Investing in currencies or digital assets is not easy. Look no further than the many who’ve gotten burned at the start of that fateful yet treacherous year 2018.
Thankfully, we don’t have to be clueless when trading.
There are professional traders and lessons that we can take from people who have had success within investing in the past.
One of these successful individuals are George Soros.
While he is certainly a controversial figure shrouded in various political situations there is much one can learn from his trading process.
After all, he has a net worth of more than $6 billion and has formed several funds since his initial trading days.
Let’s learn a little about George Soros and his background in the industry before progressing toward his bet.
Soros and Finance
Soros graduated from the London School of Economics and after a few years, he was able to obtain a role at financial institution in London. Soros would work in London for a while before heading over to the land of opportunity, the United States of America.
While in the United States, Soros picked up an arbitrage trading position at a small brokerage firm on Wall Street. He would then progress to learn more and gain a bit of experience at different firms across Wall Street before getting his big break.
He finally obtained another wonderful opportunity.
Soros would manage a few large funds and then move on to start his own firm, the Quantum Fund.
The Quantum Fund
His firm would open up in 1973 and would go on a bit of a tear. It is noted that this legendary fund would provide annual returns in excess of 25% of over the course of more than 20 years. Suffice it to say, his firm did quite well.
Soros started the fund with less than $15 million and has grown it to more than $20 billion over the course of more than 20 years.
He is known for one of his most aggressive bets.
What was this bet?
He thought that the British pound was overvalued and appropriately shorted the currency.
By making this decisive and bold move, Soros was able to net $1 billion in the latter half of 1992.
But why was he so keen on moving against the British pound? Why was he so confident in this particular position?
Soros had a deeper understanding of the markets and macro environment.
The Formation of the EU
Not a single leader in the European Union wanted to have another calamitous world war. They decided to take measures to prevent it from ever happening again.
They decided that the best form of action was to create an union. The union would make it to where each country was dependent on the other thus dis-incentivizing potential struggles.
In the initial years, they each had an exchange rate mechanism where sovereign currencies were tied to each other at a fixed rate.
This simple mechanism would create undue pressure on central banks.
These financial institutions would now have to monitor the exchange rates in a more in-depth manner to keep their respective currencies in line. If central banks were to make a mistake and shrewd market participants caught it, then the bumbling central bank would be in for a world of hurt.
This is exactly what happened in England.
England was one of the latter countries to join the exchange rate mechanism. Their economy was already lagging and struggling prior to joining in the ERM and it would only face further after joining.
The leaders of England did not realize the complexity of keeping in line with the ERM system and propping the British economy up. English leaders had made a huge mistake.
The British pound would continue to depreciate over several years and Soros and other currency traders would watch and wait for a cataclysmic event.
Soros started to take action in 1992 and build a position.
He would then quadruple down on his position and sell about $10 billion worth of British pounds.
This would be a trigger event that would lead the currency to decline even faster.
Because Soros short sold the pounds, he was able to earn a hefty sum of $1 billion.
What can we learn from this?
- Soros didn’t become rich overnight. He had years of experience working hard and learning the game by working on Wall Street.
- The speculator was confident in his position because he understood the underlying mechanisms of the currency markets and knew how he could be a factor in it.
- Soros knew that the trend was on his side. The currency faced major resistance and continued to depreciate over time. He knew that market sentiment was bearish and acted accordingly.
- He practiced patience, persistence, and stayed focused.