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Sunday, August 29, 2010

George Soros Principles

George Soros -Was he one of the world's greatest investors?

George Soros will always be remembered for his almost $2 billion profits made when he shorted the British Pound. Or making over 60% yearly returns on his Quantum Fund with almost $4 billion under management.

Staggering returns by any standard! But not too many seem to recall George Soro's horrific 60%+ losses in his funds when he was caught in the 1987 crash!

In fact, Soros even admits that he is rarely more than half right.

His secret, "I simply make a lot of money when I am right and lose as little money possible when I am wrong"

Soros investment principles were different to many fund managers today. Not for him was the systematic, mathematical approach to the markets. He liked to look at them practically.

Soros's basic principle was to view a country. He would look at their currency or stock market and try to see if the current trend was wrong.

If he believed the current trend had "really overshot" (as trends usually do) then he would go the other way. He would take the contrarian view.

What are the advantages of adopting this kind of contrary approach?

When a trend that has been present for some time does over-shoot it is only a matter of time before it reverses. With more and more trend followers simply following the trend there will come a time when there are no more buyers in a bull trend or sellers in a bear trend. When this point is reached the trend will sharply reverse.

The person who had the "guts" to go against the trend will make a killing. But, whilst trends do over-shoot, they can overshoot by a much bigger margin than you could ever possibly imagine. Many trends have really overshoot and many, many months before the market had the chance to realize it.

Take a look at the 1999-2000 NASDAQ. Was it overbought? YES. By a long, long shot! But trying to predict this and betting against that trend during this over blown bubble, would have resulted in catastrophic losses.

Losses, Soros himself was not immune from. Many investors bet a number of times trying to predict the end of the stock market bull/bear trends and they did lose most of their fortunes.

Knowing a trend has overshot is one thing. Profiting from it is a very difficult and risky game. Huge risks with huge rewards or huge losses.

Soros was caught on the wrong side of the October 1987 stock market crash and lost a staggering $200 million in just one day. It was estimated his funds lost anywhere from $650 million to $800 million during this crash. Although Soros himself claims that the actual figures were much lower.

Soros's reply to this? "I made a very big mistake, because I expected the crash to come in Japan, and I was prepared for that, and it would have given me an opportunity to prepare for the fall off in this country, and actually it occurred in Wall Street and not in Japan. So I was wrong."

Soros - by his own admissions - had no secret. He made his mind about a market and simply made big bets. If he was right, he made a ton of cash. If he was wrong, he paid for his mistake and just kept on moving on.

We do consider George Soros to be or have been one of the very best minds in the markets. On the other hand, his approach is not really suited to everyone.