George Soros is back.
I was reminded of that fact the moment I sat down in the chair at 30 Rock and the CNBC anchor started peppering me with questions about his trades. Frankly, I have no idea if Soros is right or wrong. Those of you who know me know that I never make trades longer than 24 hours forward.
But I know one thing. Soros likes to make asymmetrical bets. Whether it’s Brexit or the Chinese economy the odds are highly skewed one way. After all if UK stays in the EU cable isn’t going to jump ten big figures in celebration, but it may fall that much if the Brits actually pull the trigger on exit. Same with the Chinese economy which is not going back to growing at 10% per year – ever but may, due to the massive built up of non performing debt, see some unexpected event sent it into waves of paroxysm that could rattle global markets in a very nasty way.
Walking back to the office in the early morning light through deserted streets of Manhattan, I realized it really doesn’t matter what Soros trades but rather how he trades it. George Soros has been at it for a very long time. He has been trading markets as a hedge funds manager since the 1970’s and is in fact the second most profitable hedge fund manager of all time.
Most people believe that he is a classic “have-a-hunch-bet-a-bunch” trader, walking away with billions when he is right. If that was the case, Soros would have blown up a long time ago. What make Soros so special is that he only bets big with house money.
Given that we are now in the midst of the Brexit trade it may be instructive to review the last time pound sterling was under such pressure – a time when Soros walked away with a cool 1 Billion in profits on the trade that “broke the Bank of England”. The mythology around that trade has given Soros almost super human qualities but the reality holds some very valuable lessons for all traders.
At the time of the GBP exit from the ERM, Soros Quantum fund had built up a nice profitable cushion on a series of small trades throughout the year. The fund was up about a billion dollars in profit and it was those profits that Soros was willing to gamble on the GBP trade. If he was right he stood to double his yearly earnings in matter of days. If he was wrong he would lose his winnings for the year but not his capital.
This is a key distinction that most traders miss. Sometimes, if the opportunity strikes, it can be very profitable to “bet a bunch”, but most retail traders take such risk with their capital not their build up profits and that’s why most of them get blown out of the market.
Over the years Soros has been as wrong as he was right, but what has set him apart from the crowd is that he always managed to walk away from his losses with his capital in tact. He learned survival during WWII and that the lesson of live to fight another day has been forever etched into his psyche.
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For us a retail traders who want to trade “The Soros Way”- that is the most important lesson of all.