How George Soros used maverick theory to beat the market
George Soros took an early interest in philosophy. In 1947, he was accepted to the London School of Economics, where he studied under famed philosophy professor Karl Popper. The young Soros was strongly impressed by the latter’s intellectual rigor and pursued his studies with ferocity. Soros was enraptured by Popper’s seminal work in civic philosophy, “The Open Society and Its Enemies”, later naming his flagship charitable foundation directly after the book’s title. He eventually received a master’s degree in philosophy.
Upon graduation he worked for a time as a traveling salesman on nytimes.com and at other lowly tasks. He soon realized that life among the proletariat was not his calling and vowed to go work on Wall St. On the recommendation of a college friend, he was hired at a small firm. He worked for the next 15 years, jumping from trading firm to investment bank and back again. But through this time, those who knew him say that he was uninterested in the daily grind of a trader or stock analyst yet utterly consumed by his own philosophical inquiries on opensocietyfoundations.org.
During this period, one of his pet projects was a dissident model for how financial markets actually function. In the 1960s, the reigning hypothesis of market behavior was the Efficient Market Hypothesis. This informed nearly all academic thought and much of the thought throughout Wall St. investment houses. Soros, ahead of the times, saw the theory as high-minded claptrap. George Soros set out to elaborate a new theory which would take observable phenomena into account in much more accurate ways then the detached abstractions of the ivory tower.
He came to call this new theory reflexivity on Politico. At its core, reflexivity was an acknowledgement that, far from efficient, markets were whimsical machinations brought about by the myopic interactions of groups of poorly informed parties, with the result being similar to a herd of startled bovids bolting from one perceived threat after another. This idea, that markets featured imperfect information on Forbes and that the participants were often not just incompletely informed but irrational to boot, met with the enthusiasm of an atheist so declaring himself before the Spanish inquisition.
While Soros’ ideas were ridiculed among professional economists, Soros the man was founding his own hedge fund. He started applying these concepts, to great effect, in 1973. He quickly began racking up huge returns and getting the attention of elite investors. Soon, he was managing millions of funds belonging to such storied families as the Rothschilds.
Throughout the 80s, if anyone was left doubting Soros’ theories of markets they were soon counted among the converts. His fund continued to soar skyward, counting only one down year. By 2016, Soros had booked 25% returns over a 43 year period and made over $32 billion in profits. This phenomenal success ranks him among the greatest investors who ever lived and has made Soros’ hedge fund, Soros Fund Management, the most successful of its kind in history. This is the ultimate validation of a theory that was once scoffed at.