Key insights
1. Economics and stock markets don’t reflect reality as they’re greatly influenced by thinking actors (people) whose actions affect outcomes
Soros believes that perceptions drive markets. According to his “reflexivity theory,” the perception of the value of a stock simply reflects the expectations of investors about its future returns, which can in fact be wrong. These speculations impact the price of the stock, influence investor behavior, and therefore create a feedback loop where perception affects reality.
Soros’ bottom line is, therefore, to avoid investing in companies that don’t have strong foundations. While these may seem to be growing, their success could be based merely on investor expectations rather than substantial underlying value.
2. Markets are amoral
According to Soros, markets are not a force for moral good – they are agnostic, meaning they do not favor any particular moral stance. The crucial aspect is not whether decisions are morally right or wrong, but rather whether they result in a profit or a loss.
Soros stresses the importance of focusing on outcomes and the actions (or reactions) that lead to them.
Although many fundamentalists believe in market equilibrium, which assumes that investors are rational and markets will efficiently allocate resources, Soros disagrees. He argues that the concepts of reflexivity and human uncertainty undermine the idea of market equilibrium. Despite this, Soros suggests that these factors can be exploited, as he further explores in his next point.
3. The best time to make money is the market chaos
During times of disruption, those who can remain composed find the most promising opportunities. Investors can leverage the misunderstandings or desires of others by leaving emotions out of it and making rational decisions, focusing on companies' fundamentals before deciding to invest in them.
4. Power, in the form of events and relationships, has a significant impact on free exchanges
Soros writes that the global financial system comprises two types of countries: those positioned in the center and those on the periphery. International debts are denominated in the currencies of the central countries, granting them the advantage of being able to borrow in their own currencies. Peripheral countries do not have this privilege.
This puts center countries at a distinct advantage, reflecting that power relationships and political events truly impact the markets.
Center countries have the liberty of using countercyclical fiscal and monetary policies as it’s all in their own currencies. They can leverage these policies, for instance, by implementing stimulus measures during economic downturns to offset the fluctuations of economic cycles. In other words, it’s the center countries’ game and peripheral countries have to abide by their rules if they want to play.
5. Objective economic factors smooth pricing distortions in the long-term
The author’s final key point is that it’s not all just irrationality and perception. Most imbalances in exchange-traded asset pricing – influenced by the psychology of investors – are smoothed out over the long run.
This strategy is exemplified by perhaps the most prolific investor of all time, Warren Buffett. Indeed, he tends to purchase the stocks of companies he intends to invest in for decades, as shorter time frames do not allow for the full realization of fundamental analysis.
