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George Soros: Learning From The Trading Master Who Broke The Bank of England
01:02:23
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- [00:00]
Brett Shafer
Foreign.
- [00:05]
Ryan Henderson
Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
- [00:26]
Brett Shafer
Foreign.
- [00:33]
Co-host / Narrator
Welcome to Chit Chat Stocks, the podcast that helps you discover your next great investment. Today we have a Super Investor Research report where we are looking at George Soros, one of the most controversial figures in the investing and political world, but has one of the most impressive hedge fund track records and at least in its prime, of any investor out there. So we're going to be going through his investing life, the bets that he made, the rationale and the thinking behind those bets, and whether or not it's applicable to us as individual investors. And if there's anything we can steal or any lessons we can take away from his investment career. But before we get into his life, his investments lessons, want to give a quick thank you for everyone that's tuning in. If you are listening to this for the first time, please go ahead and follow our show on Spotify, Apple or wherever you get your podcast so you never miss an episode. And if you really enjoy us, please please, please give us a review. It helps our podcast grow so much. So thank you if you have and if not, feel free to do so. Brett, what inspired you? You picked George Soros here. What inspired you to look at him as a super investor?
- [01:50]
Brett Shafer
Well, really it's the returns. 25 we're going to get into 25 years. I tried to estimate 28% annualized returns for his investors in Quantum Fund while he was generally running it. And even though he's outside of our value investor mindset, it's a little bit of different stuff, which I thought was kind of educational for us researching this episode and I hope will be educational for the listeners as well. It's just learning from someone who has done so well and before you get into his early life and upbringing, I'll say regardless of what you think of him, if you're one of those people that is an extreme anti Soros person, I don't care either way. If you love him, I don't care either. We're strictly looking at him as an investor. What we can learn from him. Because clearly, unless you're one of the few people out there that has produced 28% returns for 25 years, and if you have, you're probably not listening to this podcast so I'd say almost every, every single listener has not put up his performance. So there's something we can learn from him to try to do well as investors ourselves.
- [03:00]
Co-host / Narrator
Let's start with his early life and upbringing. I, I, sometimes it can be too much to look at all this stuff, but I do think it's kind of fascinating when we've done all our Super Investors series episodes. It's, you do start to recognize some patterns of great investors, something that they had in their early lives. Typically that's some sort of hardship that led to like frugality in the early days and understanding like value and being value conscious early on. But also typically they are very bright as well from an early age. And that seemed to be the case with George Soros. So Soros, for those that don't know, he is super old. I think he's almost 100 years old at this point. He was born into a Jewish family in Budapest, Hungary in 1930. For those that know their history, being Jewish in Hungary in the 30s and 40s was a really difficult time. His family was fortunately able to obtained false identity papers and they survived the Nazi occupation of 1944, 1945. And his father, apparently, from everything that I read, was actually sort of a bit of like an unsung hero in, in Hungary at the time where he helped a lot of other Jewish families conceal their backgrounds and obtain false identity papers so they didn't ultimately get deported and brought to internment camps and stuff like that. So he really was sort of a hero. And, and George Soros saw that early on and was one of, one of the fortunate ones to, to survive following the Second World War though. So keep in mind 1944, 45, he's about 15 years old. Afterwards, Soviet occupation started to turn Hungary into a communist state, which Soros says has encouraged him or encouraged him at the time to emigrate as soon as he could. So in 1947, at the age of 17, Soros left on his own to go to London where he studied at the London School of Economics and worked part time as a railway porter and as a nightclub waiter. Kind of funny there, nightclub waiter. It's not really the job you picture I imagine out of George Soros, but that's true.
- [05:16]
Brett Shafer
Yeah.
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Co-host / Narrator
Anyway, in his book, which is, it's called the Alchemy of Finance and it basically is sort of our primary reading for all the content we got in this episode as well as some other stuff also. But he describes this portion of his life as having many false starts. So early on in his studies. He wanted to be a philosopher. And if you read his book or listen to interviews of him, you can tell pretty quickly that he was very much like an academic. He even. His theory of reflexivity, which we'll talk about in a bit here, started initially by his understanding of the laws of nature and how he found that the same laws actually don't apply in economics. And like many great investors, he took issue with academia's understanding of economics and he sort of paved his own way. But when you read his book, you'll get it right away because he uses, frankly, a lot of really big words constantly throughout the book. And it was a bit of a hard read at times, but he could.
- [06:17]
Brett Shafer
Have used an editor. I think this could have been a 100 page pamphlet with a few case studies at the back. But it's okay. We grind it through it so the listeners didn't have to. Yeah.
- [06:27]
Co-host / Narrator
Anyway, he was, you can tell he kind of had that philosophy edge and economics really wasn't. It's not like he knew from 12 years old that he wanted to be an investor like Buffett. It's very different. So. However, eventually he decided while he was studying at London School of Economics, I don't want to be a philosopher, I want to study economics. I want to understand markets and investments. And in 1954, so he is 24 years old at this point, he got a job at the London merchant bank Singer and Friedlander. He initially started as a clerk, but eventually moved into the arbitrage department where he was apparently very successful advising clients on currency arbitrage. And when you go back through his history and early life, this is probably the moment that shaped. Shaped his future success the most. Obviously having a generally strong intellect and worldview shaped by his philosophy studies is nice, but he even talks about the fact that the lessons and knowledge that he gained from his university studies actually did not apply much at all to his understanding of economics and success in investing. He basically had to relearn because if you apply the laws of nature to markets, it teaches you a lot of the wrong lessons. And that's basically his entire theory.
- [07:44]
Brett Shafer
He disagreed with everyone.
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Co-host / Narrator
Yeah, yeah, exactly.
- [07:49]
Brett Shafer
And that can make you a lot of money if you're right. If you disagree with everyone and you're correct.
- [07:53]
Co-host / Narrator
Yeah. And he really didn't start taking these. From what I could tell, he didn't start like making. Placing huge bets on variant views until kind of later in his career when he was managing his own money. For the most part, he was just a successful currency trader. At these firms, which didn't really take that much talent. I'll explain why in a second. But anyways, a couple years into the job, a colleague of his had a father that ran a brokerage house in New York and recommended to George Soros that he should apply. So in 1956, Soros left for New York and he continued working as an arbitrage trader. Only this time he was specializing in European stocks. Once again, very successful in this role. But I would personally argue that it didn't really take a ton of like unique insight to capitalize on these mispricings because it was basically just if, if, unless I'm misunderstanding, it was mispricings based on the countries that you're in. So if you have the resource, and if you're talking about European stocks, if you have the right resources and the right connections across the Atlantic, you can probably make money in that field. And he continued in that field until 1963. There is the Kennedy administration imposed a tax on the purchase of foreign stocks and bonds by U.S. investors. This was known as the interest equalization tax. And this basically wound down Soros's European arbitrage business. So he was still working at the firm. It was just, he basically just describes it as. It sort of curtailed demand for a decade. And while he was at the firm, the firm gave him $100,000 to start a fund of his own, just implement his own trading strategies. So I'm sure he was doing more on his side and on his own prior to this. But that was 1966, and that would eventually pave the way for what we now know him for the most, which is the Quantum Fund.
- [09:51]
Brett Shafer
And let me take it over with the Quantum Fund. They started it in 1968, I should say just really sorrow started it in 1968 with 4. $4 million of investor money. And that grew to $2 billion by the time the second edition of the Alchemy of Finance was written, which is the main source for our podcast episode through 1993. We didn't get exact figures throughout this. So this is kind of ballpark stuff I'm trying to connect for some of the data points that get thrown out throughout the book. But again, 1968, $4 million, $2 billion by 1993. And in the book, Soros mentions, and this is a key point, that there were few new capital raises and that the fund grew 300 fold for initial investors. So if we ballpark these as pre of the fees paid to the Quantum Fund, or even if it's post fees. It could be a little bit different. We can look at an estimate over from 1968 to 1993 for 25 years. If you were in an LP of the Quantum Fund, you generated a 28.25% annual return in 1998. Stan Druckenmiller, who we have covered on the show before, if you want to look details into his strategy, which is very similar to Soros but slightly different, he took over the Quantum fund in 1988 and Soros slowly moved away from active investment management and focused more on philanthropy in the early 90s. But we're going to cover basically what he did. Any ideas from the alchemy of finance, which is really this 1968 to the late 80s, early 90s. And you gotta ask, how did Soros do so well? I mean, over this time period, I think this is better than what Buffett did. The greatest investor ever. Now Buffett's done it for a longer time period. And if you look at Source, it matches what his partner Stan Druckenmiller produced at Duquesne asset management. About 30% for 30 years. Generally about the same. There are very few professional investors that come close to these return levels. I think if Ryan and I looked at each other, we said we could do 15% for 25 years. We would go, all right, I sign up for that tomorrow. So these are very good returns. It puts you in the 99.999 percentile. And similar to Druckenmiller style, which you can hear again on the podcast we talked about on him last year, it's really comes down to we'll get into some of the details here, but having a flow flexible, what they call matrix of investing tools. He'll go Source will go long or short, stocks, bonds, currencies, commodities, options, you name it. There's going to be some case studies we look at, but they'll look at anything. It's not like he goes, okay, I'm only going to be small cat Valley, or I'm only going to be a commodities guy, or I'm only going to be a bond guy. He's looking at anything anywhere he can find value. And I think before we get into reflexivity, one philosophy that Soares is known for in regard and above all others is portfolio management and position sizing. I'll kick it off with a quote from Druckenmiller talking about position sizing that encapsulates his overall trading mentality. Source's overall trading mentality quote. Soros has taught me that when you have tremendous conviction on a trade. You have to go for the jugular. It takes courage to be a pig. It. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you're right on something, you can't own enough. Although I was not at Soros management at the time, I've heard that prior to the Plaza Accord meeting in the fall of 1985, other traders in the office had been piggybacking George and hence were long the yen going into the meeting. When the yen opened 800 points higher on Monday morning, these traders couldn't believe the size of their gains and anxiously started taking profits. Supposedly George came bolting out the door, directing the other traders to stop selling the yen, telling them that he would assume their position. While these other traders were congratulating themselves for having taken the biggest profit in their lives, Source was looking at the big picture. The government had just told him that the dollar was going to go down for the next year. So why shouldn't he be a pig and buy more yen? Alright, there's other parts to that quote, but I think that encapsulates a lot of his thinking. A lot of people look at, oh well, you can't go broke taking a profit. This actually, I think relates. We'll talk about this throughout the episode a little bit to what we just talked to, an interview with David Gardner where you have to look at your opportunity cost across all these situations. You have to look at, okay, well, even if, if we're talking stock investing, even if Netflix has been a huge winner for me, it's now 20, 30% of my portfolio. Do I think it's going to be fine over the long term? Am I going to be giving up too much by trimming this down, even if it's slightly overvalued today? And with Soros here, he said, look, this was in the Plaza Accord, we're not going to go into the exact details there, but essentially the government had a mandate that they're going to devalue the dollar. It was probably 100% going to happen. So we thought, this is a high conviction trade, why wouldn't I size this up even further? Once we got that information confirmed now toss it back over to you Ryan with a discussion question. Do. What do you think as a whole, were the characteristics of Soros that allowed him to excel? Was it natural intellect, flexible thinking, contrarianism, or is it kind of you add in this I can't, I have nothing to lose mentality as basically a refugee of The Nazis and the Soviet Union. Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds and more, all from a single unified platform. 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- [16:10]
Co-host / Narrator
I do think there's a definitely an element of the I've got nothing to lose, I've had it worse type of like mentality. The, the last part of your quote here, I think is important. He's. This is Druckenmiller talking. He says Soros is also the best loss taker I've ever seen. He doesn't care whether he wins or loses on a trade. If a trade doesn't work, he's confident enough about his ability to win on other trades that he can easily walk away from the position that I think is very rare. The, the willingness to just step away and say, I'll make money somewhere else. Because so often you see it where people get locked in or fixated on certain positions. They've done the, the mental work, the, the, the research to have some sort of a take on that position, and then they have a hard time letting it go. So, yeah, I think maybe his ability to move on and have sort of an air of arrogance or confidence, I should say, has definitely helped him.
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Brett Shafer
ARR. Conviction. But the ability to go, eh, I was wrong. Let's do another one.
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Co-host / Narrator
Yeah. The other thing that I wanted to mention here, because I don't think we're going to mention it anywhere else in the episode, but one sign of a great investor because there isn't that much openness about the bets that Soros has made over his life. Like, you see the big ones, you see the ones where it was huge currency bets that get talked about. But he's made a, he's. I'm sure he's had tons of other successful investments that aren't as well broadcasted. But when an Investor has multiple proteges that go on to be successful investors themselves. And they talk positively and kind of give praise to the people that they learned from. That's a big sign. So Stan Druckenmiller, we've talked about him on this show before. Phenomenal investor. Learned a ton from Soros. The second one. Do you know who I'm going to mention here, Brett?
- [18:14]
Brett Shafer
I think so, but I don't want to spoil it for the listeners.
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Co-host / Narrator
Take a guess.
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Brett Shafer
The current treasury secretary.
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Co-host / Narrator
Correct. Scott Besant, who I believe was actually responsible for his bet against the yen. It was either the yen or. Yeah, it might have been the Thai bot.
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Brett Shafer
He was in charge. He's later after Druckenmiller left. This is.
- [18:38]
Co-host / Narrator
He joined in 91. I saw.
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Brett Shafer
Okay, but he, he was there like Druckenmiller left in the 2000s, but he. Bessant was there later.
- [18:46]
Co-host / Narrator
Yeah, and Bessant became I think the manager of one of the funds.
- [18:50]
Brett Shafer
But yeah, now we're going to talk about later. He's trying to be on the other side of potentially some reflexive currency trades against Argentina. But we'll save that for later.
- [19:00]
Co-host / Narrator
Yeah, let's talk about the theory of reflexivity. So this is probably one of the reasons that Soros is so well known in the investment industry that and generating 28% returns for a sustained period of time. But he introduced this concept in his book the Alchemy of Finance. I'm going to give a technical explanation of his theory and then I'll describe it as I understand it. So here's the technical definition. In social systems such as financial markets, participants understanding and beliefs influence their actions which in turn change the reality they are trying to understand. Creating a dynamic, self reinforcing feedback loop between cognition and reality that differs from the laws of nature. My definition, perception can impact real results. And here's a. I'll give a real life example right now. OpenAI. The perception of OpenAI right now is incredible. It's like peak reputation. Everything they touch turns to gold. Everyone wants to be associated, associated with them. People want to invest in the company which raises their valuation and gives them more access to capital, which in turn gives them more firepower to invest, which actually probably improves their chances of being a more valuable business in the future. Like if they're able to raise more money and employ better people and do more business deals with other, you know, businesses. The reputation and perception of OpenAI is benefiting the actual business. Another way in which this shows up, okay, every single week we Talk about this OpenAI has announced some partnership with another company and yesterday as of this recording, I think maybe two days ago, they announced a deal with AMD. AMD stock jumps 28 on the day. This is, Businesses want to be associated with OpenAI now, so they can probably get better terms just by having the partnership or association of OpenAI which actually helps OpenAI's business. Right. So this, that's kind of, I'm applying the theory of reflexivity there to kind of the micro level, the company level. And in some ways this kind of goes against the typical mantra of value investors, which is in the short term the market's a voting machine, but in the long term it's a weighing machine. Because it's basically saying that the voting.
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Brett Shafer
Machine impacts the weighing machine.
- [21:36]
Co-host / Narrator
Yes, exactly. My take. I'm kind of on the fence here because on the one hand the value investor in me is saying companies with absurd valuations will eventually have their day of reckoning. Like eventually gravity is going to bring them back down to earth and it can't last. But the version of me that works for a private VC backed company, I see this on a regular basis. When a company has a great reputation, other companies are more receptive to partnerships and B2B deals. They respond to your LinkedIn posts more or your LinkedIn messages. For example, when you have a certain company in your bio, you get more talented employees that want to work for you. You get better valuations from VCs which attracts more attention, attracts more talent. So on the micro level there's definitely some legitimacy to this theory. There's also I wanted to touch on this here because it's kind of related to theory of reflexivity, but it's kind of its own theory as well. He talks often about the anti equilibrium theory and what, what he's basically saying is he believes in the complete opposite of the efficient market hypothesis. Instead of believing that there is so much information out there that the markets are so competitive, there's so many different investors that all prices are basically efficient. That's kind of the efficient market hypothesis. He says all the investors are humans, all the humans are biased, which means security prices are actually almost always mispriced, not perfectly priced, they're almost always away from their true value in some way. So, and I think I would, if you're putting me in one camp, like on one side of the the scale there's the anti equilibrium and then on the other side there's efficient markets, I would definitely skew towards the anti equilibrium.
- [23:34]
Brett Shafer
I'm in the same Boat. I think if you're like not even a true historian, even the amateur one like ourselves of say the last 100 years of financial market history, the anti equilibrium theory makes so much more sense. If prices were efficient they would all trade like Constellation Software and would just go up into the right.
- [24:02]
Co-host / Narrator
Google is up 70% in the last five months. Markets aren't efficient because everyone's biased.
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Brett Shafer
Yeah, I agree, that's a great example where we can even go back further. Early 2023 there was an insane bias against Google. The information out there was not accurate or perceived accurately because the first model they tossed out there, Google Bard, didn't work very well even though their internal models were as good or just as or better than ChatGPT. And they put those out there and those are the fundamentals. Right. But the perception was the complete wrong thing. And now we look back today, Alphabet was completely mispriced. And this isn't a show on the efficient market hypothesis, but I still can't believe that's a real thing because you can look at a Soros, a Buffett, a Druckenmiller, a Greenblatt, a Lilou, they shouldn't be possible. Those are the quote unquote six Sigma events that shouldn't happen and they happen over and over and over again. And there's probably 10 times as many individual investors who aren't famous that we don't know the returns because they're rich and they don't need to go on tv.
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Co-host / Narrator
Yeah. What are your thoughts on the theory of reflexivity? Do you have anything else to add to what I had?
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Brett Shafer
So let me add on that I agree with source that this is a common phenomenon in financial markets and beyond to try to connect with the listeners because it's something that is hard to think through. It's very qualitative. He's kind of going through as like a professor with all this stuff. Look, people are biased and it can influence the outcome of the events. Even if the quote unquote fundamentals say otherwise at the current moment. You know, this is backward looking stuff. You can look at history, politics, sports, business, you name it. I think sports can be a great analogy to help connect the listeners Here everyone says Pele is the goat in soccer. You know, maybe, maybe they do, maybe they don't. I'm just saying in this example they do. Therefore everyone else believes that and it is true. Even if a decent percentage of the population may come to a different conclusion if they did not know what the prevailing bias was, they were coming fresh to the situation they didn't know everyone else's opinions. And I think another adjacent phenomenon related to reflexivity that can be helpful in financial markets is what it's this kind of a growing topic of some kind of pop psychology that people might be interested in. It's memetic desire. I believe that can be helpful when doing also your fundamental analysis and looking at prevailing biases in financial markets from other investors. The definition is quote all human desire imitates the desire of others, almost always without awareness. The term memetic indicates that this imitation is not conscious. Memetic desire frees us from acting merely out of the appetite or instinct and makes friendships and other kinds of human flourishing possible, but also can lead to violence. Blah, blah, blah, blah, blah. Long story short, we humans unconsciously desire to be like other people we see. I think this is similar to what happens within a reflexive situation where everyone says the future is AI. So therefore the future is AI. It's self fulfilling. And that's why I think a lot of the science fiction stuff turns into science fact, because that's what we see and consume in it. People then end up creating it are inspired by what science fiction writers do. It's also why I think people investing in a stock, because Sydney Sweeney is an advertiser is not that it's not dumb. I wouldn't say that's irrational.
- [27:26]
Co-host / Narrator
I think it can be boiled down to perception can impact reality, it can impact the future. Palantir is probably a good example. If we're going back to the company level like they have in every aspect an absurd valuation. But they've probably done more deals and they've probably closed more customers because people have heard about them and they think there's like it lends credibility to them as a business because they have such an absurd valuation and people think so highly of them.
- [28:02]
Brett Shafer
Yes, and I think this is a good time to add on that Soros is not necessarily looking for riding reflexivity. He's looking for timing the shifts in reflexivity or equilibrium when a trend either starts or reverses. What I guess technically the same thing. This can be an opportunity to make huge profits in a short time period. So he wouldn't necessarily, and we'll talk about some of his case studies on stocks. He wouldn't actually necessarily have to go long Palantir. He might actually look for a catalyst to go short and then it can go reflexive in the other direction because reflexivity can go negative. And when this shifts, there's a again the opportunity to make Two, three, four, five times your money within a very short time period. And this is why he says, if you are early to see a bubble forming, invest in it, don't shy away from it. That's a paraphrase, but that's essentially what the quote means. You can take that for investing in bubbles or if a bubble pops now.
- [29:05]
Co-host / Narrator
So let's talk about how he made money. Because true, some examples, like you said, when the bubbles pop, not only can you make money, but you can make money much faster. And he did that on a number of occasions. Why don't you go through kind of the most famous example, unless you've got any other topics, which is him, what everyone refers to as breaking the bank of England.
- [29:30]
Brett Shafer
Yeah, I was going to. My discussion question was around examples around reflexivity in the 21st century, but I think we've already covered that. Let's go into the British pound. Any student of market history like ourselves has heard of this famous, famous bet from George Soros and Stan Druckenmiller. Druckenmiller did find the idea, but they did it in together. I think, as Joker Miller says, I found it, so sized it correctly because it was 100% guaranteed to work and it was to short the British pound in 1992. But if you're also like us, you can get crisscrossed on over how these currency trades actually work. Because if you come from the stock investing crowd, you may feel dumb asking the question how exactly do you go long or short currency? And let me try to explain it as simply as possible. Foreign currency trades are done in pairs, meaning you simultaneously buy one currency and sell another. If you buy US dollars and sell Mexican pesos and the dollar appreciates versus the peso, you earn a profit when not just converting back to pesos. Actually wrote that down wrong. When you end the trade, if it's different. Again, if you have like your base currency versus two currencies, that is not your local currency. If you're in the euro, you know the euro and you have something US dollar, Japanese yen, that's completely different than if you just have, you know, euros already and then just put money into yen. Now, currency exchange rates are determined by the supply and demand of currencies. I will say he went through the details of this in his book. We can't go through all the formulations that impact that, you know, it can come from economic trade, capital inflows or speculative investments. Essentially it's just what can impact the flow of currency from one country to another or the Exchange of one currency for another. For example, if there's a bunch of imports, you're importing products, but you are selling or sorry, you are sending your currency, say the United States currency from the US you get the imports of cars and you put the money, the dollars go to Korea, Japan, China, what have you, and they get converted there to the local currency. There are a lot of interests, yeah, as I mentioned, but the general rule of thumb is that speculative capital is attracted by a rising exchange rate and rising interest rates. The higher the rate on a country's treasury bonds, the more attractive it is to investors. I mean, you can just ask someone, what would you rather buy? I guess this hasn't, this has changed recently. But would you rather buy the Japanese bonds at 0% or the U.S. treasury bonds at 4%? I think the answer is obvious. Unsurprisingly though, Soros sees reflexivity as a key driver of the currency market. It's not just that high interest rates and a positive exchange rate drive demand for a currency, but the expectations of high interest rates and a rising exchange rate that can reinforce on itself. I think this seems rather straightforward for currency markets. Essentially your branding matters if all players are biased extremely negatively, for example Turkey, Argentina. The fundamentals can be self reinforcing if just a small slip up occurs if they don't trust you. Now the opposite happen in the United States where people go the deficit, the trade imbalance, the currency should start depreciating, blah, blah, blah, blah. But it hasn't because that reputation has been stellar for so long. And that brings us to the British pound. Just for historical context to go quickly through this. In 1973, currencies began freely floating with the ending of the Bretton woods agreement. This happened after the start of the Quantum Fund, I think should not be discounted because investors were just building out this whole market. I think there was probably a lot of inefficiencies. People didn't know what they were doing. And if you were smart and can kind of develop strategies here, there were opportunities, especially during the 70s, 80s and early 90s and this allowed the Quantum Fund to take a big advantage of it. Now in 1979, Europe adopted a European exchange rate mechanism to stabilize currency exchange rates. For example, we're talking about here the British pound and the German mark. If an exchange rate got to an upper or lower part of a stated band, the central bank was required to intervene and stabilize the said exchange rate. And this was kind of a bridge period before the full euro adoption. In 1990, Britain joined the ERM, the European exchange Rate Mechanism. However, they did this at a. Looking back with hindsight, a dumb high Exchange rate of 2.95 British pounds to German marks. It should have been lower. It made exporting out of Britain expensive. And yeah, like Britain's economy, they had higher inflation than Germany. Reunification in Germany caused higher inflation in Germany then and then higher interest rates which caused again Britain to react and maintain a strong exchange rate by increasing their own interest rates and that.
- [34:26]
Co-host / Narrator
You're confusing me a bit here, Brett.
- [34:28]
Brett Shafer
So, okay, okay, let me go, let me try to pull that back. Essentially Germany's economy is doing better than Britain's. Britain had high inflation, but then Germany had reunification from, from east and West Germany and that brought some high inflation in Germany for a small time period, which caused Britain to react because again, they needed to maintain the peg. So they had to raise their interest rates and they brought their interest rates into the teens. Now this brings in source and the other speculators, they believe this is propping up the British pound versus what would be the quote unquote natural rate with free markets, which was going to be as every month went on every day lower than what they were propping it up as. And they began to short the pound. He borrowed billions of pounds from banks and then sold them to buy German marks. He then went public and began to tell people about it. This brought in other traders, started to create a flood of currency out of the pound which the government had to defend by buying pounds in the open market to maintain the exchange rate peg. Now this public decree seems to have made the trade self reinforcing and maybe is why Soros called it the perfect trade or 100% guaranteed to happen. Because he created his own reflexivity in this situation. Then it went black. Wednesday, September 16, 1992. The pound finally broke, collapsed 15% versus the German mark and 25% versus the US dollar. And since the Quantum Fund had extreme leverage in this trade, the returns for them were much higher. I heard it was a billion dollars in a single day. Remember, the fund 1993 is worth $2 billion. So I think they doubled their value in a single day.
- [36:13]
Co-host / Narrator
This episode is presented by our brand new partner, Portcido. Do you know what your actual investment returns are? Well, if you're like me, then the answer is probably no. And that means you need to try Portsito. Portcito is the ultimate portfolio performance tracker. With Portcido, you can easily aggregate your various brokerage accounts and instantly see your actual investment returns. That includes all your investments too stocks, ETFs, even crypto, if that's your thing. You no longer have to guess what your returns are. With Portcito, you can find out in minutes whether or not you are actually beating the market. And that includes a dividend tracking dashboard and even tracking of short positions. I have been looking for a tool like this for a long time because I was sick and tired of tracking it manually and Portcito has finally built it. It you want to find out what your real returns are, check out Port Sido. The link will be in our show. Notes.
- [37:06]
Brett Shafer
Any confusion thoughts? Anything here? Ryan I. It's hard to go through audibly.
- [37:12]
Co-host / Narrator
But yeah, the, the mechanics of a big currency devaluing is always tough. A little tough to talk through because there's typically a ton of moving parts. So. And the, the lead up to it is what creates it. And usually there's so much that goes into the lead up that it's sometimes hard to explain. But yeah, he. They made, they were extremely confident in this bet and they sized it up accordingly. And I'm trying to find the quote here because I remember Soros at one point. I think I'm. I'm just going to have to paraphrase. So Druckenmiller came across this. If I'm not mistaken, he was the one that first came across this and presented it to Soros.
- [37:59]
Brett Shafer
Yes.
- [38:00]
Co-host / Narrator
And Druckenmiller was like, okay, I'm gonna bet on it. And he put this kind of tiny position together. And Soros was like, I wish I had the exact quote. But it was like, are you kidding me? You've presented what you've just presented to me is a bulletproof investment and you want to bet 5% of the fund. No, he sized it up in a huge way and sort of this is going back to the position sizing where he's like, if you are this confident in a bet, you should size it accordingly. And think about it.
- [38:33]
Brett Shafer
They can't lose because it's not going to go higher. There's an upper band.
- [38:36]
Co-host / Narrator
Right. So yeah, he made 50 in a day or so for his fund because of sizing 100%.
- [38:45]
Brett Shafer
I think if the fund size was 2 billion in 1993 and they said the profits were a billion, so that's 1 billion to add a billion. That's 100% pretty good.
- [38:55]
Co-host / Narrator
Let's. So if this is too much currency talk for you listeners, you can feel free to skip ahead here. But I'm going to mention one more, one more currency bet that he made against the Thai bot in 1997. And then we'll talk more about what's applying today and whether or not this is useful and lessons we can take away and all that. So I'm going to go through and he didn't make as much money from this trade, but it's nice to walk through some of the mechanics of it to, to see if you can ever kind of replicate this. My I probably say most of the people investing or listening to this, this isn't the typical type of trade, but it kind of, it's fun to study. So in the 1997 Asian financial crisis, Soros spent a billion dollars against the Thai baht of his 12 billion dollar fund by selling currency futures. So in effect shorting. I'll mention what happened technically and then we can go back through what Soros saw leading up to this. But big shout out to Valdosta State University. I've never actually heard of this university, but they had a phenomenal report on everything that he saw. So here's a snippet from the report. He says George Soros took out forward contracts to exchange bought into dollars at the rate of 26 baht per dollar. In January of 1998, Soros advertised Thailand's problems and sold all of his bot. Thailand defended the bot to by buying up the surplus when Thailand started to run out of dollars. The bot was floated on July 2, 1997. I'll explain what that means. Floated here in a second. When they did that, the bot fell from $1 for US$1 for 25 baht in June of 1997 to $1 for 54 baht in January of 1998. So basically the value was cut in half of the the Thai currency.
- [40:51]
Brett Shafer
He was short the bot.
- [40:53]
Co-host / Narrator
He was short. So essentially he doubled his money on that.
- [40:55]
Brett Shafer
Essentially shorting a stock. Yeah.
- [40:58]
Co-host / Narrator
What led up to this? So prior to the crisis from 1985 to 1996, Thailand was one of the fastest growing countries in the world. They had a fixed exchange rate below equilibrium that resulted in the accumulation of foreign reserves. So I know that's all a lot, but basically just remember that this was not what you typically see today, where it's like how much, how much is 20 pesos worth in US dollars? And when you look that up, that's a floating exchange rate. It's changing every day. They had a fixed rate. They also had 5% higher interest rates than most of the world, which made a lot of foreign money want to flow into Thailand.
- [41:37]
Brett Shafer
But they also like how people have Japanese Yen and then they go into Mexico and get 11% today. Right.
- [41:45]
Co-host / Narrator
But they also had capital controls that prevented money from flowing in for a long time. So their solution was to set up the Bangkok International or Bangkok International Banking Facility bf with the goal of attracting a large amount of money from the us, Europe and Japan that would then be loaned to Thailand's neighbors. The money did flow in, but it didn't want to flow out of Thailand because Thai interest rates were so high. So they got the money from foreign investors, but they weren't able to deploy it to Thailand's neighbors. So they had all this money but not enough productive assets in reality to put the money into which led to this major oversupply of goods. So if you're, if you have tons of money, you start building. And this led to a whole bunch of excess supply. So according to this report, and the excess supply typically leads to a speculative bubble as well. So according to the report, they had 150% excess supply relative to the market demand of iron. They had 192% excess supply relative to market demand of automobiles, 200% in Bangkok, housing, 195% in petrochemicals, 300% in private hospitals. All of this is to say that basically they were oversupplied, in the words of this report. And I thought the sentence was perfect. And it probably explains why this, why these, why nations have currency issues to begin with. It says when more is built than can be sold, borrowers default on their bank loans. That's what happened in this case. And the flood of defaults meant that Thailand needed money. So here's what happened and this is all precursor to basically the catalyst. As I mentioned earlier, the bot was floated on July 2, 1997. So it went from a fixed currency exchange rate like I talked about, to a floating one. And essentially the market repriced it. And over the, whatever it was four months the Thai bot got cut in half, which meant Soros doubled his money.
- [43:55]
Brett Shafer
Seems like he just profits on economists being not smart.
- [44:03]
Co-host / Narrator
Yeah, probably. And there's probably some level of maybe greed, not from Soros, but. Well, yeah, probably from Soros, but from the countries they, you know. Yeah, things are.
- [44:15]
Brett Shafer
They don't want to go through a year of tough times, right.
- [44:19]
Co-host / Narrator
And they don't, they don't want to be the one that causes the crisis. And so now, now they can point fingers and say it was the, it was the guy who was vocal about shorting our currency. But in reality they would have had to come to terms with this eventually. So it, yeah, let's, let's talk about real world scenarios today. He made a ton of money from this. But I think it's kind of interesting with what's going on in Argentina now. So maybe you can go through that case study.
- [44:47]
Brett Shafer
Yeah, we got kind of lucky researching this. There's a bit of a currency crisis ongoing there. We don't know what's going to happen. This is on October 7, 2025 that we're recording this. So if anything happens after this, which I guess we're releasing this the day after, but just know that if the country collapsed or something like that, we didn't know at this time they are having currency issues. Here is a current byline in the Wall Street Journal. The country's central bank no longer prints money to finance deficits, but a run on the currency could still cause prices to surge. I think astute listeners will note the importance not only of the fundamentals here, but the financial paper of record that is getting a lot of influential people reading it, talking about Argentina's financial troubles and having. If you're one of the economy people or the politicians in Argentina and you see the quote run on the currency in newspapers, you just don't want that whatsoever because that is when the reflexivity can kick in. And here's another quote. Let's see. The odds didn't look good. Previous presidents had failed to address one of inflation's root causes, government deficits. Without access to capital markets, Argentina often turned to the central bank to finance its deficits by printing money. Efforts to rein in spending were stymied by resistance in Congress and by the public. Now we all know Javier Milei has broke that cycle and is trying to continue to break that cycle, but it is difficult. And Argentina has historically run a peg, which I think should sound familiar. Quote. Long after other countries allowed their currencies to float relatively freely, Argentina persists with a peg for fear devaluation will rapidly feed through to import prices and, and inflation. Now they've kind of gone to a staggered peg where they're going to slowly devalue it with kind of decreasing that band to try and maybe move on to a free floating because it is kind of the big last leap they need to make, I would think, to become a sustainable economy and get out of that kind of socialist Peronius stuff. Without going into the nitty gritty details here, it looks like a situation where Argentina may be forced to devalue the currency which could open up traders to pile in. I don't know, maybe what's funny is that Bessant Scott Besant, the Treasury secretary of the US try to work with Argentina to fix this issue. But there could be some of his old colleagues that are on the other side of this bet.
- [47:14]
Co-host / Narrator
Yeah, that is interesting. And it's all, it's kind of, I guess, reassuring if you are maybe an Argentine citizen to know that Scott Besant, who probably has your best interest in it's sort of the forefront of his policies. He is as familiar with currency relations and currency arbitrage as anyone. This is such a good example of reflexivity. So. Or the theory that Soros has, which is you see all these concerning headlines about what is it, the Argentine peso? Is that what they call it?
- [47:54]
Brett Shafer
It's the peso, yeah.
- [47:56]
Co-host / Narrator
Is so self reinforcing because let's imagine, let's take an example, let's say I was an American soccer player and an Argentine soccer team wants to sign me to go play for them. This actually happened in Turkey recently, which is why I'm using the analogy. I, I would be worried getting paid in Argentine pesos. I would immediately convert that to dollars.
- [48:20]
Brett Shafer
Or Bitcoin or what have you.
- [48:21]
Co-host / Narrator
I'm going to convert it to dollars, I'm going to try to get it out. And in the case that I saw, they just demanded that they be paid in dollars. So someone did this, an American player went to Turkey and were like, I just want to get paid in USD. That's all. Like, I'm not taking the Turkish lira. And you can trade it on your own if you want. But that is self reinforcing because then no one wants to hold whatever your nation's currency is. So it is. I totally see how this can lead to reflexive nature and people basically creating the issues themselves. Their perception is impacting the real results.
- [49:03]
Brett Shafer
All right folks, before we move on, we need to tell you where we get our financial data. Fiscal AI Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including company specific segment and KPI data. That means Amazon, AWS revenue, SoFi's total members, Google's paid clicks, growth and literally millions of more data points. They've also got earnings call transcripts, ownership data, company specific research reports and much more. If you want complete financial data at your fingertips, Then you need to check out fiscal AI and if you use our link fiscal AI chitchat, you will get 15% off any paid plan. Again, that is fiscal AI chitchat. The link will be in the show notes. Plus you toss in politics in there. People want to get elected. They don't want to cause economic crisis even though it could happen for a year. And that's what's necessary to get the economy on the right footing. All that good stuff. Let's talk though about some underfollowed stuff with Soros I think can relate for a lot of our listeners is how he invested in stocks. He actually talks about this in detail without going through kind of, you know, specific returns or case studies. We can look at what he has used philosophy wise in the alchemy of finance to invest in stocks. There's a couple of quotes here, I think I can just read one and then we can talk about, you know, quick discussion around them. And there's. Here's one from the alchemy of finance. It took an intensely personal emotional form. Testing was closely associated with pain and says sex with relief. When I asserted that quote, markets are always biased, I was giving expression to a deeply felt attitude. I had a very low regard for the sagacity of professional investors and the more influential their position, the less I considered them capable of making the right decisions. My partner and I had a malicious pleasure by selling short stocks that were institutional favorites. But we differed in our attitudes to our own activities. He regarded only the other participants views as flawed. While I thought that we had as good of a chance as being wrong as anyone else. The assumptions of inherently flawed perceptions suited myself. Critical attitude. Here's my discussion question. Does this actually make him a contrarian value investor? Because, or, or just an investor trader, you know, go short, whatever. This is not that different than other value investors I see out there.
- [51:37]
Co-host / Narrator
Yeah, once again it's a bit of a. It's long winded but complicated quote. But I think it goes back to him being sort of impartial to the results. Like you see this where he says we differed in our attitudes towards our own activities. He regarded only the other participants he used as flawed. While I thought basically I could be wrong and he's willing to make these bets even knowing that he could be wrong. And I think it's such, such an interesting trait to have as an investor of being totally agnostic to what you're trading. Almost like true, you know, he stripped emotion out of it like oh, I lost money. Hm, okay, my analysis was wrong. I don't care about the company. It's a token for me or whatever. Like he, it's not really how I invest.
- [52:25]
Brett Shafer
But he's trying to test his academic theories, it seems like.
- [52:29]
Co-host / Narrator
Yeah.
- [52:30]
Brett Shafer
And what's interesting again, I don't think it's that different than value investors looking for low downside, high upside situations. Here's another quote on technology stocks climbing the wall of worry. The stocks were selling at very low multiples of anticipated earnings and the main argument against them was that they would not be able to grow fast enough to meet the demand and eventually IBM would move in into the market and kill them. The argument turned out to be valid, but not before these companies became large and prosperous and investors became eager to throw money at them at high multiples. Those who had been willing to fight the negative bias were amply rewarded. Is this not what we try to do sometimes, Ryan? Is this not what the Molly fool does just without, you know, trading in and out as much?
- [53:19]
Co-host / Narrator
Yeah. And I think if I'm understanding this quote correctly, high valuations can help a business. They actually can. Yeah, it's interesting.
- [53:28]
Brett Shafer
Early. He wants identified trend early.
- [53:30]
Co-host / Narrator
Yeah, it helps to get into a business where the multiple then expands and then helps them because then you're making money and there's less of a paradox of yes, the high valuation helps but multiple compression can hurt your returns. Amazon's kind of a good example of that. I mean I think Bezos would have been successful no matter what, but the access to capital during the dot com.
- [53:56]
Brett Shafer
Raise money in 99 they might have gone bankruptcy.
- [54:01]
Co-host / Narrator
Yeah, the dot com bubble was the perfect time for them to be successful and that actually leads into. At some point we should discuss Bezos's speech that he did recently because he talks about that a little bit but let's. That's a topic for another time. What does Soros Asset Management invest in today?
- [54:18]
Brett Shafer
Yeah, we wanted to look at this. We do this every time. It's not that helpful on this one I'll say there is just really easy to do this because on fiscal AI which use our link in the show note, check them out. They have a super investors page with all Big 13 Fs that are updated regular and you can look at that plus the history which I think is quite useful. It's now the Soros family office which is just called Source Asset Management and it's just internal family money. I think it's not run by Soros or Druckenmiller, even Bessant. I'm not sure who runs it and it just seems highly diversified. But I thought there were some interesting holdings, even if they were small in the grand scheme of things of the 13F and that were Spotify Interactive Brokers, Rivian Dropbox and others that maybe listeners can kind of notice. We've talked about from time to time. You could see Rivian being a. Maybe a reflexive one because if they got some momentum they could raise some money. That's one that could end up being there. But I'm not sure if they're even investing in a reflexive nature or if they're just trying to be kind of a pension fund for the philanthropy. Philanthropy stuff.
- [55:27]
Co-host / Narrator
Yeah. This is one of those 13 Fs that's got very little signal in my opinion because I, if I'm not mistaken, it's basically a fund of funds now. So each fund kind of has a different.
- [55:36]
Brett Shafer
Yeah, yeah. It's the opposite of Candace Arya, which. That one. Those are quite useful.
- [55:42]
Co-host / Narrator
Let's talk lessons from Soros. This is. You and I are not really big macro investors. I, I don't think that'll change over time. We focus primarily on owning individual businesses.
- [55:55]
Brett Shafer
Really the only thing is investing in some international stocks. And part of the thesis sometimes I think is we look at maybe the currency is undervalued or overvalued but we like to have that just be a little extra juice on top of if the fundamentals work out. Would you describe that fairly?
- [56:15]
Co-host / Narrator
Yeah. Honestly, studying Soros has given me less confidence in my ability to analyze countries.
- [56:25]
Brett Shafer
Like yeah sure, it's complicated.
- [56:28]
Co-host / Narrator
It's. It's so complicated. And you. And you think like okay, I'm not. I'm optimistic about Mexico. I think they'll be more productive and they'll have higher income per consumer over time. But gauging where sentiment's at and under like Thailand had a very prosperous period prior to basically being cut in half on the currency which impacted put them into a bubble and then sort of a recession. I worry so much that it's like am I just seeing the good times right now? And that's why I think things will be better for Mexico. Am I. It's put my mind in a pretzel a bit because it's like am I. Is this the reflexive period where it's like a self reinforcing feedback loop prior to.
- [57:18]
Brett Shafer
Nah, I don't, I don't think you can look at it. It's not black and white situations. Each country is case by case stuff. Politics matter. The, you know that, that all Stuff mattered. You have to, I guess, keep up with things which you have to do with a company either way and politics and whatever the economic model of the country matters for the underlying businesses. So again, he was probably perk for this because he came from philosophy, came from studying economics. So he put that all together to build these theories for macroeconomic trading. Is it a lot harder than what we do, which is hopefully buy some quality stocks that are trading at reasonable prices and don't worry about them too much? Yes, but I don't know if it's impossible. It can just be more stressful for individuals.
- [58:07]
Co-host / Narrator
Yeah. The other thing I guess I did take away from this, that's very specific, is if a company, sorry, if a country has a floating exchange rate, that's a positive because it's more likely that recent news is priced in. Whereas if you have a fixed exchange rate, yeah, that can become a huge catalyst for a decline. And you're, you're just more at risk, I imagine. And I haven't looked at this, but I imagine most countries have floating exchange, floating exchange rates at this point. Other than Argentina as an example.
- [58:41]
Brett Shafer
I, I don't, I'm not an expert on the China exchange rate, but I believe they keep it within a band, but they could be powerful enough. That's a whole, that's, that could be a whole episode in and of itself is the, the China foreign exchange. Any other lessons before I hit mine.
- [58:55]
Co-host / Narrator
I'm not a macro investor and this probably discouraged me from becoming one even more so, but gave me a lot of respect for Soros to study this because regardless of what you think of him, and there are a lot of strong opinions on him out there, if you read his work, you will find out very quickly that he is a bright individual and he is pretty sharp intellectually. Well, maybe not anymore. He's like 100 years old, but he was sharp.
- [59:27]
Brett Shafer
Yeah. I guess another lesson is to reiterate currency risk matters and can impact you in a big way. So don't discount that when looking at individual stocks outside of your home market. I have one main lesson. It is to not be afraid of being late on a bet. I think an example for us 2023, we were in the middle of covering the rapidly booming AI theme. We had been pitched Nvidia numerous times. We knew what the company was. I think both of us, speaking for both of us here, felt it was, quote, overvalued. I was afraid to invest in it because of the risk of developing into a bubble. But today, Nvidia's up 5x or 10x from different points in 2023, which we saw. We knew it had a great management team, we knew it had a competitive advantage and we just didn't act on it because of being afraid to something turning into a bubble. Now we might look back 10 years from now and say that Nvidia is in a bubble today. But it was much easier to see in early 2023 that it was potentially forming a bubble. Not to mention that Druckenmiller himself invested in Nvidia, made his largest position. We could see that in his 13F. I think the takeaway for investing in stocks is don't be afraid of investing in a thematic stock if you believe there's a good management team competitive advantage and there might be a self reinforcing economic trend that is taking hold, such as the AI revolution. Thoughts on that, Ryan?
- [60:57]
Co-host / Narrator
No, I think you're right. And yeah, it is. It's. I wish I could go tap 2023 me on the shoulder and be like, don't discard this.
- [61:08]
Brett Shafer
Yeah, don't overthink it. Just it's. Yeah, it's a wave starting. We were there, you know, it's not like we've done bad, but it's a good lesson.
- [61:17]
Co-host / Narrator
I think maybe some missed opportunities there. Well, I think that's going to do it. Thank you to everyone for tuning in. We try to study one great investor pretty much once a month. So if there's anyone that you want us to look at, any particular individuals or investors that have a great track record, just let us know and, and we can study them. But that's going to do it.
- [61:39]
Brett Shafer
Next up, Chris Hone as a little.
- [61:41]
Co-host / Narrator
T. Chris Home tci.
- [61:43]
Brett Shafer
Right.
- [61:44]
Co-host / Narrator
Is that the.
- [61:45]
Brett Shafer
I actually don't know about him, so I'm fascinated to learn.
- [61:48]
Co-host / Narrator
Okay, well that's going to do it for this one. Thank you everyone for tuning in. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chitchat Stocks is not formal advice or recommendation. We may buy, sell or hold any of the securities discussed in this podcast. So please do your own work. Thank you again for tuning in and we'll see you next time.
- [62:23]
Ryan Henderson
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Co-host / Narrator
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Ryan Henderson
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Co-host / Narrator
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Ryan Henderson
And young Mason Moore got more done quickly uploading HD product demos and video conferencing without freezing the numbers look good.
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Co-host / Narrator
Brad, you're on mute.
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Ryan Henderson
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Co-host / Narrator
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