George Soros is one of the most successful hedge fund managers ever. While at the helm of the Quantum Fund (founded by Soros and Jim Rogers in the 70s), he generated an average annual return for investors of 30%.

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements.  In the first eight parts of this series, I’ve covered the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992. Alongside these infamous trades, I also covered Soros’ trading mentality over the years and why he has been able to make so much money while others have struggled.

George Soros Part Ten: Investing wisdom

The final part of this ten-part series on George Soros is devoted to Soros wisdom.

George Soros
Image source: Bloomberg Video Screenshot

Over the years, the billionaire has issued some great nuggets of advice about both trading and trading psychology. So, to end the series I have gathered together a selection of these pieces of advice. Hopefully, they will help you improve your own investing process, or at the very least give you some more insight into Soros’ way of thinking.

“Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.”

One of the worst mistakes an investor or trader can make is to let losses run. No one likes to experience loss; we often find it painful. Indeed, investors usually follow a path of “Loss Aversion” a psychological concept describing a desire to avoid losses at any cost.

Unfortunately, loss aversion usually leads to greater losses in the long-term. Realizing your losses and mistakes can help you become a better investor.

“The secret to my success is that I know that I will be wrong. I consider it strength to admit my mistakes. That allows me to stay in the game and fight another day.”

You can still come back from a 90% loss. You can’t come back from a total loss.

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

This quote is a nod to Soros’ contrarian streak. Contrarianism is a well-known and well-respected art. Going against the herd can be highly lucrative especially in the equity markets when following groupthink or story stocks can be highly damaging to your wealth.

The billionaire has made plenty of other statements on the unpredictability of the markets over the years and here’s another highly informative quote, which is similar to the above:

“The financial markets generally are unpredictable. So that one has to have different scenarios. … The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”

Once again Soros is trying to get across the idea here that markets are unpredictable and trying to predict market movements is an impossible task.

“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. The point was made by John Maynard Keynes when he compared the stock market to a beauty contest where the winner is not the most beautiful contestant but the one whom the greatest number of people consider beautiful. Where I have something significant to add is in pointing out that it pays to look for the flaws; if we find them, we are ahead of the game because we can limit our losses when the market also discovers what we already know. It is when we are unaware of what could go wrong that we have to worry.”

This is one of the most interesting quotes from Soros. Soros is known for his reflexivity theory, which is based around the idea of momentum investing. Momentum investing can be highly lucrative, but it can also lead to huge losses if the investor fails to get out in time. The quote above alludes to momentum timing. An investor must know when to get in and out of a position ahead of the crowd, and they must understand why an investment is attractive to others as well as what catalyst would cause the undoing of a thesis.

And the last two quote from Soros I want to include here relate to the market’s role in predicting events, something investors and financial commentators always place a great deal of weight on:

“How good are markets in predicting real-world developments? Reading the record, it is striking how many calamities that I anticipated did not in fact materialize.

Financial markets constantly anticipate events, both on the positive and on the negative side, which fail to materialize exactly because they have been anticipated.

It is an old joke that the stock market has predicted seven of the last two recessions. Markets are often wrong.”

Perceptions affect prices and prices affect perceptions:

“I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.

For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.

As long as the bias is self-reinforcing, expectations rise even faster than stock prices.

Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.”