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The #1 Secret Behind George Soros’s Investment Success

Written by Nicholas Vardy, CFA.

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Although now long retired, the octogenarian George Soros is widely considered the greatest speculator of all time. Other investors such as Ray Dalio may have made more money for their investors than Soros. Activists such as Carl Icahn may have briefly exceeded Soros's net worth.

But Soros will always remain the man who "broke the Bank of England" in 1992, thereby exemplifying a gunslinging style of trading that has been largely confined to the history books.

Back in 1987, Soros wrote a book about his investment philosophy called The Alchemy of Finance, outlining his "Theory of Reflexivity." Soros admitted he gave his theory such a grand-sounding name so that it would sound like Einstein's "General Theory of Relativity." He thought it was that important.

Wall Street strategist Barton Biggs called it:

"a seminal investment book... it should be read, thought about, underlined page by page, concept-by-idea... (Soros) is the best pure investor ever... probably the finest analyst of our world in our time."

Because of Soros's stature, The Alchemy of Finance turned out to be one of those books that every Wall Street investor said they had read.

But I doubt any of them got through it, let alone understood it.

GEORGE SOROS'S #1 INVESTMENT SECRET: TACKLING 'THE ALCHEMY OF FINANCE'

When I was managing my first investment fund over 20 years ago, I decided that I really wanted to get inside Soros's head. So I took Barton Biggs's advice and read The Alchemy of Finance.

I read it once... I didn't get it...

I read it again...I still didn't get it...

Now, keep in mind that I had been through law school...

... So I was used to stirring concrete with my eyelashes...

... And getting through more poorly written, turgid prose than most humans should have to endure...

But Soros's writing style made judicial opinions seem like Ernest Hemingway's lucid prose.

Then one day I ran across a quote from Soros's own son.

It made everything crystal clear, but not in the way that I expected.

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Investment Wisdom from the Original Global Guru

Written by Nicholas Vardy, CFA.

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Sir John Templeton, who passed away at the age of 95 in 2008, was the original Global Guru.

Templeton provided me with an introduction to the world of global investing when I picked up a book on Templeton's investment philosophy many years ago in Amsterdam.

While today you can buy a Brazilian or Malaysian or South African stock with a click of the mouse, the world was a very different place when Templeton began his global investing career.

John Templeton: A Pioneer in Global Investing

Born in 1912, Templeton hailed from the South (Winchester, Tennessee), graduated from Yale in 1934 and won a Rhodes Scholarship to Oxford.

After studying law in England, Templeton embarked on a whirlwind grand tour of the world that took him to 35 countries in seven months. That tour exposed him to the enormous investment opportunities that exist outside of the United States.

In the very first display of his famous contrarian streak, Templeton came to Wall Street during the depths of the Great Depression to start his investment career in 1937.

Templeton soon borrowed a then-princely sum of $10,000 ($170,000 in today's dollars) as a 26-year-old investor and bought shares of 104 European companies trading at $1 per share or less.

This was in 1939, the year German tanks rumbled into Poland, launching World War II.

Though dozens of companies were already in bankruptcy, only four companies out of those 104 turned out to be worthless. Templeton held on to each stock for an average of four years and made a small fortune.

In 1940, he bought a small investment firm that became the early foundation of his empire.

Templeton then went on to build an investment management business whose name became synonymous with value-oriented global investing. He launched the Templeton Growth Fund in 1954 — notably in Canada, which then had no capital gains tax. He made his company public in 1959 when it only had five funds and $66 million under management, and eventually sold his business to Franklin Resources for $913 million in 1992.

Templeton focused his final years largely on philanthropy, endowing the Centre for Management Studies at Oxford. He also established the Templeton Prize in 1972, which recognized achievement in work related to science, philosophy and spirituality. His Templeton Foundation, which today boasts an endowment of $1.5 billion, distributes $70 million annually in grants to study "what scientists and philosophers call the Big Questions." Past winners have included Mother Theresa, Billy Graham, Desmond Tutu and the Dalai Lama.

John Templeton: Contrarian to the Core

Templeton's investment track record was impressive, although, given his deeply contrarian style, inevitably quite volatile. A $10,000 investment in the Templeton Growth Fund in 1954 grew to roughly $2 million, with dividends reinvested, by 1992. That works out to a 14.5% annualized return since its inception.

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How to Beat Goldman Sachs at the Prediction Game

Written by Nicholas Vardy, CFA.

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"It's tough to make predictions... especially about the future"

The late Yogi Berra's quip about predictions reminds us that we humans are a funny lot.

In ancient times, the ancient Babylonians predicted the future using animal entrails. Today, millions of people still turn to astrology to get a glimpse of what's to come. And we do the same when reading the financial media.

Yet, for all of our relentless commitment to divining the market's future by reading this morning's Wall Street Journal, it's hard to avoid feeling that financial predictions aren't any more reliable than those we find in the astrology columns.

Goldman Sachs' Call on Oil

Just consider the case of Goldman Sachs' calls on the oil price over the past 12 months or so. In late 2014, Wall Street's premier investment bank asserted that "downside risks" in the oil price were gaining momentum and it forecast a decline in the price of oil to $90 a barrel in the first quarter of 2015.

Three weeks into 2015, and oil was trading below $50, confounding Goldman and nearly every other analyst on Wall Street. Fast forward to December 2015, and Goldman is standing by its latest prediction of a $20 per barrel bottom.

To give Goldman its due, it was actually more bearish than its peers, lowering its forecast before other investment banks did. But Goldman has revised its predictions so many times that at this point the only thing certain is that Goldman's predictions will change — rendering them essentially useless.

Here's what's surprising. Although Goldman's analysis moves the markets, no one ever calls Goldman Sachs on its bungled predictions.

And it is highly unlikely that any Goldman Sachs oil analyst has ever been fired for making predictions about the oil price that have been wildly off the mark.

Contrast that with the fate of any surgeon or airline pilot — all of whom would have been sued or put out of a job for showing similar levels of incompetence.

The Achilles Heel of Wall Street's Complex Models

Most of us know deep down that astrological predictions are bunk. And we also realize that what Sam Goldwyn said about Hollywood also applies to Wall Street: "Nobody knows anything."

Yet, we still cling to the irrational hope that a sleep-deprived 26-year-old Goldman Sachs analyst, armed with her elaborate spreadsheet models, can tell us something about the future of oil prices.

We are still wowed by a combination of the Goldman imprimatur and the apparent complexity of the firm's financial modeling and its access to information.

One of the myths of Wall Street high finance is that the more variables a financial model accounts for, the more accurate its predictions.

Truth be told, any financial analyst worth his salt can construct a model that generates accurate predictions based on past data. But test the model on a different set of data and the predictive ability of the most elaborate model simply evaporates. Complex models are rarely robust.

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Why You’ll Never See Another Soros or Buffett Ever Again

Written by Nicholas Vardy, CFA.

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George Soros' investment track record made him the equivalent of a .400 hitter in baseball.

Yet, in a decade that has been lousy for all investors, even the "Granddaddy of Hedge Fund Managers" has had it tough.

Soros quietly left the hedge fund scene in 2011, turning his fund into a family office. But his last few years in the game were hardly like his first. Indeed, 2010 was Soros' worst year since 2002, with his flagship fund up a mere 2.63%. The following year was even worse, with his famed Quantum fund reportedly down 15%.

And a quick glance at Warren Buffett's returns shows that the Oracle of Omaha has had a tough stretch as well.

Over the past 15 years, Berkshire Hathaway's average annual returns have shrunk to 7.89%.

Granted, that's over a span in which the S&P 500 has risen only 4.35% a year.

Nevertheless, these anemic returns are a long way from either Soros' or Buffett's glory days.

Prior to the dotcom bust in 2000, both Soros and Buffett boasted enviable "30:30" track records: average annual returns of 30% over a period of 30 years.

Today, Buffett's long-term track record in the 50 years between 1965 and 2014 has fallen to 21.6%. And last year's drop of 12.06% did little to improve it.

The last time hedge fund managers like John Paulson and Kyle Bass were able to generate outsized returns was in 2008 with a big bet against mortgages. And both Paulson and Bass have struggled since.

With consistent double-digit percentage returns a thing of the past, it is no wonder many of the original hedge fund greats like Soros and Stanley Druckenmiller have called it quits.

So will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?

The short answer is "no"...

And here's why...

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Why the 10,000 Hour Rule Doesn’t Apply to Investing

Written by Nicholas Vardy, CFA.

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You may have heard of the "10,000 hour rule."

It goes something like this....

Across all fields of human endeavor, it takes about 10,000 hours of "deliberate practice" to master a skill.

Whether it's speaking French, playing a musical instrument or becoming an NFL linebacker, you need to put in about 20 hours a week, over a 10-year period, to rise to the top of your profession.

That's why Olympic athletes and musical prodigies need to get such an early start.

This idea isn't new.

I first read about this around a decade ago in the context of a broader rule of thumb. It takes 1,000 hours of intensive study to become "competent" at a skill; 5,000 hours to be able to teach it to others; and 10,000 hours to "master" it.

True "virtuosos" put in about 20,000 hours — roughly 20 years of intense commitment and practice.

The conclusion is cheerfully democratic, if daunting. As long as you put in your 10,000 hours, you too can become a "master" at any field you choose.

Sadly, this conclusion is also just plain wrong.

Unlike mastering a violin or becoming a world-class Brazilian jiu-jitsu practitioner, the 10,000 hour rule does not readily apply to the world of investing.

My Own Journey through 10,000 Hours

A few years ago, I tallied up the hours I had put into mastering the basics of investing.

And between my study for various formal qualifications and my work as a portfolio manager, I tallied up 10,000 hours quite easily.

Yet there were two things that struck me.

First, the least useful part of my experience — the hours I couldn't in good conscience count toward my 10,000 hours of "mastery" — were the hours spent as a mutual fund manager.

Too much of my time was frittered away with meetings and activities that had nothing to do with investment analysis. Little of my time met the standard of "deliberate practice."

Second, I also found that none of the effort I had put into learning my "craft" mattered — or even was appreciated — at the mutual fund company where I worked at the time.

The top investment manager I sat next to — a high school dropout who literally had worked himself up from the mailroom and had such limited writing skills that he could barely draft his own quarterly reports — dismissed my autodidactic efforts with a word too rude to repeat in print.

And judging by those who have been extraordinarily successful on Wall Street, he was right.

Investing as an Extreme Sport

Here's the conclusion I have come to...

The 10,000 hour rule may apply in the world of sports and musical instruments.

But it does not apply in the world of blockbuster movies, best-selling books or investment management on Wall Street.

In his bestseller "The Black Swan," Nassim Nicholas Taleb refers to these two types of worlds as "Mediocristan" and "Extremistan."

"Mediocristan" is the world of lawyers and dentists. Learn your craft, and you will make a good living. But there are only so many hours you can bill, and only so many cavities you can fill. You can become "comfortable" but never "rich."

"Extremistan" is the world of Internet entrepreneurs, hedge-fund managers and politicians. In business, an Internet entrepreneur like Mark Cuban can make more money selling broadcast.com to Yahoo than a thousand partners at New York law firms make in a lifetime.

In politics, an affable but obscure state lawmaker earning $60,000 a year in 2003, plus $32,000 as a lowly instructor at the University of Chicago Law School, can become President of the United States five years later.

Wall Street and financial markets are the very incarnation of "Extremistan."

And your experience and smarts on Wall Street and in politics don't really matter all that much.