How George Soros Finds His Trades

macro-ops.com /how-george-soros-finds-his-trades/

7/14/2017

The following is straight from Operator Kean, a member of the Macro Ops Collective. To contact Kean, visit
his website here.

One of the things that makes George Soros a market legend is his uncanny ability to identify lucrative trading
opportunities.

Lets take a look at how he does it.

(I) Look Forward!

Most traders realize they need to be forward looking. But few practice it.

The reality is herd mentality and groupthink are hard forces to overcome.

Instead of looking at the recent past and extrapolating into the future, Soros focuses on variables that might be
misunderstood or overlooked. If one of these variables upsets the present consensus, he knows a large move will
likely occur and reward those who anticipated the potential disruption.

In John Trains Money Masters Of Our Time, Jim Rogers, an ex-colleague of Soros, explained their process:

We arent as much interested in what a company is going to earn next quarter, or what 1975 aluminium shipments
are going to be, as we are in how broad social, economic, and political factors will alter the destiny of an industry or
stock group for some time to come. If there is a wide difference between what we see and the market price of a
stock, all the better, because then we can make money.

Stanley Druckenmiller, Soros right hand man during Quantums epic performance, outlines this concept further:

[My] job for 30 years was to anticipate changes in the economic trends that were not expected by others, and,
therefore not yet reflected in security prices.

Too many investors look at the present; the present is already in the price. Youve got to think out of the box and
visualise 18 to 24 months from now what the world is going to be and what (level) securities might trade at what a
company has been earning doesnt mean anything, what youve got to look at is what people think a companys
going to earn and if you can see something in 2 years thats going to be entirely different than the conventional
wisdom, thats how you make money.

Soros Japanese trade in 2012 and 2013 is the best modern example of the master riding a forward looking idea to
enormous gains.

After the 2011 Fukushima disaster, foreign investors fled Japanese financial assets. Pessimism surrounding the
struggling economy was extremely high.

There were talks of a nuclear holocaust as people became concerned about a radiation fallout. And the
Eurozones sovereign debt crisis (happening at the same time) didnt help either.

Together they fueled risk aversion across global financial markets, causing the Japanese Yen to strengthen relative
to other currencies.

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The stronger JPY caused Japanese exporters to earn less after currency translation, which meant their stock prices
struggled as well.

For nearly a year after the Fukushima disaster sent prices tumbling lower, the market did next to nothing. Valuations
were cheap and depressed.

No one was interested in Japan. Investors were convinced the country would continue its decades-long battle with
deflation.

With all this negative sentiment, the market completely overlooked Shinzo Abe taking leadership of the LDP in
September 2012

But Soros didnt.

Forbes reported that Soros was actively participating in the Japanese equity markets while being short their
currency as early as October 2012.

Abe-san only assumed the role of Prime Minister in December, meaning Soros firm was early in anticipating the
Abe variables potential effect on Japans asset markets. He was positioned before reality materialised.

Anticipating how variables (that the majority arent thinking about) could change current security pricing is
the hallmark of a successful speculator.

We all know what happened after that.

PM Abe pushed for his promise of ending deflation and the Bank of Japan (BOJ) launched its aggressive
monetary easing programme in April 2013.
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The JPY got crushed and Japanese equities took off.

An investor using either traditional valuation metrics or plain old technicals would likely have been reluctant to
foray into Japan before Abe-san was elected (there would be no buy signal according to their framework ). But Soros
was able to stay ahead of the crowd and capitalise when the unexpected situation materialised.

This is macro investing on a higher level. Learn to anticipate!

(II) False Trends Learn To Play Them!

Soros once said there are 3 realities:

1. Things that are true

2. Things that are untrue
3. And things that are reflexive

He believes we need to differentiate our circumstances to understand these 3 types of realities. In particular, he
emphasises defining false trends which occur when a belief is founded on false assumptions, but many
believe it.

Since theres nothing in financial markets that can be determined for sure (with 100% confidence), false trends
and reflexive realities are prevalent.

According to Soros, false trends can be so dominant, that they move financial markets, causing a cascading effect
on asset prices and secondary effects that reinforce the initial false beliefs. This reflexiveness creates a false reality,
which is exactly how bubbles form.

Soros believes you can make money from these trends, even when you know theyre false. Doing so requires
establishing positions at appropriate times while maintaining objectivity and flexibility. And of course, sticking to your
risk management plan is key.

The steps to exploit a false trend are:

1. Analyze assumptions to determine if theyre true or not

2. Identify false trends based on those assumptions
3. Evaluate how feedback loops form and affect the fundamental reality
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Dont strive for an ideal or perfect explanation in the markets. Be sober, analytical, and pragmatic. Seek to invert
your thinking and understand all possible viewpoints.

Big questions of our time like Is China imploding? or Are cryptocurrencies the future? are issues that fall into these
realities. Whether theyre true or not doesnt matter to the master speculator. What matters is whether you can
exploit them to profit!

(III) Look For Experimental Economics

Soros is constantly on the lookout for financial situations where theres a great amount of experimenting.

Experimenting with complex systems like economies generally leads to imbalances and unintended
consequences. Soros loves to exploit these. As he once said, the accumulated drawbacks of specific
imposed economic models simply provide a playground for financial market speculators.

Is there a government meddling with the free market (capital controls and such)?

Is there a central bank, for whatever illogical reason, pegging its currency?

These are circumstances that pique Soros interest. Hes ruthlessly speculated in many of these situations during his
career. The most famous example is his bet against the Bank of England in 1992.

There was also another situation in the 1990s where Soros observed that the boom in Asian economies would
reverse and come crashing down if liquidity conditions changed.

The stage was set as most Asian economies had their debt denominated in hard currencies like the US Dollar, while
they booked their revenues in their own local currencies. Additionally, many Asian central banks maintained a peg to
the greenback to help them tap into international debt financing.

This was a classic reflexive scenario where a strengthening USD would cause severe economic contractions
throughout emerging Asian economies. A stronger dollar would also lead an even stronger dollar as the situation
reinforced itself, trouncing the Asian economies.

This eventually forced Asian central banks to break their dollar peg after finally being overwhelmed. Soros
positioned himself in several markets like Thailand, profiting from the 1997 crisis.

Macro dislocations, far-from-equilibrium situations, politicians meddling with free market affairs these are all
playgrounds for the macro speculator. Look around you is there any experimental economics going on?

(IV) Fade Extreme Investor Positioning

In December 2012, activist investor Bill Ackman went public in his crusade against Herbalife (HLF). He was shorting
the companys stock while accusing it of conducting a huge pyramid scheme.

Ackmans war against Herbalife also sparked billionaire battles as other well-known Wall Street tycoons took sides.
The most prominent of them all was Carl Icahn, who went long HLF and publicly sparred against Ackman, debating
his claims.

It was reported that Soros went long HLF sometime in the second quarter of 2013, which spurred a rally in the stock
price. About 2 years later, Soros fully exited his long position during the third quarter of 2015.

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Soros slipped in and out of the stock while Ackman and Icahn were playing tug-of-war over who was right

We dont know wholl eventually be right, but we do know that Soros profited during that tug-of-war.
Regardless of his fundamental view, market sentiment and positioning gave Soros the opportunity to profit
off a gigantic short squeeze.

Look for popular trades or overcrowded positions. You may agree with the consensus view, but if most participants
are positioned that way, you may want to fade them.

This fourth point may be unorthodox, but thats how the Palindrome played the game. Remember, youre here to
make money, not to prove whether your opinion is right or wrong!

Review:

1. Be Forward Looking

Anticipating how variables (that the majority arent thinking about) could change current
security pricing is the hallmark of a successful speculator.

2. Learn To Play False Trend

Analyze assumptions to determine if theyre true or not

Identify false trends based on those assumptions
Evaluate how feedback loops form and affect the fundamental reality

3. Look For Experimental Economics

Governments experimenting with complex economic systems generally leads to imbalances

and unintended consequences ripe for exploitation by smart speculators.

4. Fade Extreme Investor Positioning

When everyone is on one side of the boat, sometimes it pays to take the other side!

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