One of the traders and books that has had a profound effect on me has been George Soros and his book The Alchemy of Finance.
When I read that I was blown away for several reasons:
1. Firstly, the book was hard to read.
The first half of the book talks about his various market philosophies. This was a hard slog to read. I had to read every page twice, and still didn’t understand most of it. My mind likes to figure out: “How does this information apply to me? How can I use this in my trading and life?”
A lot of things in life can be simplified down to information. Does it have practical value? Does it have inspirational value?
This blog post is information – hopefully containing powerful insights for your trading and life, as well as inspiration to do something about them. When you read a book that is information. When you have a conversation, ideas and information are exchanged. When you watch TV or check the news on your smartphone, that is information.
So I always like to find information that is both directly relevant to where I am today and where I am trying to go – my goals and vision.
As the author Robert Ringer said:
“Theory of Relevance: No matter how true something may be or how much it may please you, the primary factor to take into consideration is how relevant it is to your main objective.”
But also from time to time to read and search for information about other things not directly relevant to my main objective that can aid me as well. There was a time I read a fiction book – that I normally don’t read. But I read it, thoroughly enjoyed it, and it gave me ideas that launched me on a new adventure in life in one area of my life, that is still going on today.
Therefore, I found his philosophies interesting, but I was unable to establish a clear and immediate connection to my trading. I had to simplify his philosophies and make them my own.
As Einstein once said:
“Make things as simple as possible, but not simpler.”
The book spurred me to simplify trading down as much as I could. That is what I did with my scenario based trading philosophy that I share in The Order Flow Mastery Course. And I reckon that most people do not understand the true meaning and power of Soros’s trading philosophy because they do not have these trading habits and insights that I share with people.
Reading The Alchemy of Finance is not enough. One must know how to apply it – with proper daily habits, in order to unlock the true power of such a trading philosophy.
It is important to note that there are some great traders out there, but for one reason or another, they cannot teach what they know in an easier to understand way. What they philosophize about trading, is not always how they trade and run a portfolio. There can be very wide discrepancies between the two. It is not that they don’t have integrity, it is just that they may struggle to explain to the average person what it is that they do.
In the book Hedge Fund Market Wizards, Colm O’Shea reveals fascinating information about working for George Soros:
“George Soros has the least regret of anyone I have ever met. Even though he will sometimes play up to his public image as a guru who knows what is going on, it is in no sense what he does as a money manager. He has no emotional attachment to an idea. When a trade is wrong, he will just cut it, move on, and do something else.”
2. His Monster Trading Performance during 1985 and 1986.
So much for those people who say “size” hurts performance. He was one of the largest, if not the largest hedge fund back in 1985, and he generated a triple digit return raking in +$550 million in trading profits for his fund. The fund equity shot up from $450 million at the beginning of 1985 to $1 billion at the end of that year.
Now, market conditions were very favorable to his strategy, but he still had to go out there and have the discipline and guts to both find the trades and place the trades in the size that he did.
The next year in 1986 he followed it up with another +50% return.
This is all documented in his trading diary in the second half of the book.
3. He Operated in Many Markets
The biggest revelation I had is just the scope of financial markets that he traded. He didn’t just have positions in the currency market. He was trading individual U.S. stocks, foreign stocks, S&P futures, bonds, commodities, etc. He traded the world!
He seems to have known and developed the philosophy that if you are trading multiple markets, preferably uncorrelated, you have a higher chance to not just profit, but profit big. There are no guarantees, as he has had losing years as well. But your probability is higher, if you have a system in place for managing the information flow associated with following multiple markets.
This philosophy of operating in multiple markets wasn’t known by that many people back in the 1970’s and 1980’s. But Soros knew. Jesse Livermore knew as well in the early 1900’s as he speculated in both the stock market and in commodities as well.
Stanley Druckenmiller who worked for George Soros for a decade also started to figure this out in the 1980’s as well. He recently described his thinking in a speech:
“By the early to mid- 80’s commodities were having dramatic moves, currencies were having big moves, bonds were having big moves, and I was developing a philosophy that if I can look at all these different buckets and I’m going to make concentrated bets, I’d rather have a menu of assets to choose from to make my big bets and particularly since a lot of these assets go up when equities go down, and that’s how it was moving.”
Even today, there are not that many large hedge funds that truly operate in many markets like Soros did in the 1980’s and 1990’s. And of the ones that do, they don’t do it at the size and scale that Soros operated at. He was willing to take big positions on certain occasions.
Most of the large hedge funds today operate under a lower volatility trading philosophy. They consciously choose lower volatility and thus their return potential is usually capped. They don’t usually try to go for +50 % or +100% years. They are usually satisfied with +10% to +25% returns if they are with low drawdowns.
Back to The Alchemy of Finance. This book caused me to seriously redouble my efforts to move beyond forex trading and into new financial instruments. I knew I could apply virtually the same strategies I used in the forex market to other markets as well, with perhaps some slight differences.
That eventually led me to finding an amazing trade in the equity markets over the past year and half in Apple Stock. I alerted the members of the Mastery Course to the trade in late 2013. I even created Video Training to describe the complete thinking process and strategies I used.