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Worlds' Greatest Investors Part 14; George Soros

We profile some of the greatest investors in the world. Their achievements have influenced and inspired many. In Part 14; we feature George Soros.

 

 

George Soros

 

 

1. Who Is He?

George Soros was born on 12 August 1930, in Budapest, Hungary. He is an American financial speculator, stock investor, philanthropist, and political activist. Soros is famously known for "breaking the Bank of England" on Black Wednesday in 1992. He currently has an estimated net worth of around $9 billion, ranked by Forbes as one of the richest in the world.

Soros is chairman of Soros Fund Management and the Open Society Institute. According to his own website, Soros claims his support for the Solidarity labor movement in Poland, as well as the Czechoslovak human rights organisation. His funding and organisation of The Rose Revolution was considered by Russian and Western observers to have been crucial to its success.

In the USA, he is known for having donated large sums of money in a failed effort to defeat President George W. Bush's bid for re-election in 2004. In 2007, he said that he supports Barack Obama for the Democratic candidate in the 2008 election.

 

2. Background

Soros immigrated to England in 1947 and graduated from the London School of Economics in 1952. While a student of the philosopher Karl Popper, Soros funded himself by taking jobs as a railway porter and a waiter. He also worked in a mannequin factory, but was fired for not performing too well. He eventually secured a position with London merchant bank Singer & Friedlander.

 

3. Move to USA

In 1956 he moved to New York City, where he worked as an arbitrage trader with F. M. Mayer. From 1959 to 1963 he worked as an analyst with Wertheim and Company. During this time, Soros developed a philosophy of "reflexivity" based on the ideas of Karl Popper. Reflexivity, as used by Soros, is the belief that the action of valuation of any market by its participants, affects the valuation of the market in a vicious circle.

Soros realised that he would not make any money from the concept of reflexivity until he went into investing on his own. He began to investigate how to deal in investments. From 1963 to 1973 he worked at Arnhold and S. Bleichroeder, where he attained the position of vice president. Soros finally concluded that he was a better investor than he was a philosopher or an executive.

In 1967 he persuaded the company to set up an offshore investment fund called First Eagle. In 1969 the company founded a second fund for Soros, the Double Eagle hedge fund. When investment regulations restricted his ability to run the funds as he wished, he established a private investment company that eventually evolved into the Quantum Fund. He stated that his intention was to earn enough money on Wall Street to support himself as an author and philosopher. He estimated that $100,000 a year would be adequate. Five years later, his net worth reached an estimated $11 billion.

 

4. Investing

The Quantum Fund returned 42.6% per year for 10 consecutive years; which created the bulk of his fortune. In late 2006, Soros bought 2 million shares of Halliburton. In 2007 the Quantum Fund returned almost 32%, netting Soros $2.9 billion. On Black Wednesday 16 September 1992, Soros became immediately famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries, or to float its currency.

Finally, the Bank of England was forced to withdraw the currency out of the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was called "the man who broke the Bank of England." He ascribes his own success to being able to recognise when his predictions are wrong or when he makes mistakes. In 1988, he joined a takeover attempt of the French bank Société Générale.

French authorities began an investigation in 1989, and in 2002 a French court ruled that it was insider trading, as defined under French securities laws, and fined him $2 million, which was the amount he made using insider information. Soros denied any wrongdoing and said news of the takeover was public knowledge. His insider trading conviction was upheld by the highest court in France on 14 June 2006.

He received honorary doctoral degrees from the New School for Social Research, University of Oxford, the Corvinus University of Budapest, and Yale University. Soros also received the Yale International Center for Finance Award from the Yale School of Management in 2000 as well as the Laurea Honoris Causa, the highest honor of the University of Bologna in 1995.

 

5. Political View

In an interview with The Washington Post on 11 November 2003, Soros said that removing President George W. Bush from office was the "central focus of my life" and "a matter of life and death." He said he would sacrifice his entire fortune to defeat President Bush, "if someone guaranteed it". Soros was not a large donor to US political causes until the U.S. presidential election in 2004, but according to the Center for Responsive Politics, Soros donated $23,581,000 to various groups dedicated to defeating President Bush. Despite Soros' efforts, Bush was re-elected to a second term as president in U.S. presidential election in 2004.

After Bush's re-election in 2004, Soros and other wealthy liberal political donors backed a new political fundraising group called Democracy Alliance which aims to support the goals of the U.S. Democratic Party. Harken Energy, a firm partly owned by Soros, did business with George W. Bush in 1986 by buying his oil company, Spectrum 7.

 

6. His Investment Philosophy; Reflexivity and Financial Markets

Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals enter into market transactions, potentially changing the fundamentals of the economy. Soros argues that such transitions in the fundamentals of the economy are typically marked by disequilibrium rather than equilibrium. And, the conventional economic theory of the market viz. the efficient market hypothesis, does not apply in these situations. Soros popularised the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions. Reflexivity is based on 3 main ideas:

  1. Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include; equity leveraging, or the trend following habits of speculators.
  2. Reflexivity appears intermittently since it is most likely to be revealed under certain conditions i.e. the equilibrium process is best considered in terms of probabilities.
  3. Investors' observation of and participation in the capital markets may at times influence valuations and fundamental conditions or outcomes.

 

 

 

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