Billionaire investor. Philanthropist. Political provocateur.
His legendary investing acumen, vast net worth and political activism have made George Soros a feared and respected power broker worldwide.
Soros is driven by an investment philosophy built upon the scientific method combined with a focus on societal change. His reputation sends shivers of fear through the central banks with weakened currencies and disagreeable governmental policies. His political stances aside, this mentor to hedge fund legends like Jim Rogers and Victor Niederhoffer can offer critical lessons for any investor.
George Soros' Biography
Born in 1930 in Hungary, Soros survived the Nazi occupation of his homeland. After fleeing communist-dominated Hungary in 1947, he attended the London School of Economics graduating in 1952. It was here where he began studying Karl Popper's "The Open Society and its Enemies," a critique of totalitarian societies and an examination of the scientific method. These two ideas became the guiding light for the rest of his life.
George Soros' legendary investing acumen, vast net worth and political activism have made him a feared and respected power broker worldwide.
Making his way to New York in 1956, Soros accepted a job at Wall Street firm F.M. Mayer. After gaining experience at several financial firms, he launched his own hedge fund in 1973. First named the Soros Fund, the Quantum Fund had incredible success over the years. The success was so great that in 2012, Soros made the list as the 22nd-wealthiest person alive, with an estimated fortune of $20 billion.
Another way to picture Soros' investing success: If you had invested $1,000 with him in 1969, you would have earned a cumulative annual return of 30%, or about $4 million by 2000. Talk about powerful investing returns!
It is this financial success from trading and investing that funded Soros' foray into philanthropy. Launching the Open Society Institute in 1984 with the goal "to advance justice, education, public health, business development and independent media" on a global scale, Soros has given $8 billion via his institute to support human rights, freedom of expression and access to public health and education in 70 nations. No shrinking violet, he has written 12 books and remains chairman of the Quantum Fund.
George Soros' Investment Strategy And Big Wins
Soros' primary financial market philosophy is something he calls reflexivity. Reflexivity is a set of ideas that seeks to explain how a feedback mechanism can skew how market participants value assets in that market. He uses this framework as a means to predict financial bubbles, among other economic changes.
Soros also applies the scientific method to his financial trading strategy. This means that his first step in deciding what to trade is to develop a thesis about what he believes will happen, based on the available market-provided evidence. Secondly, he tests the thesis in the real market studying the results. If the position goes against him, he gets out. If it goes his way, thus confirming the original thesis, he adds to the position.
Most interestingly, when testing his investing thesis, Soros says he relies on bodily hints and intuition for clues. For instance, he has said that if he gets a backache after entering a trade, he takes it as a sign to close the position.
(On a personal note, my friend Dr. Flavia Cymbalista, an expert in uncertainty, was summoned by Soros to help him in quantifying these bodily and intuitive investing clues. In my opinion, this is fascinating research.)
Soros' largest win earned him a reputation as "the man who broke the Bank of England." He made more than $1 billion by betting that the British pound would have to be devalued due to the negative impact British high interest rates were having on asset prices. In addition, Soros simultaneously purchased British stocks based on the idea that stock prices would increase after currency devaluation.
George Soros' Portfolio: What's He Holding Now?
As you might imagine, Soros Fund Management holds a well-diversified stock portfolio. According to GuruFocus.com, his top-performing U.S. holding in this year's first quarter was ShutterFly (SFLY), a personalized digital photo service. The company has a market cap of nearly $2 billion, and Soros was up nearly 30% in the first quarter. However, he took profits by selling 510,000 shares, reducing his holdings to 2.5 million shares.
Soros' next top-performing U.S. holding is Pioneer Natural Resources (PXD), a nearly $20 billion market cap independent oil and gas explorer. His holdings were up nearly 18% in the first quarter. Along with the gains, Soros added over 234,000 shares in the first quarter, bringing his total position in the company to over 2 million shares.
Action to Take --> There are many investing lessons to be learned by studying George Soros. The key takeaways are:
1. Follow a strong inner belief system when making investing choices.
2. Apply the scientific method of testing investment ideas prior to committing all your capital.
3. Don't discount intuition and bodily clues that you may feel when making investment decisions.
Recently, Soros has soured on gold. He slashed his exposure to the SPDR Gold Trust ETF (GLD) by 55% in last year's fourth quarter and another 11.5% in this year's first quarter. However, in an apparent paradox, Soros increased his stake in gold mining companies in the first quarter. He more than doubled his stake in the Market Vectors Gold Miners ETF (GDX), to nearly 3 million shares.
According to CNBC, Soros told the South China Morning Post:
"When the euro was close to collapsing in the last year, actually gold went down because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold."
Soros' move proved prescient with gold dropping steeply after he reduced his exposure to GLD.
Those who wish follow Soros' bearish lead on gold's potential further decline may consider ProShares Ultra Short Gold ETF (GLL) or PowerShares DB Gold Short ETN (DGZ), as these instruments are designed to produce profits as the price of gold sinks. However, exercise caution when investing in inverse ETF's, as the built-in leverage can be dangerous.