George Soros smashes markets under the weight of his genius theory

George Soros is one of the cleverest men alive. He’s proven himself in the markets over a period of nearly 45 years, generating some of the highest returns of any investor in history. Even his staunchest opponents are quick to recognize the man as having a preternatural ability to quickly and accurately assess the arenas in which he operates. George Soros has never suited up for a contest in which he did not utterly dominate.

But his success in the markets is largely attributable his keen interest in philosophy, a trait that started to become apparent even in his earliest years. As a young man Soros wanted to study philosophy. He was a good student, achieving mostly A’s in high school. He applied to Oxford and was accepted. There, he studied under famed Professor Karl Popper, best known for his seminal work “The Open Society and Its Enemies”. This book had a profound impact on the young Soros, helping to shape his early intellectual development. He would later go on to name his flagship philanthropic foundation after the title of this book. It would be called the Open Societies Foundation. Read his profile at Forbes.

But mere names were not the most important thing that was gleaned from his time studying under Popper. The systems of thought that he would learn at Oxford would become useful to him when he finally decided to start tackling the markets.

Perhaps the single most important element in George Soros’ spectacular success as an investor has been his proprietary philosophy that he has termed reflexivity. Reflexivity is a theory of the function of markets, whereby participants themselves materially affect the valuations of securities, rather than the valuations being a product of objective analysis, completely detached from the whims of the participants. While this may sound like a fairly pedestrian view today, at that time, it was a heretical viewpoint, directly contravening the day’s reigning orthodoxies, such as the efficient market hypothesis.

By the time he was in his early forties, Soros had worked this philosophy into an elaborate system of thought, which he used to analyze the market on a high-level. This gave him unique insight and a particularly adept ability to predict what market actors would do based on the prevailing moods in the marketplace. This led directly to one of the largest single trade profits in the history of capitalism. In one trade, Soros made a profit of over 1 billion dollars betting against the bank of England. Soros believe that the bank of England would eventually be forced to float the pound against other currencies, rather than artificially fixing it to the German Deutsche Mark. He turned out to be right, to the tune of a $1 billion single-day profit.

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