By George: Investing The Soros Way (2024)

“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” – George Soros.

To George Soros, the words listed above are no hyperbole. Drilling down and gathering critical investment information, and investing when others are divesting,turned him into a legendary investor and one of the most famous financiers of the past half-century.

Who Is George Soros?

There is no template for an investment legend like Soros, but you can start with the financier’s background as a child in Budapest, Hungary, where he was born on Aug. 12, 1930.

As a pre-teenager, Soros witnessed the atrocities of the Nazi regime and survived to flee Eastern Europe in 1947, making his way to England to study at the London School of Economics. It was in London, after reading Karl Popper’s tome, "The Open Society and Its Enemies," that Soros first combined the concepts of science and politics. Soros never abandoned that concept and relied on it again and again as he championed individual rights over those of the collective.

Science and Free Markets

Soros applied science and free markets to his investment principles, starting at F.M. Mayer, a New York City money management firm. Within 20 years, Soros had opened his first Wall Street enterprise, Soros Fund, which later was renamed to the Quantum Fund, where he was able to test his free market principles in the capital markets.

Soros turned an original seed funding of $12 million into billions of dollars. Between 1970 and2000, his fund achieved an average annual return of 30%.

Human Rights

Along the way, in 1984, Soros founded the Open Society Foundations (OSF), a philanthropic organization that works "for justice, democratic governance, and human rights." Soros has reportedly given over $32 billion to the OSF.

The “Soros Way”

Soros shaped his individual investment approach after testing his ideas in the global financial markets for more than a decade. That blend of free markets, human rights, and scientific inquiry found its way into Soros’ investment strategy—a strategy erected on the scientific method Soros studied at the London School of Economics, merged with his passion for social change.

Here are five key points on how George Soros invests his money:

• The “reflexivity” theory: Reflexivity is the cornerstone of Soros' investment strategy. It’s a unique method that values assets by relying on market feedback to gauge how the rest of the market is valuing assets. Soros uses reflexivity to predict market bubbles and other market opportunities.
• Soros' method: Soros also bases his market moves on what he characterizes as a scientific method. He begins by creating a strategy that forecasts what will transpire in the financial markets based on current market data. He then tests his theories, beginning with smaller-sized investments. Afterward, he'll only add to the size of his investment positions if his theory seems to describe what is playing out in the markets. In this way, opportunity increases as the investment shows success, while risk is never elevated if the investment turns sour.
• Physical cues: Soros also listens to his body when making investment decisions. A headache or a backache has proven enough for him to abandon an investment.
• Blending political acumen with investment acumen: In September 1992, Soros famously bet heavily against the U.K. government’s decision to hike interest rates. His $10 billion short against the British pound would set off a trigger effect, devaluing the currency and sending stocks higher after that devaluation. That move earned Soros $1 billion, along with the famous moniker “The Man Who Broke the Bank of England.”
• Consolidate . . . and reflect: Soros uses a handful of advisors to make big investment decisions. Once he confers with his team of analysts, making sure to review at least one contrary view to his strategy, Soros says he takes time “to read and reflect” before pulling the trigger.

Can Investors Learn the “Soros Way"?

Can regular folks invest like George Soros? It takes moxie and it takes confidence, two attributes that Soros has in abundance. Once he makes up his mind, Soros often goes “all in” on a position, holding the view that no investment position is too large—as long as it’s the correct position.

Perhaps the biggest takeaway from the Soros method is that investing is not always smooth sailing. One of Soros’s favorite maxims is “to be in the game, you have to endure the pain.” For regular investors, that means sticking by your convictions, keeping emotion out of decision-making, and accepting that not every call will pay off.

Even for the greatest investors, not all investments will prove profitable. Soros has had both his good picks and his bad investments:

Soros' Best Investment

In 1992, George Soros wagered $10 billion against the currency policy of the Bank of England, and its underlying currency, the pound. Essentially, Soros bet the pound would flounder in global currency markets. On Sept. 16, 1992—a day known as "Black Wednesday" among currency traders—the British pound cratered against the German mark and the U.S. dollar, earning Soros $1.2 billion in profits over the next few weeks.

Soros' Worst Investment

Soros has also made some really bad investments. Perhaps the worst was in 2008 when he purchased a huge chunk of Bear Stearns' stock, valued at $54 per share, just days before the fabled Wall Street investment firm was sold to J.P. Morgan at $2 per share. Soros was correct in his assessment that Bear Stearns was on the trading block. But he was dead wrong on the takeover value of the company, an expensive lesson he details in his book,“The New Paradigm for Financial Markets.”

The Bottom Line

It's not easy emulating the portfolio results of George Soros, but you can learn a great deal from the patience, discipline, and research Soros demonstrates with his investment strategy. Researching investment ideas by taking into account both the economic and the political realities, sticking with your convictions, and getting out when your gut tells you to are some of the ways Soros wins.