George Soros’s ideas may help us navigate the markets over the next year or two

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I think some markets are moving into phases that can be usefully described by George Soros’s models of how societies and markets function. It will be helpful to me, and I hope to you, to be reminded how markets can move from being in “near-to-equilibrium” to a state of “far-from-disequilibrium”. It will become increasingly important as share markets inflate to watch out for the warning signs of bubble creation and when bubbles might be about to pop.  Forewarned is forearmed.

George Soros is most famous for being fabulously wealthy, but what he’d rather be known for is his philosophical ideas about society, in particular economics and the workings of markets.  For many of us his ideas are indeed the most important contribution he has made – although his philanthropy is very impressive too, and his tens of billions.

These concepts are not easy to absorb so I’ll have to set them out in a series of newsletters over the next few days – much of the material is taken from a book I wrote a decade ago called The Great Investors (still in print in a number of languages).

Before establishing a private family investment house George Soros made a fortune for himself and the backers of the Quantum Fund. For instance, he achieved an annual rate of return of nearly 35 per cent over the first 26 years of the fund.  A $1,000 investment in 1969 grew to be worth millions by the mid-1990s.

There is much we can learn from Soros:

  • A new way of looking at the behaviour of market prices: they result from a two-way feedback mechanism with participants (e.g. investors) moving prices and fundamentals in response to their (faulty) perceptions, and their perceptions, in turn, formed by market movements – this can help identify bubbles and irrational downward spirals.
  • The exploitation of crowd irrationality.
  • To act with independence of mind and decisiveness.

Soros sees himself first and foremost as a philosopher.  Early in life he developed his philosophy of how people in social structures operate as a group to occasionally lead the economic (or political or social) fundamentals away from a near-to-equilibrium state to a far-from-equilibrium state.

His observations and anticipations of financial market movements are but a sub-set of manifestations of his theory of ‘reflexivity’.  The same philosophical base can be used to describe and analyse, for example,  the movement of a society from an open, rule-of-law, democratic form to one increasingly closed and authoritarian.  It can also be used to describe and explain individual human interactions such as love and hate, among a host of other applications.

He has written a number of books to try to convey the essence of his idea of reflexivity – in which a two-way feedback loop, between the participant’s views and the actual state of affairs exists. His amazing life experiences have taught him that individuals do not base their decisions on the actual situation that confronts them.

Rather, decisions are………………To read more subscribe to my premium newsletter Deep Value Shares – click here

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