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The Speculator
3
lessons from ace investor George Soros
Rules divined from a long
friendship: keep something in reserve; go for the win -- and while
you can be friendly while doing business, be careful about doing
business with friends.
By Victor
Niederhoffer and Laurel Kenner
Many acquaintances, knowing that I used to trade
for legendary fund manager George Soros, have been sending me his
new book as well as a new biography -- "George Soros on
Globalization" and "Soros: The Life and Times of a Messianic
Billionaire." After a while, they call to see what I thought, hoping
for deeper insights.
As
a measure of the interest, I haven’t received so many gift copies of
a book since the dark days of 1997, when losses in the Thai and U.S.
markets forced me to close my hedge fund. The gift book of choice
then was "Tuesdays With Morrie." I received 45 copies of it, not to
mention three tapes, presumably to help me come to terms with the
idea of death.
Editor's note: Laurel Kenner is on vacation this week.
I never did read "Tuesdays With Morrie." I haven’t read either
of the new Soros books either, although I intend to, as the maestro
is endlessly fascinating and I enjoy his insights on every subject.
George and I spent 15 years as business associates in a state of
“best friendedness,” frequently speaking on the phone three or four
hours a day and playing tennis three times a week. I did learn a
couple of things from him that I used as the basis for developing
further insights. I think they will provide readers with a unique
perspective, and I’ll share them in a moment.
In the interest
of full disclosure, however, I must say that I have not taken the
liberty of interviewing George or any of the friends we have in
common. The reason is that George has chosen at this time not to
have any contact with me, concluding our last communication with the
words, “No hard feelings.” And I do not wish to embarrass any of our
mutual friends by requesting privileged information about
him.
The lessons I learned from George are as
follows:
Always use two cans of
tennis balls
George is one of the few people I have ever
played tennis with who as a matter of course buys two cans of new
balls and uses them in a set. Generally, his approach is to use
three of the balls for practice and then to use the second can for
the match. The value of this is that often, the balls get lost when
you play on crowded courts. By having a reserve of three balls, you
can still play a reasonable game without wasting half your time
retrieving balls.
As applied to the market, if you have an
investment that loses you a lot of money, it is good not to have
everything invested in it, and to have a new can of investments, if
you will, in reserve so that you can still keep playing without
wasting your time doing such things as searching for a new job or a
loan, or taking out a second mortgage on the house.
Be willing to go for the win or ace if
survivorship is guaranteed
In all candor, I am a better
tennis player than George. But in almost all the close games I have
played against him in doubles, he has been the victor. The reason is
that when it gets to the wire, George invariably goes for the lines
on his ground strokes, attempts an ace on his second serve and
rushes to the net behind his first or second serve. He knows that
fortune favors the brave. If he has a chance to make a killing in a
market, he is not afraid to put an important proportion of his chips
into it.
The amount of money he invested in speculation that
the British pound would be devalued in 1992 represented a rather
staggering proportion of his assets at the time. (I am relying on
published accounts on this, as opposed to any knowledge I might have
gained.) The result was fame and fortune.
The willingness to
stay on the offense in life-threatening circumstances is a great
trait to have. Western novelist Louis L’Amour’s heroes, when
threatened with danger, immediately go on the offensive.
Friendship based on business is
better than business based on friendship
George has always
been a master at separating the personal from the business life.
When I first met him, we realized that we didn’t agree about
anything. George liked to go with the trend; I have never bought an
up market or sold a down one. George liked modern dance; I like
classical music. Most of all, George believed even then in a mixed
economy, one with a strong central international government to
correct for the excesses of self-interest. I believe in the power of
the market to give consumers the quantity and quality they want in
timely fashion, in the power of incentive to create a constantly
increasing plenty, and in the power of competition to distribute
that plenty harmoniously and bountifully to the deserving consumer.
Yet we agreed at the outset to bury our differences. Our
friendship developed out of the ability of each to make money for
the other, and the respect we felt for each other.
As might
be expected, hardly a day passed that George was not beleaguered by
numerous friends introducing him to a prospective deal or requesting
that one or another of his foundations donate to a fantastically
worthwhile project. In fact, one of the great unintended
consequences of my no longer being in the Soros firmament is that I
no longer get 10 requests a day from my friends for introductions.
To the three to five daily inquiries I do receive, I automatically
respond: “George doesn’t talk to me anymore, so if I were to
recommend you, I’m afraid it would be an albatross around your neck.
However, his secretary’s telephone number is . . . and the address
is . . . and if you don’t mention my name, I’m sure you’ll get as
fair a hearing as anyone else.”
George has a patented method
for dealing with introductions and proposed business ventures from
friends. The toughest negotiator and most careful investigator he
knows is an 80-something Hungarian who, like George, was forced to
flee the Holocaust. This friend routinely investigates any business
deal with the skepticism of Rumpole and the persistence of Inspector
Javert, the pursuer of Jean Valjean in "Les Miserables". He is an
accountant, a lawyer, an investment analyst and a banker rolled into
one, with the skepticism and negative checklists of each of them
within his envelope of scrutiny. Occasionally, if a deal promises at
least 50% a year guaranteed, with no chance whatsoever of a loss,
after much analysis and delay to let any negatives emerge, he might
consider investing some of his own money in the deal. (I must add
that I love this man and hold his ability and analytic capability in
awe.)
But now, back to how George uses this unique set of
talents. When someone presents a proposal, George is likely to say:
“Show this proposal to my Hungarian friend. . . . If he likes it,
then I am willing to invest in the deal on the same terms to a
moderate extent on a pari passu basis with him.” End of
interview.
The obvious application of these rules to the
market and life is so vast and so personal that I will leave to the
reader the areas of application. However, I reprint below the
reflections of a friend of mine, a hedge fund manager, concerning
business and friendship:
The real question is, was the friendship based upon a
principle of being an unconditional friend? If it wasn’t, then
what does the word “loyalty” or other important words that guide
us philosophically, ethically and theologically really mean? What
does the word “friend” mean, therefore, to a man like Soros…and
does he really need any?” I cannot close without expressing
my admiration for George’s work in creating a more open, educated
and healthy society. He has created an untold, tremendous wellspring
of benefits for millions of people.
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