How a Degree in Philosophy Helped George Soros Hit It Big in Asset Management
When it comes to examples, George Soros is a prime candidate for an ideal model on which to base your strategy for asset management. Who wouldn’t love to follow his lead and experience all the things you can do as a millionaire?
However, it might come as something as a surprise to learn that Soros majored in philosophy during university, not finance. How did that philosophy degree help him hit it big in his decisions to invest and manage assets?
First, Some Background
You might think that you know who George Soros is, but do you really? For instance, did you know that he grew up disadvantaged?
Did you know that he emigrated from Hungary to the UK? Did you know that he struggled as a salesperson, and drove door to door in his early days? Did you realize that he was turned down time and time again when he first tried to land a job in sales in the city of London?
Today, Soros is considered a “maverick hedge fund manager”, but he’s also one of the wealthiest individuals in the world.
He is perhaps the definition of someone who’s pulled themselves up by their bootstraps and takes an interest in things far removed from the world of finance, including the development of feminism in Africa and the role of poverty on mental illness.
The Role of Philosophy in the World of Asset Management
What role does philosophy have in building wealth? What can it possibly do to help make you a better investor or asset manager? Actually, it can do a great deal. The crux of philosophy is that it teaches us to think critically, to question everything.
Those are crucial skills to have when investing. Specifically, it forces us to question assumptions and processes – market theories, for instance.
The Development of Soros’ Own Investment and Asset Management Philosophy
While Soros considers himself a failure in philosophy and has said as much publicly, his background in the discipline has allowed him to create his own unique investment philosophy. He calls it “reflexivity”.
Soros decided that rather than following the conventional theory of market equilibrium, he would instead study his targets and determine when and where to invest based on financial market and participant actions and movements.
His theory is underpinned by the idea that the market participants themselves create movement and influence, and any “irrational” behavior will lead to unexpected booms and busts. Perhaps this is why he divested himself of both DOW Chemical and Delta.
Here’s an example of how this works in the real world, and one that can be clearly seen in the ruins of the Great Recession and the US real estate market meltdown.
First, lenders made it easy for people to get loans, sometimes very large loans that, in all honesty, should never have been given to individuals with lower income levels.
Those people went out and bought homes. This created a demand for new housing construction (fewer available homes on the market means that builders need to get busy). That fueled the rise in housing prices, and in turn made lenders even more eager to offer loans.
The result was an upward spiral, but what goes up must come down. The very actions of lenders, borrowers and builders created the perfect storm that resulted in the crash of the market. Soros’ position here would have been to short the shares of major housing lenders or short-selling luxury home builder shares.
This would have allowed his fund to profit while the rest of the market was tumbling down around the ears of other investors.
His background in philosophy has also allowed him to take a different view of investing and asset management in general. Many traders focus on particular geographic areas. A London-based trader would focus on UK options, for instance. A New York City-based trader would profit from US options.
Soros plays the entire world, and this allows him to profit in almost any situation. It was this fact that led to his becoming the “man who broke the Bank of England”. Soros will invest in just about anything that he deems a worthwhile option, including currency.
In 1992, he borrowed a couple of billion British pounds. He then converted that money into German marks. Eventually, the British pound collapsed, and Soros was able to repay investors based on the lower value, making an immense profit on the difference between the two valuations.
In 1997, he made a similar investment in Asian currencies with similar results. Governments worldwide feared that Soros would next turn his eye on their money.
So, obviously, Soros’ philosophy (and, by extension, his background in philosophy) and his asset management allowed him to make incredibly brilliant financial moves almost every time.
The issue is that there is always the possibility that when you bet big, you’ll lose big, rather than winning. Soros has deep enough pockets to weather the financial fallout of those poor decisions with equanimity, something that other investors simply lack.
Should you follow Soros’ philosophy of betting big every time?
That’s something that should be dictated by how deep your own pockets are and your level of risk tolerance. While George Soros might be the most successful investor in all of history, you don’t have to take the same road.
You needn’t follow the conventional philosophy to invest and can adapt Soros’ own philosophy as yours, but you likewise do not have to take a “risk it all to win big” mentality.
You can be your own maverick simply by realizing that conventional investments are high-risk, particularly now that we’re nearing peak valuation, and putting your money into other areas, such as diversifying with bonds, rather than pegging your success to the growth of the stock market.