. The Open Society has brought critical thinking and democratic values to a lot of ex communist countries. So in my book he has all the credibility to talk about morals.
And now rumored he made 10% on the Aussie Dollar going down.
How does he do it?
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