Remember the scene from the 90’s classic, The Sandlot, where “Smalls” loses his father’s Babe Ruth autographed baseball to “The Beast” and the other kids question him in disbelief, saying:

Smalls: I was gonna put the ball back.

Squints: But it was signed by Babe Ruth!

Smalls: Yeah, you keep telling me that! Who is she?

Ham Porter: WHAT? WHAT?

Kenny: The sultan of swat!

Bertram: The king of crash!

Timmy: The colossus of clout!

Tommy: The colossus of clout!

All: BABE RUTH!

Ham Porter: THE GREAT BAMBINO!

Smalls: Oh my god! You mean that’s the same guy?

All: YES!

Benny Rodriguez: Smalls, Babe Ruth is the greatest baseball player that ever lived. People say he was less than a god but more than a man. You know, like Hercules or something. That ball you just aced to The Beast is worth, well, more than your whole life.

Smalls: [Falls to the ground and clutches his stomach, groaning] I don’t feel so good.

All: [Fanning Scott with their caps] Give him air, give him air.

George Soros
Image source: Bloomberg Video Screenshot
George Soros

If there’s a trader equivalent to baseball’s greatest; a sultan of swat, a colossus of clout, or a king of crash, then it’s undoubtedly George Soros, the GREAT BAMBINO of markets.

George Soros founded and ran the legendary Quantum Fund which compounded at 32%+ between 1969 and 2000 (over 30 years). A $1000 investment in the Quantum Fund at inception would have been worth over $4 million by 2000. This makes Soros arguably one of the most successful hedge fund managers of all time. He also worked with and mentored other trading greats such as Stanley Druckenmiller and Jim Rogers.

The man is known for single handedly taking down the Bank of England, in a 1992 bet against the pound, that netted over $1 billion in the course of a single day. He seemed to play the markets on a whole other level than his peers. There are stories of him correctly flipping huge positions because of a “back ache” that made him sense trouble.

George Soros retired in 2011 from managing outside money so he could focus on trading his own vast fortune, estimated to be over $25 billion. Even in his 80’s, he continues to kill it as well as train some of the best managers who go on to start their own successful hedge funds.

Needless to say, the Sultan of Swat knows a thing or two about markets. Here’s some of his words of wisdom:

George soros – Trading, Bubbles and Markets

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right, and how much you lose when you’re wrong.

My approach works not by making valid predictions, but by allowing me to correct false ones. Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.

Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.

When the California residential home market collapsed, the market thought the company might go broke, but it survived the test and we made a fortune. That is when I made the rule that one should own stocks when they have successfully passed a difficult test, but one should avoid them during the test — something that is easier said than done.

A positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction.

Usually some error in the act of valuation is involved. The most common error is a failure to recognize that a so-called fundamental value is not really independent of the act of valuation. That was the case in the conglomerate boom, where per-share earnings growth could be manufactured by acquisitions, and also in the international lending boom where the lending activities of the banks helped improve the debt ratios that banks used to guide them in their lending activity.

I look for conditions of disequilibrium. They send out certain signals that activate me. So my decisions are really made using a combination of theory and instinct. If you like, you may call it intuition.

I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it.

I am particularly keen on investment theses that the market is reluctant to accept. These are usually the strongest.

It goes to show that when you are confused it is best to do nothing. You are just going for a random walk and that is when you are liable to get mugged because you don’t have staying power. You are likely to be faked out by some stray fluctuation because you lack the courage of your convictions.

At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences.

My interpretation of financial markets differs from the prevailing paradigm in many ways. I emphasize the role of misunderstandings and misconceptions in shaping the course of history. And I treat bubbles as largely unpredictable. The direction and its eventual reversal are predictable; the magnitude and direction of the various phases is not.

Markets tend to move in fits and starts, adopting a thesis and then abandoning it. We try to catch them if we can, but if we can’t, we are better off not trying.

I was prepared for a regime change, whereas other people were acting within a prevailing regime. And that is where I think my awareness that conditions can undergo revolutionary change was useful.

Most of the time we are punished if we go against the trend. Only at inflection points are we rewarded.

The whole thrust of my approach is that the course of events is indeterminate.

Being so critical, I am often considered a contrarian. But I am very cautious about going against the herd; I am liable to be trampled on… Most of the time I am a trend follower, but all the time I am aware

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