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Weekend reading: George Soros should buy some tracker funds

Weekend reading

Good reads from around the Web.

I enjoyed Josh Brown’s post about George Soros over at The Reformed Broker.

For the most-of-you who don’t follow the markets with the fanaticism of a provincial town dweller whose hitherto sub-illustrious football team has just become the plaything of an oligarch and half-spent its way to Wembley, the short story is Soros – the now 85-year old speculator who famously “broke the Bank of England” in the 1990s when £1 billion was real money – has reportedly decamped to his traders’ offices, where he has been directing them to assume the position ahead of what he sees as a likely financial crash, by buying hedges and gold.

Is Soros right? Who knows. Virtually exactly the same story did the rounds during the panics of earlier this year, and the most generous way you could mark his outing then was to say he was potentially early. His track record in recent years has been erratic.

Billionaires will be billionaires. They have wealth to protect and those who made it as macro-investors in the 1980s and 1990s are invariably scornful that a sub-2% yield on government bonds (at best) will do the job.

But what relevance their actions have for the average investor is questionable.

It’s not just that Soros has a different problem to you and me (his mission statement being entitled How I Plan To Protect My $23 Billion And Change).

It’s that he’s playing a different game to nearly everyone who might read such stories.

As Brown says:

“Like all of the greatest traders, Soros doesn’t have a process.

I mean, I’m sure he does, but it is his instincts that have made him wealthy, not a checklist.

He’s got a highly sophisticated way of viewing the world and more wisdom and experience than anyone else, but in the end, he pulls the trigger on gut.

Don’t be shocked, this is true of all the greats: Tudor Jones, Stevie, Tepper, etc.

You’ve heard of Smart Beta? This isn’t that. This is called Brass Balls Beta. It won’t work for most people, but it works for them.”

Soros’ own son once debunked the master’s cult book The Alchemy of Finance by saying that, actually, pop just sold his shares when his backache played up. Reflexivity – Soros’ central insight that market participants change markets – was just a theory he grafted on after the event, said the familial whistle-blower.

Funny, but don’t get me wrong. I judge Soros to be one of the very rare greats who did generate alpha for himself and his clients, although we can surely attribute +/- $22 billion of his fortune to luck.

But I also agree with Brown that what these rare giants do can’t be bottled, copied, or run past the approval team at the pension advisory committee.

Be the billionaire next door

EU Referendum fears might be prompting those of us who aspire to be mini-Soroses in our spare bedrooms churn our portfolios like we’re making ice cream, but more level-headed investors like my co-blogger will be sensibly sticking to their plans.

If you’ve diversified your portfolio properly in the first place, it will be ready for times like this. Owning assets that might offset the pain isn’t an accident, it’s a design feature.

For instance, a sensible UK investor’s passive portfolio will have much of its equity allocation overseas, because that’s where most of the world’s money is.

If the pound crashes after a vote to Brexit, these holdings will rise in value as their local currencies appreciate. The vast majority of their earnings will be derived beyond our shores, too, so they should shrug off any recession here. (The same can be said of the majority of UK FTSE 100 companies, incidentally, as they make 70% off their money internationally. But they might smell funny to investors for a while.)

True, global stock markets might all go into a rout over fears that the EU will now inevitably be pulled apart, but that’s a separate issue – and a reason why you own other assets such as bonds, cash, and gold.

In an alternate reality: The slow and steady Soros

George Soros is a creature of the markets, and I’m sure he’ll be trading on his deathbed. It’s also true that you don’t make $23 billion by owning a bunch of passive funds.1

But to keep $23 billion, once you’ve got it?

The elderly Soros would probably do just as well to read our article on the various lazy passive portfolios.

Okay, and perhaps add a few Caribbean Islands and Monets to the mix…

From the blogs

Making good use of the things that we find…

Passive investing

  • 11 signs you own the right portfolio – Jonathan Clements
  • Institutional investors are delusional – Meb Faber
  • What are negative interest rates and what do they mean? – Vanguard

Active investing

Events

  • The first Evidence-Based Investing conference [is in New York…] TEBI
  • Lars Kroijer is repeating his talk in London – Eventbrite

Other articles

Product of the week: ThisIsMoney reports that The Royal Mint has begun to sell gold bars to pension savers. There’s an annual fee of 1% + VAT, which includes storage costs. A cheaper option is its Signature Gold product, which works like BullionVault in that you can buy any amount of gold, whereupon an equivalent portion of the Mint’s horde is allocated to you. It never leaves the premises – you’d eventually sell it back to the Mint. This option costs 0.5% per year plus VAT, which is still a bit more expensive than a gold ETF but presents a slightly different risk profile. Also see my article on how gold is taxed.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

  • Millennials shun active managers [Search result]FT
  • Interview with Jason Zweig [Podcast]Econtalk
  • Know your target-date fund [US but relevant]Morningstar
  • iShares: ETF cannibalism that worked [US but interesting]ETF.com

Active investing

  • Alpha Female: Women in money management [PDF]Citywire
  • Active firms may need to shrink assets by $10 trillion – Bloomberg
  • Bond rally breaks records as investors race to safety [Search result]FT
  • Brexit could herald historic gold rush – Interactive Investor
  • Time to buy emerging markets – ThisIsMoney
  • Goldman Sachs: Stocks to beat the S&P 500 – Bloomberg

A word from a broker

Other stuff worth reading

  • Prices, property, pensions, and the EU: 30 questions – Guardian
  • How to profit from building your own home – Telegraph
  • The squeezed upper middle is no such thing [Search result]FT
  • Man buries £850,000 of gold in his back garden – ThisIsMoney
  • Sorry JP Morgan, smart guys still wear suits [Search result]FT
  • Tinder is changing the restaurant business – Washington Post

Book of the week: If you want more Jason Zweig after you listen to the podcast interview above, you might like The Devil’s Financial Dictionary.

Like these links? Subscribe to get them every week!

  1. Short of a Weimar Republic-style hyperinflation scenario. Which would be a Pyrrhic way to enter the billionaire’s club. []
  2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 13 comments… add one }
  • 1 Dan June 11, 2016, 2:55 pm

    I read a lot of financial blogs, this is by far the best – keep up the good work gents.

  • 2 John from UK Value Investor June 11, 2016, 3:30 pm

    I see you’ve linked to the ‘squeezed middle’ issue twice. I ended up doing a waffly comment on Fire v London’s blog so I won’t blab on here, other than to say that along with the squeezed middle there’s a squeezed top and a squeezed bottom as well.

    Everybody almost always feels squeezed and even the super-rich get yacht envy. It’s human nature and most people think another 20% on top of their current income will solve everything, but of course that’s what the people already earnings 20% more are saying as well…

  • 3 @algernond June 11, 2016, 3:51 pm

    Interesting read from the FT on how ‘smart guys still wear suits’

    One thing that has helped prevent me from being conned a few times over the years has been to never trust a man in a suit.

  • 4 SemiPassive June 11, 2016, 6:16 pm

    Interesting to see some chatter on gold. I swapped a little money from equities to a gold ETF last week and intend to build my position further and to make it a permanent holding. Already up 5%.

    I agree it will be one of the best assets to hold in the event of BREXIT, certainly in the short term chaos. More so for us than George Soros I might add, its the pound and perhaps the euro that are going to get trashed, not the dollar.

  • 5 The Investor June 12, 2016, 11:57 pm

    @John –I agree with your general point, and you’re surely right about human nature. But I do believe something is shifting in terms of expectations and the ability to meet them of course it’s probably also true that that this shifting has been going on forever, too. Perhaps it’s happening faster now — in a working life instead of over generations?

    @algernond — I recently bought a new suit. Looks great. Designed to bamboozle. 😉

    @SemiPassive — Yes, I own more gold than ever currently. Very very uncertain fortnight ahead, and sadly likely more to come after that it seems. 🙁

    @Dan — Cheers!

  • 6 IZ June 13, 2016, 8:32 am

    An important thing to know about Soros, and I think something that was key to his success, is that he wasn’t afraid to change his mind. Actually he was known to change his mind quite a lot. So while the papers are still reporting that he is preparing for a crash, who knows? Maybe by now he’s actually bullish 🙂

  • 7 The Investor June 13, 2016, 9:50 am

    @IZ — Couldn’t agree more. Like a very sharp sword it’s dangerous in 99% of hands, but for Soros it’s a weapon. (The Alchemy of Finance is fascinating for revealing these regular 180 degree turns).

  • 8 Gregory June 13, 2016, 11:45 am

    You can copy a trick but not a talent.

  • 9 bestace June 14, 2016, 9:15 pm

    The Meb Faber link seems to be broken – looks like it’s now at:

    http://mebfaber.com/2016/06/08/institutional-investors-delusional/

  • 10 The Investor June 15, 2016, 9:04 am

    @bestace — Thanks, fixed now!

  • 11 Mathmo June 15, 2016, 9:41 am

    So many links, so little weekend…

    Fascinated by the UKVI article this week suggesting (golly it’s a long time since I’ve seen one of these articles) that an index is cheap on CAPE terms. Of course there’s a bit of me that’s grown used to VUKE at 30 so 27 always *looks* cheap, but nice to see the analysis.

    And then there’s that dividend cover problem. Does this mean that the long-term nature of CAPE is hiding a sudden dip in earnings? Isn’t that Shiller’s point that short-term is nothing? Should dividend cover bother me, since if I truly believe that it’s earnings (as a proxy for FCF) that drive value rather than distributions?

    Two great bits of analysis unearthed there and food for thought. Thanks TI.

    And then the markets took a dive yesterday making the whole thing much much easier. VUSA at record* highs? VUKE at record lows? What a time to be rebalancing. Sterling can’t live down here forever can it? She can’t keep rates low forever? (Suggests the same little voice that told me bonds can’t keep rising…)

    Wait — I’m a believer in the passive, aren’t I? Perhaps with a little tilt on the side of the angels… So my gambling is limited to an evens side-bet with a friend on whether we’ll see 6,500 before 5,500 (made in Feb when the sky fell in). Discipline, 007, discipline.

    * technically not, but whatever.

  • 12 The Investor June 15, 2016, 10:52 am

    @Mathmo — Cheers for your thoughts. I’ve been meaning to ask John at UK Value Investor if that yield is historical or forecast, as it wasn’t clear to me from his piece. If it’s historical than while no doubt things would still look at least tight, there could be a certain amount of non-cash writedowns and so forth hitting the earnings portion, particular in the energy, mining and banking sectors…

  • 13 Millennial Moola June 15, 2016, 2:36 pm

    I’ve been saying that Europe and EM are cheap for four years now, and compared to US markets have been absolutely walloped. Hoping for a turnaround soon or I’m going to have some difficult explaining to do

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