Trading tactics of George Soros

As a follow-up to yesterday’s post here is a piece I saved, alas without a link. I have edited it slightly. My sincere apologies to the unacknowledged blogger.

One of Soros’s most useful qualities has been his ability to detach his emotions from his dealings in the financial markets. In that sense, he is something of a stoic. While others permitted their egos to get in the way of making intelligent market decisions, Soros understood that the wise investor was the dispassionate investor.

It made no sense to claim infallibility. Although it may have been difficult when a favorite stock suddenly took a plunge, it was far better, as Soros constantly did, to admit when he made mistakes.

One day in 1974, Soros was playing tennis with an acquaintance. The phone rang. It was a broker in Tokyo, letting Soros in on a secret: That year President Richard Nixon was immersed in the Watergate scandal that would eventually cause his downfall. The broker was calling to let Soros know that the Japanese were reacting poorly to Nixon’s troubles.

Having taken heavy positions in the Japanese stock market, Soros had to decide what to do--stay in, get out. His tennis partner noticed that sweat had formed on Soros’s forehead that had not been there during the match. Then and there Soros decided to sell. There was no hesitation, no feeling that he needed to consult anyone else before taking such a large step. It had taken him a fraction of a second to decide. That was all.

Allan Raphael, who worked with Soros in the 1980s, believed that Soros’s stoicism, a rare trait among investors, had served him well. “You can count them on one hand. When George is wrong, he gets the hell out. He doesn’t say, `I’m right, they’re wrong.’ He says, `I’m wrong,’ and he gets out, because if you have a bad position on, it eats you away. All you do is think about it--at night, at your home. It consumes you. Your eye is off the ball completely. This is a tough business. If it were easy, metermaids would be doing it. It takes an inordinate amount of discipline, self-confidence, and basically lack of emotion.”

Then there was the vaunted Soros self-confidence. When Soros believed he was right about an investment, nothing could stop him. No investment position was too large. Holding back was for wimps. The worst error in Soros’s book was not being too bold, but too conservative. “Why so little?” was one of his favorite questions.

Finally, there was his instinct. This was the immeasurable ability to know when to speculate heavily, when to pull out of an investment position--when, in effect, you were on the mark, and when you were not. “Basically,” said Soros, “the way I operate is I have a thesis and I test it in the market. When I’m short and the market acts a certain way, I get very nervous. I get a backache and then I cover my short and suddenly the backache goes away. I feel better. There’s where the instinct comes in.”

Summing up George Soros’s investment skills, Morgan Stanley’s Byron Wien suggested that “George’s genius is that he has a certain discipline. He views the market very practically and he understands the forces that influence stock prices. He understands there is a rational and irrational side of markets. And he understands that he isn’t right all the time. He is willing to take vigorous action when he is right and really take advantage of an opportunity, and to cut his losses when he’s wrong. He has great conviction when he’s sure that he’s right as he was in the sterling crisis in 1992.”

Part of Soros’s instinct was in detecting movement, one way or the other, in the stock market. This was not something one could learn in school; it was not part of the curriculum at the London School of Economics. This gift is one that few possess. And Soros had it.

Edgar Astaire, his London partner, had no trouble pointing out the source of Soros’s success: “His greatest key to success is his psychology. He understands the herd instinct. He understands when lots of people are going to go for something, like a good marketing man.”