Key points

● Soros and his Quantum Fund are one of the most famous hedge funds in the world.

● Soros insists that the market is always wrong and insists on profiting from its mistakes.

● Soros made huge gains by shorting sterling, Thai baht and yen

George Soros, known as the "financial genius", founded the quantum fund with another investment guru, Jim Rogers, and used its original investment concept to grow at an average annual rate of 35%. Become one of the most famous hedge funds in the world.

Soros and his "Quantum Fund" made the global capital market jump in the last decade of the 20th century, and the saying "speculation knows no national boundaries and money never sleeps" is deeply engraved in the hearts of investors all over the world.

Basic theories and investment secrets

In his decades of investment career, Soros has formed a set of unique theories which are significantly different from the traditional economic theory.

According to the traditional economic theory, human beings are rational, while Soros insists that human thoughts and the events they participate in are not completely independent, and that they not only interact with each other, but also determine each other. There is no symmetry or correspondence.

There are participants who are full of thinking ability in the market, and their own thinking consciousness determines and affects the factual objects studied by the participants to a certain extent. Soros believes that participants' cognitive biases affect market prices to some extent (tulip bubbles and South China Sea bubbles are typical examples) and even so-called fundamentals, which in turn are seen as market determinants.

Soros believes that financial markets are volatile and chaotic, and the buying and selling decisions in the market are not based on ideal assumptions, but on the expectations of investors.

Soros points out that the market is always wrong and that it is impossible for existing analysis tools to accurately predict stock price movements and coordinates. Because there is a deviation in the expectations of market participants, which in turn affects the process of trading activities, it is not that current expectations are consistent with future facts, but that future events are shaped by current expectations.

Soros's investment secret is briefly summarized as: profit from the mistakes of the market.

Actual combat case

Soros's well-known investment experience is basically short.

Its basic operations are:

Find problems-look for markets with bubbles as short sellers; act decisively-act decisively at the peak of the bubble, focusing on the foreign exchange market, supplemented by the stock market, options market, etc.; stop as soon as you see what is good-those who are sold short will passively rescue the market. as soon as you find that the momentum is wrong, withdraw immediately.

Here are three classic cases of Soros.

First, attack the pound and bring down the Bank of England.

After the reunification of Germany in 1989, large-scale reconstruction triggered inflationary pressures that led the government to raise interest rates. Britain joined the European exchange rate system in 1990, and the pound was pegged to the Deutschmark and maintained high interest rates. Soros believes that to maintain a strong pound is simply to make the face fat, and that high interest rates are not conducive to stimulating growth in Britain, which was in a weak economic environment at that time, and that the strength of the pound can never be maintained, so he began to bet heavily against the pound, spending 10 billion US dollars.

On September 15, 1992, the pound fell sharply against the Deutschmark. In the early morning of the 16th, the British government announced that it would raise bank interest rates by 2 percentage points. Only a few hours later, it announced an increase of 3 percentage points, sharply raising the benchmark interest rate from 10% to 15% at that time, and bought a lot of pounds. At the close of trading on the 16th, the Bank of England bought about 3 billion pounds, but also failed to stop the collapse of the pound, and then the United Kingdom announced the defeat of the currency defense war and withdrew from the European exchange rate system.

Soros and his funds made a profit of more than $1 billion from the attack on sterling, according to the size of the fund.

Second, shorting the Thai baht triggered the financial crisis in Southeast Asia.

In the early 1990s, the economies of Southeast Asian countries grew rapidly. From 1990 to 1995, Thailand's GDP grew at an average annual rate of 9.1%. In order to support the rapid development, the Thai government has liberalized capital controls, accelerated financial liberalization, and stimulated a large amount of foreign investment into Thailand.

The influx of hot money triggered an asset bubble. Soros believes that Thailand is overheated and asset prices are seriously overvalued. Since 1996, he has borrowed Thai baht from the Bank of Thailand and converted it into dollars. By May 1997, Soros kept hyping the Thai baht, triggering a market sell-off and a devaluation of the Thai baht.

The Thai government then fought back, controlling the situation for a short time by jointly using 12 billion US dollars to buy Thai baht with Singapore, issuing an executive order prohibiting domestic banks from lending Thai baht to Soros, and sharply raising interest rates.

Soros made a comeback a month later, using the foreign exchange, stock market, futures market, derivatives market to attack the Thai financial market. Finally, on July 2, 1997, Thailand announced that it would abandon the fixed exchange rate, and the Thai baht continued to plummet against the dollar. At the same time, short-selling funds have hit the Philippines, Indonesia, Malaysia and other countries, the comprehensive outbreak of the financial crisis in Southeast Asia.

It is estimated that Soros made a total profit of about 2 billion US dollars in the Southeast Asian financial crisis.

Third, short the yen and long-day stocks in 2012.

The 2011 Japanese earthquake and tsunami not only had a great impact on the Japanese economy, but also lengthened the long-depressed road to economic recovery. However, the yen began in 2008 and strengthened until the end of September 2012. At this time, many global macro hedge funds, including Soros, generally believe that the yen is overvalued.

At the end of 2012, Shinzo Abe, then president of the LDP, unveiled an economic revitalization plan, setting a 2 per cent inflation target and indefinite quantitative easing, sounding the short yen bugle. Soros's usual tactic, short foreign exchange long stocks, came out again, focusing on yen put options, while using leveraged financing to buy Japanese stocks as a cover.

The market showed that 100 yen depreciated rapidly against the dollar from 1.28 in October 2012 to 0.80 in May 2015, a 37% drop in the range. It is reported that during the depreciation of the yen, Soros made a profit of more than 1 billion US dollars.

In addition, Soros has also had several painful failures.

In 1981, Soros judged that there would be a big rise in the US government bond market, and then used the short-term bank loans he borrowed to buy large amounts of long-term government bonds. As a result, as the US economy continued to climb, interest rates rose, leading to a sharp increase in borrowing costs. In the end, it lost a total of several million dollars.

During the US stock market crash in October 1987, Soros suffered huge losses due to holding a large number of long positions. The net value of the quantum fund fell by 26%, with a loss of about $650 million to $800 million.

In 1998, Soros, who made a lot of money in the Southeast Asian financial crisis, began to attack Hong Kong, but was strongly counterattacked by the Hong Kong government of about HK $120 billion. In the end, the exchange rate of the Hong Kong dollar and the Hong Kong stock market withstood the impact and remained stable. Soros is reported to have lost about $1 billion in the war.

Quotation

1. The worse the situation, the shorter the time it takes to turn things around and the greater the benefits.

two。 Stock market bubbles do not come out of thin air, they have a solid foundation in reality, but this reality is distorted by a misconception.

3. Financial markets are often unpredictable, so we have to make some preparations and take into account a variety of situations.

4. The market is always in uncertainty and change, ignoring the obvious so-called opportunities and betting on unexpected things in order to make money.

5. In fact, many evils in the world are not intentional, and the inadvertent actions of many people in the financial markets will also cause great harm to the market.

6. Financial markets are stable in self-destruction and repair, and markets occasionally tend to be unbalanced rather than balanced.

7. I insist that the financial market itself is unstable, even though many times we see the market tend to equilibrium, in fact, this is just our fantasy.

8. Market fundamentalists believe that the role of the state in the economy is always negative, destructive and inefficient, so they believe that market mechanisms can solve all problems.

9. Making mistakes is not shameful. Admitting mistakes is also something to be proud of. To face failure calmly, what you fear most is knowing your mistakes and not correcting them.

10. The global economy and capital markets have many advantages, but in my opinion, these advantages are not enough, because the market has not fully taken into account the overall social needs.

Conclusion

Prosperity and decline is a true portrayal of Soros's late investment career. After entering the 21st century, the quantum funds of transitional family companies are mainly engaged in low-risk and low-return arbitrage trades, gradually fading out of the fame and wealth circle of the mainstream capital market.

In any case, Soros and his investment philosophy have a great impact on capital markets and remind us that shorting does not mean evil and that opportunities are always reserved for those who are prepared.