Five Reasons to Listen to George Soros

Keith Fitz-Gerald
  JUL 01, 2009 11:30 AM

And why interpreting his position as bullish is almost certainly a mistake.

 


Billionaire investor George Soros thinks the worst of the global financial crisis is behind us.

In a June 20 interview with Polish television, the Hungarian-born Soros acknowledged that this has been the most serious crisis he’s seen in his lifetime, but said that: “Definitely, the worst is behind us.”

For those who like to interpret “Soros-speak,” that’s as powerful a sign as any that Soros -- one of the world’s most successful investors -- is “going long.”

But is he wrong?

On the one hand, the World Bank's busy roiling the markets with recently updated figures that project a 2.9% decline in global economic activity this year. Then there are the signs that the green shoots (how I’ve come to detest that term) may be more like weeds. Debt's devastating the developed world, and the once-mighty G-7 looks more like a G-1 every day.

On the other hand, I wouldn’t bet against him. When it comes to financial influence and acumen, Soros is about as powerful and prescient as they come. He’s made billions over the years speculating on things that others simply couldn’t see -- or, more often, didn’t want to see. He’s legendary for making big bets on market timing, even if, by his own admission, he isn't always right.

For the millions of investors tempted to interpret Soros’ comments as bullish, I urge caution. In fact, this advice applies to any comments that might be made by such investment legends as Warren Buffett, or even Soros’ former investment partner, noted author and commentator Jim Rogers.

I preach caution for 3 reasons:

1. Despite the fact that each of these men is fabulously successful, the typical retail investor has no idea how much money they’re betting on the upside, or what percentage of their wealth is involved in any publicized position.

2. It’s not clear what -- if any -- protective stops are being used, so you don’t know whether the positions they’ve taken represent core portfolio holdings or speculative trades.

3. These revelations -- disclosures, really -- are usually made after the fact, which means that investors who may want to tag along for the ride are put in the risky position of having to make “me too” investments. So if you’re a savvy investor, what steps can you take to translate moves being made by 3 of the best investors of our time into profits of your own?

1. A good place to start is by taking the time to understand precisely what drives these guys. Even though superficially they're different -- Rogers hunts for opportunities around the world, Soros tends to pursue investment plays involving currencies and macroeconomic trends, and Buffett's a deep-value guy -- they have much more in common than you think. That’s especially true since the core elements of the strategies these 3 investors use to win and profit usually run counter to Wall Street’s conventional wisdom.

2. Take the very concept of profits, for example: Most people are surprised to learn that none of these gentlemen spends the morning rubbing his hands together and cackling over how much money he’s going to make that day. But nearly all have gone on record at one point or another about the importance of not losing money in the first place. They’ve also repeatedly stressed the importance of waiting until the really compelling opportunities develop before putting money at risk.

Rogers, once Soros’ partner at the Quantum Fund -- a hedge fund that’s often described as the first real global investment fund -- goes a step further: He describes his investment process as waiting until somebody puts money down in the corner, then “walking over and picking it up.”

3. Moreover, none of these 3 investors believes you have to take big risks to make big money. In fact, all 3 believe, as I do, that it’s how you concentrate your wealth that matters.

This flies in the face of what Wall Street would have you believe, which is that you need to diversify your assets to get ahead. Diversification as Wall Street practices it is a complete misuse of the math and a proxy for an entire establishment that doesn’t know what it’s doing.

The thinking is that by spreading your money around willy-nilly, some of your holdings will rise in value, even as other parts of the portfolio fall. Even so, by diversifying, Wall Street says that you'll be better off for it over the long run.

Granted, there are some instances where taking steps to “diversify” leaves you better off than if you’d done nothing at all, but one of the critical problems with diversification as Wall Street has practiced it is that it doesn’t work when everything goes down at once -- as so many investors who'd been led to believe they were protected found out the hard way in 2000, and again in 2007.

That’s why, for example, I’m a proponent of concentrating my efforts on a few relatively high-probability choices, especially when it comes to trading services, such as the Geiger Index or the New China Trader, for example.It’s a strategy that individual investors should consider, as well. 4. But what matters most is that people put the comments they hear from these guys into perspective and think for themselves. It’s important to remember that Buffett, Soros, and Rogers don't care about what other people think. That’s one of their real strengths. Nor do they care what the markets will or won’t do.

In fact, none of the 3 -- at least as far as I can tell from the research I’ve done -- subscribes to the “random walk” or “efficient market” theories, which I take to be complete bunk.

5. The bottom line is that Soros, Buffett, and Rogers have demonstrated time and again that they’ll only make a move when they’re darned good and ready -- when they’ve done all they can to scope out the situation at hand, and to make sure that the percentages are in their favor.

That, by itself, is a terrific lesson for retail investors to learn. Wall Street tries to push investors into action with advertisements portraying “real” people making trades from their kitchens, or getting the latest quotes on their mobile phones. They show attractive retired couples who’ve achieved their dreams with big sailboats, or antique cars, or expensive vacations. Ignore those messages, and you’ve effectively elbowed aside the artificial sense of urgency that Wall Street is trying to create.

Not only is this manufactured urgency designed to separate more of you from your money, but they wouldn’t do it if they knew that most investors got it “right” more often than they got it wrong.

Buffett, Soros, and Rogers act only when they believe the time is right. Buffett has referred to this as waiting for the Sunday pitch. If you’ve never heard that term before, it’s one that dictates extreme patience while all the spitballs, knucklers, and sliders go by. You only take action when the one pitch you know you can hit out of the park is on its way -- then you swing from the heels, and give it all your effort.

There’s one final thing these guys do better than almost anyone: Keep everything in perspective. They assemble their portfolios with diligent planning, attention to detail, and an emphasis on the objectives they expect to achieve. They make investments based on a clearly defined set of expectations and don't hesitate to cut their losses if they find out they were wrong.

In that sense, every investment choice they make fits a specific role in their portfolio. Nothing, if they can help it, is left to chance. So to the extent there’s any action to be taken right now, let me leave you with one final thought.

No nation in the history of mankind has ever bailed itself out by doing what we’re doing now, which means that placing bets on a “recovery” is really a fool’s errand. On the other hand, making choices that capitalize on the trillions of dollars now being injected into the world’s financial system is the place to be. History shows that it’s better to be generally long resources, inflation-resistant choices, and real companies with real earnings.

Not only will these kinds of profit plays fall less than others if the markets stumble and fall from here, they’ll also rise faster and farther once the capital infusions start to work their way through the global financial system and the rebound gets under way.

And I’ll bet my bottom dollar that George Soros knows it.
No positions in stocks mentioned.