Friday, January 30, 2009

George Soros Recaps His Investment Decisions in 2008

From a sidebar to an article by George Soros in yesterday's Financial Times about the financial crisis ("The Game Changer"), a self-assessment by the billionaire investor:


Positions I took were too big for ever more volatile markets

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.

Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.

I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.

That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.

On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.

We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.

I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.

Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.


Sivaram Velauthapillai said...

Soros: "Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. "

Is that really true? I disagree with Soros and think the US$ is actually seeing genuine strength due to capital flight (US$ is a safe haven.) We won't know, except in hindsight, but the US$ has been strengthening all of this year. Due to the successful actions of the FedRes, the credit lockup is thawing so why is the US$ still strong?

I think Soros is wrong here. I'm bullish on the US$ and think it will strengthen or at least maintain its present strength as capital flies away from the risky stuff into a safe haven.

DaveinHackensack said...

I think you're right that the USD has benefited from a flight to safety so far, but I wonder if it might be a good idea to move some money into Aussie dollars this year. The Aussie dollar has gotten hammered by the commodity correction, but the country seems to be in better shape than the U.S. in number of ways (e.g., having no net debt, richer in natural resources on a per capita basis, positioned to benefit from the long term growth of India and China, etc.).

Sivaram Velauthapillai said...

I'm bearish on commodities, though it's not a strong sentiment (i.e. I wouldn't short them or anything,) whereas I believe you are still bullish on the sector. So my view differs.

Betting on the commodity currencies such as AU$--Canadian dollar, Brazilian Real, and Russian ruble are other possibilites--does not seem like a high probability bet. There is a possibility of commodities rallying by summer--they are always volatile and swing widly--and you may see the AU$ and others strengthen. But I am not confident it will be a long-term trend. I personally think that the commodities bubble has burst and the sector will go out of favour, like how technology sector, except some specific companies, hasn't been in favour for a decade.

Similar to how I think it is unlikely that, say, BHP Billiton, an Australian mining giant, is going to go back to its past $400 billion market cap (4x current price,) I think these commodity currencies won't go back to what they were last year. I can see the currencies going out of favour.

Although you are right about Australia having more resources, I believe it still runs a current account deficit, has low savings, and may have property bubbles (not on the scale of USA though.) Its location, close to Asia, will help in the long run but I'm not sure it matters until the world economic growth recovers (which I don't see for many years.)

Having said all that, I think if you are simply going into AU$ for diversification purposes (rather than a bet on a macro case) then it is worth pursuing. Not just the AU$ but others like Yen, or even C$, is worth considering. But a bullish macro bet, although possibly rewarded in the short term, seems uncertain in the longer term.

DaveinHackensack said...

The Canadian dollar is a commodity fueled currency as well, but Canada's economy is closely linked to that of the U.S. Of the others you mention, the Brazilian Real is a possibility, but I wouldn't touch Russian currency. The first time I went to Brazil on vacation, back in '02, I flirted with the idea of buying the Brazilian equivalent of Treasury bonds, but I had no idea how to do it. Too bad, because that would have been a home run, just based on the currency movement alone -- the Real back then was about 4 to the dollar.

Last summer Daniel Wahl mentioned a Brazilian ag stock that trades only on the Bovespa in Reals. That might be worth looking at again.