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Four Different Ways George Soros Finds His Investments

By Alex. Originally published at ValueWalk.

The following is straight from Operator Kean, a member of the Macro Ops Collective. To contact Kean, visit his website here.

One of the things that makes George Soros a market legend is his uncanny ability to identify lucrative trading opportunities.

Let’s take a look at how he does it.

George Soros: US Should Befriend China To Avoid World War

Soft brexit, UK, Soros, May 2017 hedge fund letters Q1 letters

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(I) Look Forward!

Most traders realize they need to be forward looking. But few practice it.

The reality is… herd mentality and groupthink are hard forces to overcome.

Instead of looking at the recent past and extrapolating into the future, Soros focuses on variables that might be misunderstood or overlooked. If one of these variables upsets the present consensus, he knows a large move will likely occur and reward those who anticipated the potential disruption.

In John Train’s Money Masters Of Our Time, Jim Rogers, an ex-colleague of Soros, explained their process:

We aren’t as much interested in what a company is going to earn next quarter, or what 1975 aluminium shipments are going to be, as we are in how broad social, economic, and political factors will alter the destiny of an industry or stock group for some time to come. If there is a wide difference between what we see and the market price of a stock, all the better, because then we can make money.

George Soros Says China Hard Landing Inevitable [FULL BLOOMBERG TRANSCRIPT]

Stanley Druckenmiller, Soros’ right hand man during Quantum’s epic performance, outlines this concept further:

[My] job for 30 years was to anticipate changes in the economic trends that were not expected by others, and, therefore not yet reflected in security prices.

Too many investors look at the present; the present is already in the price. You’ve got to think out of the box and visualise 18 to 24 months from now what the world is going to be and what (level) securities might trade at… what a company has been earning doesn’t mean anything, what you’ve got to look at is what people think a company’s going to earn and if you can see something in 2 years that’s going to be entirely different than the conventional wisdom, that’s how you make money.

Soros’ Japanese trade in 2012 and 2013 is the best modern example of the master riding a forward looking idea to enormous gains.

After the 2011 Fukushima disaster, foreign investors fled Japanese financial assets. Pessimism surrounding the struggling economy was extremely high.

There were talks of a “nuclear holocaust” as people became concerned about a radiation fallout. And the Eurozone’s sovereign debt crisis (happening at the same time) didn’t help either.

Together they fueled risk aversion across global financial markets, causing the Japanese Yen to strengthen relative to other currencies.

The stronger JPY caused Japanese exporters to earn less after currency translation, which meant their stock prices struggled as well.

For nearly a year after the Fukushima disaster sent prices tumbling lower, the market did next to nothing. Valuations were cheap and depressed.

No one was interested in Japan. Investors were convinced the country would continue its decades-long battle with deflation.

With all this negative sentiment, the market completely overlooked Shinzo Abe taking leadership of the LDP in September 2012…

But Soros didn’t.

Forbes reported that Soros was actively participating in the Japanese equity markets while being short their currency as early as October 2012.

Abe-san only assumed the role of Prime Minister in December, meaning Soros’ firm was early in anticipating the “Abe” variable’s potential effect on Japan’s asset markets. He was positioned before reality materialised.

Anticipating how variables (that the majority aren’t thinking about) could change current security pricing is the hallmark of a successful speculator.

We all know what happened after that.

PM Abe pushed for his promise of “ending deflation’” and the Bank of Japan (BOJ) launched its aggressive monetary easing programme in April 2013.

The JPY got crushed and Japanese equities took off.

Soros Has Another Warning, But Has He Lost His Touch?

An investor using either traditional valuation metrics or plain old technicals would likely have been reluctant to foray into Japan before Abe-san was elected (there would be no buy signal according to their framework). But Soros was able to stay ahead of the crowd and capitalise when the unexpected situation materialised. 

This is macro investing on a higher level. Learn to anticipate!

(II) False Trends —  Learn To Play Them!

Soros once said there are 3 realities:

  1. Things that are true
  2. Things that are untrue
  3. And things that are reflexive

He believes we need to differentiate our circumstances to understand these 3 types of realities. In particular, he emphasises defining false trendswhich occur when a belief is founded on false assumptions, but many believe it.

Since there’s nothing in financial markets that can be determined for sure (with 100% confidence), false trends and reflexive realities are prevalent.

According to Soros, false trends can be so dominant, that they move financial markets, causing a cascading effect on asset prices and secondary effects that reinforce the initial false beliefs. This reflexiveness creates a false reality, which is exactly how bubbles form.

Soros believes you can make money from these trends, even when you know they’re false. Doing so requires establishing positions at appropriate times while maintaining objectivity and flexibility. And of course, sticking to your risk management plan is key.

The steps to exploit a false trend are:

  1. Analyze assumptions to determine if they’re true or not
  2. Identify false trends based on those assumptions
  3. Evaluate how feedback loops form and affect the fundamental reality

Don’t strive for an ideal or perfect explanation in the markets. Be sober, analytical, and pragmatic. Seek to invert your thinking and understand all possible viewpoints.

Big questions of our time like ‘Is China imploding?’ or ‘Are cryptocurrencies the future?’ are issues that fall into these realities. Whether they’re true or not doesn’t matter to the master speculator. What matters is whether you can exploit them to profit!

(III) Look For “Experimental Economics”

Soros is constantly on the lookout for financial situations where there’s a “great amount of experimenting”.

Experimenting with complex systems like economies generally leads to imbalances and unintended consequences. Soros loves to exploit these. As he once said, “the accumulated drawbacks of specific imposed economic models simply provide a playground for financial market speculators”.

Is there a government meddling with the free market (capital controls and such)?

Is there a central bank, for whatever illogical reason, pegging its currency?

These are

The post Four Different Ways George Soros Finds His Investments appeared first on ValueWalk.

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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!