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George Soros: The Philosophy of an Elite Investor

Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

He often makes reference to the use of leverage and the availability of credit in initiating the process, and the role of floating currency exchange rates in these episodes. In the financial markets, we can see reflexivity in progress every single day. The distorted views of individual market participants can lead to different outcomes for securities that range bound market do not represent the underlying company’s fundamentals. Within economics, reflexivity refers to the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. The same process can operate in reverse leading to a catastrophic collapse in prices.

Soros, Fallibility, Reflexivity, and the Importance of Adapting

While most global macro hedge fund traders are relatively quiet types, avoiding the spotlight while they earn their fortunes, Soros has taken very public stances on a host of economic and political issues. Despite the animosity generated by his trading tactics and the controversy surrounding his investment philosophy, Soros has pent decades at the head of the class among the world’s elite investors. In 1981, Institutional Investor magazine named him “the world’s greatest money manager.” ] example of reflexivity in modern financial markets is that of the debt and equity of housing markets.[59] Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses.

This can also be seen in the effect that published academic research has on so-called market anomalies. Larry Swedroe summarized recent academic papers that demonstrated how publicized anomalies induce trading by institutional investors and thereby degrade the magnitude of the anomaly. For example, towards the end of last year, Tesla announced it would be raising $5 billion through an at-the-market offering of shares. A few years ago, this sort of cash call would have had a substantial negative impact on the stock price, but the market was happy to absorb the extra shares on this occasion.

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  • He has stated that whereas the greatest threats to the “open society” in the past were from communism and fascism (as discussed in The Open Society and Its Enemies by his mentor Karl Popper), the largest current threat is from market fundamentalism.

What is attainable in social science falls short of what is attainable in physics,” Soros pointed out in closing. Subjective realities on the other hand are affected by what participants think about them. Since perfect information does not exist (ie, we can’t predict the future and it’s impossible to know all the variables moving markets at any given time) we make our best judgements as to what assets (stocks, futures, options etc) should be valued at. Our collective thinking is what moves markets and produces winners and losers.

Objective realities are true regardless of what participants think about them. For example, if I remark that it’s snowing outside and it is in fact snowing outside, then that is an objective truth. It would be snowing outside whether I said or thought otherwise — I could say it’s sunny but that would not make it sunny, it would still be snowing. The idea is centered around there being two realities; objective realities and subjective realities. You may change or cancel your subscription or trial at any time online. Simply log into Settings & Account and select “Cancel” on the right-hand side.

Along the way, Soros founded the Open Society Foundations in 1984, a philanthropic organization that “builds vibrant and tolerant societies whose governments are accountable and open to the participation of all people,” according to the foundation’s website. Although various versions of reflexivity have long been discussed, in recent years George Soros has been particularly effective in bringing ideas about reflexivity to the attention of the economic and financial communities. These case studies show why investors need to be aware of the impact of market sentiment on equity prices. Improving market sentiment can dramatically improve a company’s prospects. But, on the other hand, deteriorating market sentiment can make it harder for a company to raise capital and attract talent. Meanwhile, over the past six months, AMC has returned to the market several times to raise new money by issuing shares.

Understanding Reflexivity

Lenders looked at their balance sheets, which not only showed that they had made more loans, but that the collaterals backing the loans – the value of the houses – had gone up (because more money was chasing the same amount of housing, relatively). Thus they lent out more money because their balance sheets looked good, and prices rose higher still. “I have developed a conceptual framework which has helped me to both make money as a hedge fund manager and to spend money as a policy-oriented philanthropist,” said George Soros at the start of this first lecture. But, he added, his conceptual framework itself is not about money, it is about the relationship between thinking and reality, a subject that has been extensively studied by philosophers from early on. Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. Sometimes it’s quite insignificant, at other times it is quite pronounced.

Despite his masterful successes, not every bet George Soros made worked in his favor. His fund lost $300 million during the crash, although it still delivered low double-digit returns for the year. George Soros (Trades, Portfolio) has a fantastic reputation of being one of the greatest investors. He has attributed his success to a theory he started developing back in the 1950s. This theory helped him build a framework to navigate macroeconomic environments.

Applying Soros’ Reflexivity Theory

One is that in situations that have thinking participants the participants’ view of the world is always partial and distorted. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity,” in summarizing his concept, developed after trying to apply Karl Popper’s scheme for scientific method to human affairs. After leaving the field of intelligence he went to work at a global macro hedge fund.

The CEU Lectures: Lecture One, George Soros on the General Theory of Reflexivity

Michel Foucault’s The order of things can be said to touch on the issue of Reflexivity. Foucault examines the history of Western thought since the Renaissance and argues that each historical epoch (he identifies three and proposes a fourth) has an episteme, or “a historical a priori”, that structures and organises knowledge. Foucault argues that the concept of man emerged in the early 19th century, what he calls the “Age of Man”, with the philosophy of Immanuel Kant. He finishes the book by posing the problem of the age of man and our pursuit of knowledge- where “man is both knowing how to measure volatility subject and the object of his own study”; thus, Foucault argues that the social sciences, far from being objective, produce truth in their own mutually exclusive discourses. Reflexivity presents a problem for science because if a prediction can lead to changes in the system that the prediction is made in relation to, it becomes difficult to assess scientific hypotheses by comparing the predictions they entail with the events that actually occur. Thus, for example, an anthropologist living in an isolated village may affect the village and the behaviour of its citizens under study.

The observations are not independent of the participation of the observer. His bid for such recognition — in a new book published last week — lies in a theory called “reflexivity,” which Soros argues should supplant conventional economic thought that’s based on coolly calculating rational actors. Soros, 77, who ondas de elliot first read philosophy as a teenager during World War II, has promoted the concept for more than 20 years with little success. Why these anomalies don’t disappear entirely is due in part to the limits of arbitrage. It will be interesting to see how these effects play out over time in the smart beta space.

The massive amounts of money the speculators could borrow and leverage made it impossible for smaller governments to withstand the assault. He made a similar move with Asian currencies during the 1997 Asian Financial Crisis, participating in a speculative frenzy that resulted in the collapse of the baht (Thailand’s currency). These trades were so effective because the national currencies the speculators bet against were pegged to other currencies, meaning that agreements were in place to “prop up” the currencies in order to make sure they traded in a specific ratio against the currency to which they were pegged. When the pound crashed, Soros repaid his lenders based on the new, lower value of the pound, pocketing in excess of $1 billion in the difference between the value of the pound and the value of the mark during a single day’s trading. Soros went on to explain that the idea of treating drug addicts as criminals is the perfect example of reflexivity as it misconstrues the problem and interferes with the proper treatment of addicts. Other notable projects have included aid to scientists and universities throughout central and eastern Europe, help to civilians during the siege of Sarajevo, and Transparency International.

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In-person events hosted by MOI Global bring together inquisitive minds to explore ideas of consequence in investing, business, and life. The fully online conferences hosted by MOI Global bring together great minds from our network of intelligent investors, with a focus on timely ideas and timeless wisdom. Drilling down and gathering critical investment information, and investing when others are divesting, is the calling card of George Soros, one of the most famous financiers of the past half-century. He’s also proven to be a major power broker on the global political scene as well as a benevolent philanthropist. Reflexivity is reflected in how cash flows into certain asset classes have changed the underlying returns of that asset class. For example, private equity funds have seen massive global growth in the number of funds and the assets they manage.

The actions of the lenders and buyers have had a direct influence on the price of the commodity. In each of these three examples, improving market sentiment has driven a virtuous cycle. As shares in each company have risen in value, more investors have become involved, which has pushed the stock higher, allowing the company to raise capital, helping to strengthen the balance sheet and attracting more investors.

The lectures were the culmination of a lifetime of practical and philosophical reflection. 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 August 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.