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Essential reading for the advanced speculator and analyst
am 8. August 1999
This deep and profound book has been criticized by many as being opaque and unreadable. While Soros's writing style is rather obscure to say the least, this does not alter the fact that this book contains some of the most original and advanced ideas ever conceived of in the field of finance. Soros's exceptional analytical abilities shine through, despite the turgid prose. I must stress though that this is not a book for beginners - you definitely need a reasonable grasp of markets, global capital flows, and economic theory to fully understand the book.
Soros begins by introducing his theory of reflexivity. This involves situations where people's judgement of fundamentals (e.g. trusts buying and selling of stocks, or banks providing credit) can actually alter the fundamentals. For example, if banks lend lots of money to Mexico, this means Mexico can spend more and increase its GDP for a year or two. This increase in GDP then makes Mexico seem more creditworthy, so influencing banks to lend even more. Clearly if sentiment changes, the cycle can work in reverse, which will cause a self-reinforcing crash, as happened in Asia in 1998.
While his theoretical framework is interesting, the real strength of this book is in Soros's analysis of the financial markets from the 1970s into the mid-80s. It is fascinating to see him analyse the major structural changes of that era (e.g. the savings and loans fiasco, the incredible boom and bust in the dollar, the stockmarket bull run, the 3rd world debt crisis, the collapse of OPEC) as they unfold, and even better to see how he fits this information into his real-time trading. As Paul Tudor Jones says in the introduction, this was at a time when technical systems trading was at it height, yet here is Soros using pure fundamental analysis to short oil at $28-31, and then riding the eventual collapse down to $11 per barrel. Even more impressive was his huge ($1 billion+) short dollar/long DM/long Yen position in 1985, which he added to after the September Plaza Accord and held from Y242/DM2.92 all the way to Y155/DM2.07. Soros made his name on the British pound, but his profit there was much less in percentage terms than on these incredible trades from the mid eighties, which helped propel the Quantum fund to a 126% gain over 11 months.
Unfortunately, Soros ends the book badly. His analysis of his own trading is interesting, but he then veers off on a discussion on the merits of regulation vs free markets, and proposes an international central bank. While this is an interesting topic, Soros seems a little out of his depth at times, and completely fails to consider many important issues (e.g. the restrictions on individual freedom that regulation imposes; the fallibility and sometimes excessive power of regulators, etc). He also give a short description of the 87 crash (where he lost hundreds of millions) which is quite interesting.
But despite this anticlimax, this book is absolutely essential reading for anyone interested in speculation, economics, financial markets, and who wishes to develop an understanding of global events. Soros, for all his flaws, is undoubtedly one of the greatest financial minds of all time, and it would be a remarkable achievement for any intelligent person to read this book and not come away much wiser.