George Soros – the man who ‘broke the Bank of England‘ – is well known in finance circles. He has donated over $30bn to philanthropic causes, and has made fortunes in commodities.Â
George Soros survived Nazi-occupied Hungary and studied at the London School of Economics. He started his first hedge fund, Double Eagle, in 1969, and started Soros Fund Management in 1970. These have grown to significant sizes, and it’s no wonder that Soros is regarded as one of the greatest investors of our age.Â
Here are three things that George Soros has said that we would be wise to listen to:
Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.
George Soros believes that there is no shame in being wrong – but there is shame in staying wrong. Every day we have choices, and when the investment case is deteriorating against us and we decide to grimly hold onto our stock and refuse to sell, then we are in the wrong. It goes against one of the core tenets of investing, which is to cut our losses and run our winners.Â
Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.
The unexpected can often carry favourable risk-to-reward probabilities. Often, the market is efficient, and an outside event is unlikely to happen. But every now and again opportunities arise where the reward significantly outweighs the risk. Usually, nobody is interested.Â
It’s situations like these where Soros has made plenty of money over the years, such as his famous Bank of England trade.Â
Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
Stock market bubbles take time to form. They require the hype and excitement to slowly build. Take Bitcoin – nothing had fundamentally changed when Bitcoin had its mega rise in 2017. It was still a cryptocurrency. But what had changed was the perception.Â
The story slowly built, that cryptocurrency was going to ‘kill’ the banks and fiat currency. Every bubble has a compelling narrative, and the idea that cryptocurrency was going to make everything fairer and much simpler was incredibly seductive.
However, as the price rose, punters took that to mean that they were right. It was positive feedback. And so more and more people bought, and they were right too as the price continued to rise. Although Bitcoin has no intrinsic value and is impossible to value with any sense of accuracy (the price is purely what people are willing to buy and sell for), the price continued to rise faster and faster until eventually the bubble burst.
And so it is the same with equity bubbles. You’d be wise to take heed of Soros’ words.