George Soros is a Hungarian-American billionaire financier, known for his extreme risk-taking investing style based on instinct. Many associate Soros for "breaking the Bank of England" because he made $1 billion in a single day during the 1992 Black Wednesday U.K. currency crisis. But this investment style has clearly paid off -- he is the founder of one of the most profitable firms in the hedge fund industry: Soros Fund Management. Below are several hallmarks of Soros-style investing.
Short-term speculator Unlike Warren Buffett, who holds investments for decades, Soros has been known to stay in a position for a mere few months, according to Bill Hammer, a certified financial planner in Melville, N.Y.
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"Soros is more of a trader/speculator who is trying to predict the movements of the market, while Buffett is trying to buy a share in a business at a discount to its true value," says Hammer, who is also vice president of wealth management at Vanderbilt Partners. "Soros doesn't worry as much about valuation. He just wants to be right on the temporary direction of his bet."
Of course, no one is right all of the time, and in a 2008 interview with the Wall Street Journal, Soros admitted that the key to his success has been recognizing his mistakes -- quickly.
"I'm only rich because I know when I'm wrong," he was quoted as saying. "I would say that I basically have survived by recognizing my mistakes. ... Whenever you are wrong, you have to fight or [take] flight."
Currencies Soros also prefers esoteric investments, such as derivatives, currencies and commodities, Hammer says. In fact, Soros made a fortune by betting against Britain's currency.
In 1992, when the United Kingdom fell into a recession, Soros anticipated that British authorities would be forced to break from the European Exchange Rate Mechanism (ERM). Soros' prediction was correct -- the British government abandoned the ERM, and the pound was devalued by twenty percent.
"Soros bet on the pound losing value and made a huge profit," Hammer says.
Unfortunately, Soros hasn't been correct all of the time. He lost hundreds of millions in 1994, when he bet the wrong way on the direction of the Japanese yen's value relative to the dollar, following the collapse of trade talks between the United States and Japan.
MacroeconomicsFinally, Hammer says Soros makes investments that are based on macroeconomics, such as the movement of interest rates and oil prices.
While working as a financial analyst and trader in New York, Soros developed his interpretation of the social theory of "reflexivity," which asserts that prices influence fundamentals and then these fundamentals, in turn, change expectations, thus influencing prices.
Soros began to apply his ideas on reflexivity to investing, using his theory to predict the emergence of financial bubbles (when prices for securities rise above their actual value).