George Soros (Trades, Portfolio) has written 15 books. One of those is "Soros on Soros - Staying Ahead of the Curve," which was published in 1995 when he was 65 and still very much a massive player in global markets. It is the most autobiographical of all his books. It is worth reading to get the details of the life of the "father of global macro investing" and a deeper understanding of his mindset that has made him one of the most successful investors of modern times.
I decided to read the book because I know that it has influenced many successful investors such as James Anderson and John Paulson (Trades, Portfolio). The book is written as a series of Q&As with Byron Wien, who was a highly respected strategist with Morgan Stanley (MS) at the time, and journalist Krisztina Koenen.
The book is different from Soros' first and probably most famous book "The Alchemy of Finance" as there is no real-time experiment. However, it spends more time on Soros' life experiences, his education and investment career (including the evolution of The Quantum Fund, and managing Jim Rogers). This book also covers his philosophy and his activist work and how that impacted his fund management duties.
The format of the book helps Soros focus his words as both Wien and Koenen ask for clarification and examples when Soros' answers become too abstract, which happens occasionally, especially in Soros’ other books.
Part 1: Investing and Global Finance
For most GuruFocus readers, Part 1 is probably the most fascinating section of the book. Soros says, "I do not play according to a given set of rules; I look for changes in the rules of the game." He also notes, "Risk taking is, to me, an essential ingredient in thinking clearly"
While Soros has said he probably could not be successful as a pure value investor, and that he seeks to ride bubbles, his approach is quite nuanced. He was searching to find the flaw in every investment thesis so that he could feel reassured knowing that he sees the flaws, meaning he would know what could go wrong in any given trade. Other times Soros stated he was looking for more contrarian views.
The point I wish to make here is that Soros does not have a rigid methodology. Instead, his is a totally flexible methodology, not trying to forecast the future but having in each situation a range of hypotheses and trying to figure out which route should be taken so that he can position accordingly.
This reminds me of French analyst Louis Gave's advice: "As an investor, you're not paid to forecast, you're paid to adapt and it's the guy who adapts the fastest that wins."
Byron Wien quizzes Soros on making $1 billion in Sterling in 1992 during the ERM crisis in the UK. Soros praises Stanley Druckenmiller (Trades, Portfolio) for that, only taking credit for coaching Druckenmiller:
"As coach, I said to him that this is a once-in-a-lifetime opportunity, the risk-reward relationship is extremely favourable, and therefore we should play it on a larger scale than normal… I advised him to go for the jugular."
Chapter 4, "The Theory of Investing," is probably the most interesting and useful chapter in this book, in my opinion. If you just read one chapter out of the entire book, make it the fourth one.
Here, Soros goes through his investing philosophy. Because we always have imperfect understanding (unlike in natural science), in social situations and even more in the markets, the participants' thinking impacts the reality. This means in the markets, causality is not one way from the "fundamentals" to the security price, but that the price action in financial markets can also impact the underlying fundamentals.
This, in essence, is Soros' theory of "Reflexivity." Rather than equilibrium, we get the boom/bust processes, and these can overshoot in either or both directions. In periods in between we have near equilibrium. The market participants have a "prevailing bias," which probably does not reflect reality; however, this bias can actually impact the reality. This process continues until the moment when bias becomes unsustainable and it quickly swings in the opposite direction. The market price action reflects these biases.
A lazy explanation would be to simply call this market sentiment, but it is more than that. This can be difficult to follow at first, so it is worth reading The Theory of Investing several times until you understand. It also helps if you have watched how markets move over various cycles, either at the macro level or at the individual security level as this process can apply to any market, macro or micro.
Ultimately, disequilibrium is axiomatic and the imperfect understanding of market players causes financial markets to be inherently unstable.
Part 2: Geopolitics, Philanthropy, and Global Change
The chapters in part 2 give the reader an insight into what Soros was doing in the late 80s and early 90s when he had delegated the day-to-day management of Quantum Fund to other portfolio managers. It is fascinating to read about the extent of Soros’ political activism and how he pushed for what he calls Open Societies. Initially, you might think all of this would be a big distraction to Soros. However, I ended up thinking that Soros' ability and capacity to meet with so many different types of people on the ground, including various politicians, intellectuals and activists, must have given him a better insight into how the real world works, and how perception or thinking interacts reflexively with reality.
Despite this, for a long time Soros claims he refused to invest in countries where his foundations were active. Chapter 6, "The Philanthropist," is focused on how he ran his foundations, and Chapter 7, "The Stateless Statesman," focuses on geopolitics, especially around the time that the Berlin Wall fell in 1989.
In summary, Part 2 of this book does not directly relate to trading and investing. Indirectly though, we see how much time Soros spent in meeting people, collecting information and thinking deeply about the world's issues. As Soros was a global macro investor, who by that time was semi-retired, living in this chaotic way was probably beneficial to his overseeing his hedge fund empire. A key takeaway here is that investors need to travel, see the world from the ground up and be connected to movers and shakers.
Part 3: Philosophy
Chapter 9, "The Failed Philosopher,"comes back to the important topic of reflexivity, along with the related subjects of fallibility and imperfect knowledge. It also covers a generally deeper conversation on Soros' life philosophy.
This chapter is abstract and conceptual, so it needs some patience. It is important, however, because in my opinion Soros’ philosophy and his ability to think very critically enabled him to become the investor he is. Therefore, it is an important aspect to his story and a key reason for his investment success.
Chapter 10, "The Power and the Myth," digs further into Soros' early experiences. It also explores his life as a Guru during the early 1990s when, after the Sterling episode, he suddenly became very influential in markets.
