George Soros Trading Strategy — What Is It?

Last Updated on July 31, 2022 by Oddmund Groette

“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” This quote by George Soros captures his trading strategy.

George Soros’ approach to trading is short-term speculator, making highly-leveraged bets on the direction of the financial markets based on market and macroeconomic analysis. In other words, Soros bets on the long or short direction on any market by studying the market movements, what other market participants are doing, and the actions of the government regulators.

In this post, we take a look at this maverick investor and his trading philosophy.

Who is George Soros?

George Soros is a renowned hedge fund manager popularly known for his Quantum Fund which has a great history of huge returns. He turned an original seed funding of $12 million into $20 billion by the first decade of the 21st century. To put it in perspective, if you had invested $1,000 in his Quantum Fund in 1969, you would have earned $4 million by 2000. That is an annual average growth rate of 30%.

In the trading and investing world, Soros is a revered name. He was named “the world’s greatest money manager” in 1981 by Institutional Investor magazine. In 1992, he was nicknamed “the man who broke the Bank of England (BOE)” following a trade he made that forced the BOE to change its policy.

Early Life

Soros lived his childhood in Budapest, Hungary, where he was born on August 12, 1930. After WW II, he made his way to England to study at the London School of Economics. His stay in London helped to shape his concept and approach to the financial markets and philosophy to life. In fact, it was after reading Karl Popper’s tome, “The Open Society and Its Enemies,” that he first combined the concepts of science and politics which became the basis of his philosophy.

The journey into the financial markets

Soros’ first post-graduate job was with F.M. Mayer, a New York City money management firm. In less than 20 years, he had opened his first investment firm, Soros Fund, which allowed him to apply his science and free markets principles to investments and he was able to test them in the markets. He later changed the name of the fund to the Quantum Fund.

George Soros’ trading philosophy

George Soros is a short-term speculator. His trading approach centered around making highly leveraged, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic and market analysis.

He applied scientific inquiry in his investment strategy, merging it with his belief in free markets and human rights. The five key elements of his investment approach are as follows:

  • The “reflexivity” theory: The theory opines that the market participants themselves directly influence market fundamentals and that their irrational behavior leads to booms and busts that present investment opportunities. Soros uses reflexivity as the cornerstone of his investment strategy. He looks out for market bubbles and booms.
  • Scientific method: Soros uses scientific methods to study the market. He uses current market data and probability to formulate a strategy that tracks what will transpire in the financial markets. He usually tests his theory with a smaller investment first and increases his investment if the theory proves positive.
  • Physical cues: He also listens to his body when making investment decisions. For example, a headache or a backache could be enough for him to abandon an investment.
  • Blending political acumen with investment acumen: Soros combines his knowledge of politics with his market analysis. For example, he once bet heavily against the U.K. government’s decision to hike interest rates in September 1992. That trade forced the BOE to devalue the British pound, sending stocks higher after that devaluation. Soros made about $1 billion from that trade and earned the famous moniker, “The Man Who Broke the Bank of England.” Effectively.
  • Read and reflect: Soros has a handful of advisors/analysts he confers with when he wants to make big investment decisions. According to him, after discussing with his team of analysts, making sure to review at least one contrary view to his strategy, he takes time “to read and reflect” before pulling the trigger.

George Soros and the Bank of England

Soros was dubbed “the man who broke the Bank of England.” It was in September 1992; the GBP was pegged against the German marks. Soros knew that Britain could not defend that peg for long, given its political and economic turmoil linked to a policy of higher interest rates. So, he bet heavily against the GBP. He borrowed billions of dollars worth of GBP and converted them to German marks. That is, he went short a position in the British Pound (worth $10 billion).

When the pound crashed, He repaid his lenders based on the new, lower value of the pound, pocketing in excess of $1 billion in the difference between the value of the pound and the value of the mark during a single day’s trading. He made nearly $2 billion in total after unwinding his position.

Soros and the Asian Crisis

In 1997, Soros saw a possibility that the Thai baht, which was pegged at 25 to the USD, could go down, and he went short on the baht by using forward contracts to go long on USD/THB. He made over $700 million from the trade. It is believed that trade triggered the 1997 Asian Financial Crisis that affected not only Thailand but also South Korea, Indonesia, Malaysia, the Philippines, Hong Kong, and others.

Charity

Soros loves to give back to the community. In 1984, he founded the Open Society Foundations (OSF), a philanthropic organization that “builds vibrant and tolerant societies whose governments are accountable and open to the participation of all people,” as described by the foundation’s website.

As of March 31, 2013, George Soros had donated over $8.5 billion to charity through his foundation, which seeks to “strengthen the rule of law; respect for human rights, minorities, and a diversity of opinions; democratically elected governments; and a civil society that helps keep government power in check.”

George Soros’ trading mates

Several other famous traders and investors have worked alongside George Soros: Jim Rogers, Stanley Druckenmiller, and Victor Niederhoffer.

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