George Soros

Big Ideas

• Reflexivity: Not only does business/macroeconomics reality affect financial markets, the financial markets in turn end up affecting macroeconomy and business reality. This is the source of the massive positive feedback cycle in markets.

Lore

The best-known story about Soros is when he broke the Bank of England (the British Pound). The actual events of the trade are pretty well-known. But the lesson to learn from it is best told by Stanley Druckenmiller, who was managing Soros' Quantum Fund at the time.

...when I went over to work for George...I thought what I would learn would be like what makes the yen goes up, what makes the deutsche mark move, what makes this, and to my really big surprise, I was as proficient as he was, maybe more so, in predicting trends.

That's not what I learned from George Soros, but I learned something incredibly valuable, and that is when you see it, to bet big....

...

Probably nothing explains our relationship and what I've learned from him more than the British pound. So, in 1992 in August of that year my housing analyst in Britain called me up and basically said that Britain looked like they were going into a recession because the interest rate increases they were experiencing were causing a downturn in housing. At the same time, if you remember, Germany. the wall had fallen in '89 and they had reunited with East Germany, and because they'd had this disastrous experience with inflation back in the ’20s, they were obsessed when the deutsche mark and the ... combined, that they would not have another inflationary experience. So, the Bundesbank, which was getting growth from the ... and had a history of worrying about inflation, was raising rates like crazy. That all sounds normal except the deutsche mark and the British pound were linked. And you cannot have two currencies where one economic outlook is going like this way and the other outlook is going that way. So, in August of '92 there was 7 billion in Quantum. I put a billion and a half, short the British pound... ...based on the thesis I just gave you. So, fast-forward September, next month. I wake up one morning and the head of the Bundesbank, Helmut Schlesinger, has given an editorial in the Financial Times, and I'll skip all the flowers. It basically said the British pound is crap and we don't want to be united with this currency. So, I thought well, this is my opportunity. So, I decided I’m going to bet like Soros bets on the British pound against the deutsche mark.

It just so happens he's in the office. He's usually in Eastern Europe at this time doing his thing. So, I go in at 4:00 and I said, “George, I'm going to sell $5.5 billion worth of British pounds tonight and buy deutsche marks. Here's why I'm doing it, that means we'll have 100 percent of the fund in this one trade." And as I'm talking, he starts wincing like what is wrong with this kid, and I think he's about to blow away my thesis and he says, "That is the most ridiculous use of money management I ever heard. What you described is an incredible one-way bet. We should have 200 percent of our net worth in this trade, not 100 percent. Do you know how often something like this comes around? Like one or 20 years. What is wrong with you?" So, we started shorting the British pound that night. We didn't get the whole 15 billion on, but we got enough that I'm sure some people in the room have read about it in the financial press.