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The Alchemy of Finance by George Soros

January 14th, 2009

Page 35 – Secrets of a Successful Speculator

In many ways The Alchemy of Finance reads like a personal diary or journal.  The book offers a rare glimpse into how this multi-billionaire investor approached the markets.  From reading the book and the below passage, it is apparent that many of Soros’s movements are based on instinct and intuition.  Rarely in his book does he talk about extensive analysis or academic study of securities. In fact he often describes himself as a financial illiterate.  Here are some telling passages regarding Soros’s investing style from the book:

Here I shall go a step further further and give a subjective account of my decision making process.  In other words, I shall try to reveal “the secret of my success”… As a money manager I was emotionally engaged in managing my fund.  I managed it as if my existence depended on it, as indeed it did. I relied on my instincts and intuition as well as my conceptual framework to guide me through uncertainty.  A number of factors conspired to increase my dependence on emotions. For one thing, I had less knowledge and information at my disposal than most other fund managers.  I had never studied security analysis… I was not well positioned to perform better than others if I had tried to play the market by a particular set of rules; my competitive advantage lay in recognizing changes in the rules of the game.

….

Specializing in reflexive change put me under tremendous time pressure.  I had to familiarize myself with particular industries or countries at short notice, and having done so I did not have the luxury of keeping up to date.  I used to claim half jokingly, that it took me 48 hours to become an expert on any subject; if I spent any more time on it my judgment would be clouded by the facts.  Specialists often develop a vested interest in their subject; the information they collect is never enough for them.  I was only interested in the information that was sufficient to make a decision; the rest would merely confuse the issues.  I called it “going for the jugular”.

….

I also developed  a passage of “investing first and investigating later”. It worked very well because if an idea was appealing enough to attract me on first hearing, it was likely to have the same effect on others.  If, on further investigation, I found it to be flawed I could always turn around and liquidate my position with a profit provided I was not the last one to hear it. If the idea checked out, I was better situated to increase my position because I had already bought at a lower price or sold short at a higher one.

….

My son is right about the backache.  I used to treat it as a warning sign that something was wrong in the portfolio.

….

I identified myself with my hedge fund so intimately.  I assumed the market felt teh same way as I did, and by keeping myself detached from other personal feelings I could sense changes in its mood.  It made it difficult to maintain other emotional involvements.  My family had good reason to resent it.  I looked at myself as an athlete or a boxer in training who had to sacrifice many other things for the sake of success. Managing a hedge fund requires single-minded devotion.

I was willing to risk only my gains, not my capital. My favorite saying was: “He who runs away lives to fight another day.”

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