1/George Soros is one of my favorite investors, and I've wanted to compile a thread of Re-Soros-es by George Soros and his ideas.
Here's what we can learn from one of the greatest investors- a thread:
Here's what we can learn from one of the greatest investors- a thread:
2/Soros' famous theory of reflexivity, simplified:
1. We try to understand the world, as well as change it to benefit ourselves
2. Our act of understanding is part of the reality we try to comprehend so trying to understand changes reality
3. Thus, we can never gain a full...
1. We try to understand the world, as well as change it to benefit ourselves
2. Our act of understanding is part of the reality we try to comprehend so trying to understand changes reality
3. Thus, we can never gain a full...
3/...understanding of reality and the implications of this idea are huge.
Firstly it means nobody can possess perfect knowledge, making all our decisions imperfect.
As our understanding already causes reality to change, which makes our initial understanding was wrong.
Firstly it means nobody can possess perfect knowledge, making all our decisions imperfect.
As our understanding already causes reality to change, which makes our initial understanding was wrong.
4/This also leads to dislocations between our expectations/understanding and reality, as we act on the basis of imperfect understanding.
The world is too complex for one person to understand, so we use theories/generalizations to simplify.
Reflexivity tends to be very abstract.
The world is too complex for one person to understand, so we use theories/generalizations to simplify.
Reflexivity tends to be very abstract.
5/The implications on financial markets are huge.
Divergence between our understanding and reality tend to occur.
There are misconceptions that lead to the formation of trends and boom bust cycles, and exploitable opportunities for speculators.
Divergence between our understanding and reality tend to occur.
There are misconceptions that lead to the formation of trends and boom bust cycles, and exploitable opportunities for speculators.
6/Soros' Pound coup was a big one. Some of the market participants had an imperfect understanding of the world (and thought the peg would hold).
Soros/Bacon/etc recognized this imperfect understanding, and bet against it.
Soros/Bacon/etc recognized this imperfect understanding, and bet against it.
7/Soros' ideas on boom-bust cycles are worth noting. A sample is seen in this picture: 
8/To simplify, he uses the concept of an "underlying trend" vs the "prevailing bias".
The bias can be taken as the expectations of traders, while the trend can usually be taken as the fundamental reality.
The bias can be taken as the expectations of traders, while the trend can usually be taken as the fundamental reality.
9/Soros argues that there usually tends to be a misconception which gets one of these trends started.
The longer we see strong earnings growth, more market participants expect earnings growth in the future. This leads to more buying and higher stock prices.
The longer we see strong earnings growth, more market participants expect earnings growth in the future. This leads to more buying and higher stock prices.
10/Not only that, Soros also argues that higher stock prices can affect the very fundamentals they're supposed to reflect (expectations affecting reality).
Admittedly, they tend to be a lot more discrete as opposed to continuous.
How does this happen?
Admittedly, they tend to be a lot more discrete as opposed to continuous.
How does this happen?
11/Soros gives the example of the 1960s conglomerate bubble.
Conglomerates would buy up other companies in stock-for-stock deals to boost earnings growth.
This growth in earnings fueled higher stock prices for the conglomerate allowing it more acquisition power.
Conglomerates would buy up other companies in stock-for-stock deals to boost earnings growth.
This growth in earnings fueled higher stock prices for the conglomerate allowing it more acquisition power.
12/Higher stock prices=more "capital" available to take over other companies with.
That helped conglomerates "buy" earnings. Eventually it all came crashing down, of course, when people realized it couldn't go on forever.
That helped conglomerates "buy" earnings. Eventually it all came crashing down, of course, when people realized it couldn't go on forever.
13/One more important point to note about these cycles is the prevailing bias (expectations) tend to be "tested", through corrections, bad news, etc.
If the dips get bought, then the reflexive loop gets even stronger.
If the dips get bought, then the reflexive loop gets even stronger.
14/One last point about these boom-bust cycles is that they tend to have inflection points that lead to its end.
For example, Soros used the fact that Ogden Corp was stopped from making a certain acquisition as an inflection point to time his shorting of conglomerates.
For example, Soros used the fact that Ogden Corp was stopped from making a certain acquisition as an inflection point to time his shorting of conglomerates.
15/Just as they self reinforce (higher stock prices=better fundamentals=higher stock prices) on the way up, Soros says they tend to do that on the way down as well.
Admittedly a lot of his associates claim a lot of is just Soros going off his rocker.
Admittedly a lot of his associates claim a lot of is just Soros going off his rocker.
16/On amount of analysis:
Soros said that “...I don’t like working. I do the absolute minimum that is necessary to reach a decision."
He focused on analyzing as little as possible, and knew a little about a lot of things.
Soros said that “...I don’t like working. I do the absolute minimum that is necessary to reach a decision."
He focused on analyzing as little as possible, and knew a little about a lot of things.
17/Soros points out that those who do too much work tend to "amass an inordinate amount of information, much more than is necessary to reach a conclusion."
The problem?
They get "attached to certain investments because they know them intimately."
The problem?
They get "attached to certain investments because they know them intimately."
18/On investing in "wrong" theses:
“The fact that a thesis is flawed does not mean that we should not invest in it as long as other people believe in it and there is a large group of people left to be convinced."
There is money to be made in bubbles, as long as you manage risk.
“The fact that a thesis is flawed does not mean that we should not invest in it as long as other people believe in it and there is a large group of people left to be convinced."
There is money to be made in bubbles, as long as you manage risk.
19/A great example of this would be buying dotcom stocks in the 1990s.
The thesis is wrong, as stocks are overvalued, etc but there was a lot of money to be made being long the bubble.
It was fundamentally unsound, but it worked. Always manage risk though.
The thesis is wrong, as stocks are overvalued, etc but there was a lot of money to be made being long the bubble.
It was fundamentally unsound, but it worked. Always manage risk though.
20/Keynes showed this using his beauty contest idea.
Soros also pointed out that "if we find [the flaws], we are ahead of the game because we can limit our losses when the market also discovers what we already know"
He'd always try to find what could be wrong.
Soros also pointed out that "if we find [the flaws], we are ahead of the game because we can limit our losses when the market also discovers what we already know"
He'd always try to find what could be wrong.
20/Soros on taking "starter positions":
Soros said that "generally, we followed a process of invest first, investigate later".
He did this because either he found that his original thesis was wrong and got out with a small loss/profit, or he could build on if he was right.
Soros said that "generally, we followed a process of invest first, investigate later".
He did this because either he found that his original thesis was wrong and got out with a small loss/profit, or he could build on if he was right.
21/Soros on betting big:
Soros used to say that there was no such thing as betting too much when you were right, especially when the risk/reward was heavily in your favor.
This was the case with the pound short where his exposure was 3x the size of his fund.
Soros used to say that there was no such thing as betting too much when you were right, especially when the risk/reward was heavily in your favor.
This was the case with the pound short where his exposure was 3x the size of his fund.
22/As Soros said:
“There is no point in being confident and having a small position.”
If you know the risk, the reward and you KNOW you are right, then bet as much as possible. Soros bet $15B when shorting the GBP (about as much as the BoE would buy).
“There is no point in being confident and having a small position.”
If you know the risk, the reward and you KNOW you are right, then bet as much as possible. Soros bet $15B when shorting the GBP (about as much as the BoE would buy).
23/Some of the next few tweets include Stan Druckenmiller and Scott Bessent.
These people worked with/for Soros and not only did they learn a lot from him, they made a lot of money.
In fact, the GBP short idea was actually Stan's, not Soros'.
These people worked with/for Soros and not only did they learn a lot from him, they made a lot of money.
In fact, the GBP short idea was actually Stan's, not Soros'.
24/Stan Druckenmiller on liquidity:
"Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity...Its liquidity that moves markets"
This is key- as we saw liquidity dry up in March 2020, for e.g.
"Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity...Its liquidity that moves markets"
This is key- as we saw liquidity dry up in March 2020, for e.g.
25/Stan Druckenmiller on stock analysis:
"…the best environment for stocks is a very dull, slow economy that the Federal Reserve is trying to get going."
We saw this during 2020. Fed was trying to get a dull economy moving, and we've seen stocks shoot up from their March lows.
"…the best environment for stocks is a very dull, slow economy that the Federal Reserve is trying to get going."
We saw this during 2020. Fed was trying to get a dull economy moving, and we've seen stocks shoot up from their March lows.
26/Stan Druckenmiller on finding good stocks:
"And it’s margins and capacity that matter…"
"[We] buy companies where we feel the margins are going to be higher in one to three years and selling companies where we feel they’re going to be lower in one to three years."
"And it’s margins and capacity that matter…"
"[We] buy companies where we feel the margins are going to be higher in one to three years and selling companies where we feel they’re going to be lower in one to three years."
27/Margins and capacity were the catalysts Stan watched out for.
He'd only buy companies he believed would be significantly more profitable in the next 18-24 months.
As he says- "What’s obvious is obviously wrong… The present is already in the price"
He'd only buy companies he believed would be significantly more profitable in the next 18-24 months.
As he says- "What’s obvious is obviously wrong… The present is already in the price"
28/Scott Bessent on what causes alpha:
"People always forget that 50% of a stock’s move in the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock picking. And stock picking is full of macro bets."
"People always forget that 50% of a stock’s move in the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock picking. And stock picking is full of macro bets."
29/A lot of value guys fail to realize that stocks tend to move just with the general market, and not necessarily because they're smart.
Not everything is stock picking alpha ;)
Not everything is stock picking alpha ;)
30/Scott Bessent on the "macro" of stocks:
"When an equity guy is playing airlines, he’s making an embedded macro call on oil."
Everything has a macro bet. If you're buying a farming company, it's exposed to soybean/wheat/corn prices etc.
"When an equity guy is playing airlines, he’s making an embedded macro call on oil."
Everything has a macro bet. If you're buying a farming company, it's exposed to soybean/wheat/corn prices etc.
31/Lastly if you've made it this far-
Thank you so much for reading! I really appreciate it. And please give it a share, if you can :)
Thank you so much for reading! I really appreciate it. And please give it a share, if you can :)
In case you need more Soros, and haven't gotten enough, read this awesome compilation by @gfc4
triinv.com/soros
triinv.com/soros
• • •
Missing some Tweet in this thread? You can try to
force a refresh
