George Soros: 5 lessons on investing

Discover 5 useful lessons on investing from George Soros, a reference for every investor.

George Soros is one of the world's most successful and influential investors, known for his unique – and sometimes controversial – approach to investing. Find out more about George Soros’s investment philosophy and how you can apply it to your next decisions.

Who is George Soros?

Born in Budapest in 1930, George Soros survived the Nazi occupation of Hungary. He moved to the UK in 1947 and began his career as a stockbroker in New York. In 1973 he founded Soros Fund Management, one of the most influential hedge funds on Wall Street. In the 1990s, he became known as "the man who broke the Bank of England" after betting heavily against this financial institution.

Soros' impressive track record doesn't end there: he achieved annual returns of over 30% for more than 30 years and became famous for making a billion dollars on a single investment, in a single day.

In addition to his financial successes, George Soros is also an active philanthropist, contributing to social and political causes through the Open Society Foundations, which were established to support causes such as education, justice and public health.

How can you invest like George Soros?

Like all masters of their craft, George Soros has his own unique view of the financial market. He is known for his ability to anticipate asset fluctuations, his successful investment strategies and his enormous appetite for risk. These are some important lessons to keep in mind.

1. Finding opportunities on a global scale

Soros is an expert at finding good opportunities around the world by predicting market movements, whether in sovereign debt, futures contracts, currency appreciation or real estate.  

One example is the mythical "Black Wednesday" in the UK in 1992. After Italy and Germany had devalued their own currencies, George Soros placed a bet on the devaluation of the pound sterling. He sold five billion pounds when the price was high and bought it back when the price fell sharply, making a profit of one billion pounds. A few years later he repeated the formula, this time in Thailand and Malaysia. Soros' global vision was key to spotting and executing opportunities in regions that other investors found difficult to read.

What to do: 

• Look for good investment opportunities globally, not just in your nearest market;

• Rely on expert advice to identify the macro trends in the market;

2. Adopt the theory of reflexivity 

The theory of reflexivity has been an important part of Soros' investment strategy since at least the 1950s. In a nutshell, according to this theory investors' perceptions of what is happening in the markets influence their actions, which in turn influences their perceptions. 

The theory of reflexivity disproves much of the mainstream economic theory, which holds that markets move towards equilibrium, that investors are totally rational and that decisions are made according to the price of the good.

In this closed cycle, where investor perceptions feed on themselves, the risk of market bubbles is high. In these moments of overheating, prices can rise beyond rational levels as investors buy excessively, and then plummet as overvalued assets are sold. 

Soros gives a practical example: "Rising home prices induced banks to increase their home mortgage lending and, in turn, increased lending helped drive up home prices. Without a check on rising prices, this resulted in a price bubble, which eventually collapsed, resulting in the financial crisis.”

The key to avoiding losses and taking advantage of historic opportunities is to anticipate these movements.

What to do: 

• As an investor, you should pay attention not only to a company's fundamentals, but also to how other investors perceive them;

• Identify market trends driven by investor perceptions. Capitalise on the upward momentum of the assets most exposed to market trends;

• You can try to identify when a particular trend is running out of steam. Then you can invest in its reversal;

• Diversify your investment portfolio to minimise the impact of adverse fluctuations in any one asset. 

3. Trading with an appropriate risk/reward ratio

According to Soros, "it's not whether you're right or wrong; it's how much money you make when you're right and how much you lose when you're wrong". This emphasises the importance of proper risk management and "risk/reward" assessment.

Few examples illustrate this principle better than the onset of the Asian financial crisis in 1997. Millions of Thais rushed to the banks in the hope of exchanging the local baht, which was seen as unstable, for dollars. As the movement intensified, it became clear to Soros that the Bank of Thailand would not be able to continue buying the baht needed to maintain the country's exchange rate for much longer, nor would it have the dollar reserves to weather the crisis. A massive devaluation of one of Asia's most promising economies was looming – and a huge opportunity for investors willing to take big risks.

To seal the deal, Soros signed up to 6-month futures contracts to sell baht at a certain price, believing he could buy them back at a lower price by then. In other words, Soros needed a sharp devaluation of the Thai currency – or face huge losses.

A few months later, with its foreign exchange reserves exhausted, the Bank of Thailand finally ceded control of the currency to the markets, the exchange rate doubled and Soros made, albeit controversially, a large chunk of his fortune, currently valued at around €7 billion. 

What to do:

• Set a minimum return you want to achieve, including a safety margin;

• Try to quantify how much you want to risk investing;

• Identify situations with asymmetric outcomes, i.e. with limited loss if you're wrong, but high profits if you're right.

• Diversify your investments across asset classes  such as equities, bonds, real estate and commodities to reduce risk and maximise financial returns;

• Learn from each trade, whether it is successful or not, to help you make better investment decisions in the future.

4. Always consider market volatility

"We have a false dogma which postulate that markets tend towards equilibrium”. For Soros, the financial market is inherently volatile and this aspect should not be overlooked. 

Much of his investment strategy is based precisely on the market failing to perform. Soros argues that because markets are subject to periodic fluctuations and crises, the prudent investor cannot hope to anticipate or fully control them, but rather to be aware of changes, to have a good understanding of the risks, and to have the financial capacity to take advantage of them.

What to do:

• Improve your financial literacy before you start investing;

• Set clear and realistic goals for your investments, such as increasing your retirement income, buying a home or paying for your children's education;

• Before investing, assess your profile and risk tolerance;

• Seek professional advice from Banco Carregosa to make more informed decisions. 

5. Protecting the investment portfolio

For George Soros, it is essential to have strategies in place to protect assets in the event of a stock market crash. The investor's advice is even to make portfolio adjustments when a global financial macroeconomic trend is in evidence.  

For example, it may be a good idea to allocate assets to investments that are considered more defensive during these periods of economic downturn, such as shares in companies that have historically shown resilience in times of financial crisis. 

What to do:

• Reduce or stop investing in companies highly sensitive to macroeconomic events;

• Adjust the composition of your investment portfolio in line with your medium-term objectives.

Banco Carregosa, maximising your financial potential

George Soros' experience is a lesson for all investors, from the beginner to the seasoned investor, and highlights the importance of having a professional team of market experts on your side. Before you make your next investment decision, talk to our experts. Contact us.