On 16 September 1992, the British government spent billions trying to defend the pound, raised interest rates sharply and still had to give up. The pound left Europe's Exchange Rate Mechanism, and the day became known as Black Wednesday. On the other side of that trade stood George Soros, whose fund reportedly made around $1 billion. In Part 8 of Legendary Investors, we look at the man, his theory and the risks of macro investing.
Early life
Soros was born in Budapest, Hungary, in 1930. He survived the Nazi occupation as a teenager, emigrated to England in 1947 and studied at the London School of Economics. There he was strongly influenced by the philosopher Karl Popper, whose ideas about the limits of human knowledge shaped his view of markets.
He moved to New York in 1956 and worked in international arbitrage and research before starting his own fund in the early 1970s with Jim Rogers. It later became known as the Quantum Fund, and over the following decades it delivered very strong returns.
What is reflexivity?
Traditional theory assumes markets move toward an equilibrium price that reflects fundamentals. Soros disagreed. His theory of reflexivity says that participants' beliefs affect prices, and prices in turn change the fundamentals, creating feedback loops.
A simple example: rising house prices make banks more willing to lend, because the collateral looks more valuable. Easier lending pushes prices even higher, which encourages more lending. The loop can run far beyond reason, until something breaks and it runs in reverse. Soros described this boom-bust pattern in his 1987 book The Alchemy of Finance.
For Soros, the job was to spot these loops early, ride them, and recognise when they were about to reverse.
Black Wednesday, briefly
In the early 1990s, Britain had tied the pound to the German mark within a band. But the UK economy was weak, while Germany kept interest rates high after reunification. Keeping the pound in its band required high UK rates that the economy could not afford.
Soros and his then lead manager Stanley Druckenmiller concluded the peg was unsustainable and built a very large short position against the pound. When the government gave up and let the currency fall, the trade paid off. It showed both the power of macro analysis and the willingness to bet big when conviction is high.
Key lessons from Soros
- Markets are often wrong. Prices reflect beliefs, and beliefs can be distorted.
- Size matters when you are right. Soros reportedly said it is not whether you are right or wrong, but how much you make when right and how much you lose when wrong.
- Admit mistakes fast. He was known for reversing positions quickly when evidence changed, viewing fallibility as normal.
- Survive first. No single trade should be able to destroy you.
- Think in feedback loops. Ask how prices might change the very fundamentals people are watching.
He was not always right
Soros suffered big losses too, including during the 1987 crash and in some bets around the dot-com bubble and the 1998 Russian crisis. Macro trading involves leverage and fast-moving markets, and even the best practitioners face painful periods.
Beyond investing
In 2011, Soros Fund Management returned outside investors' money and became a family office. Soros has given large sums to philanthropy through the Open Society Foundations. His political giving has made him a frequent subject of public debate, which is beyond the scope of this investing series.
Can ordinary investors use his ideas?
Copying currency bets is unrealistic for most people, and leveraged macro trading can wipe out small investors quickly. But two ideas are useful for everyone:
- Watch for self-reinforcing bubbles, where rising prices are the main reason people are buying.
- Be ready to change your mind. Write down what would prove your thesis wrong, and act if it happens.
The takeaway
Soros showed that understanding human behaviour and feedback loops can be as important as reading balance sheets. His story is also a reminder that big rewards come with big risks.
In Part 9, we look at Ray Dalio, who built the world's largest hedge fund around principles, diversification and economic cycles.
Legendary Investors: the full series
- Part 1: Benjamin Graham
- Part 2: Philip Fisher
- Part 3: Warren Buffett
- Part 4: Charlie Munger
- Part 5: John Templeton
- Part 6: Peter Lynch
- Part 7: John Bogle
- Part 8: George Soros (you are here)
- Part 9: Ray Dalio
- Part 10: Jim Simons
This series is for education only and is not investment advice. Returns, dates and figures are commonly cited historical values and may vary slightly between sources. Past performance does not guarantee future results.
