Success in the financial markets is shaped like a pyramid. At the base is the wide majority of losing investors. As you move higher on the pyramid, success increases but the numbers of investors drop lower.
After the losing investors, you have the players who don’t really lose much but don’t make much either. These “break even” investors are loved by brokerage firms since they keep plunging into investments, paying commissions and fees, creating a consistent income stream for the broker. You see, the losers will eventually quite the investment game while the break-even investors just keep on trying.
As you move higher on the pyramid, the number of participants greatly decreases, but their individual profit exponentially increases. The reason for this is the fact that the masses of losing investors are supplying the capital to the rarified top of the pyramid.
One way to speed your way up the investing pyramid is to copy those at the top. The cool thing about the markets is that those at the top are often very open about their methods and freely share with others.
I strongly urge you to read books like the Market Wizards series and other sources with insight into the methods of top investors. I have found this books to be full of incredible insight and useable knowledge.
We have identified 2 investors who are clearly on the top of the investment pyramid. Each one has a different approach. These investors are Paul Tudor Jones and George Soros.
Each of these ultra-successful investors views the market differently. Their one common trait is success and that is why it is critical that investors understand their philosophy.
Let’s take a closer look at each of these kings of the financial markets.
Paul Tudor Jones
This super trader manages over $10 billion in his flagship fund named Tudor BVI Global.
He is hugely successful, earning a place in the Forbes 400 world’s wealthiest people.
He is heavily involved in philanthropic activities. For example his Robin Hood Foundation provides aid to the less fortunate and has become a giant in the world of giving.
Paul’s Investing Career
Tudor Jones started his career in 1976, as a clerk on the trading floor.
He soon rose to the rank of a broker for EF Hutton, then in 1980 started trading on his own. After two years of success, Jones got accepted to Harvard Business School but made the decision not to attend.
He wisely believed there was nothing they could teach him about trading that he couldn’t learn himself.
With this in mind, he sought out the tutelage of cotton trader, Eli Tullis. Tullis mentored Jones in trading cotton futures at the New York Commodity Exchange. In 1980, he formed Tudor Investment Corporation in Greenwich, Connecticut.
He nailed the 1987 crash, effectively tripling his funds. This was his first major success placing him on the road to massive wealth.
His Investing Philosophy
Paul Tudor Jones is a big believer in technical analysis (TA) as an investing tool. He credits TA with his success in calling the 1987 stock market crash.
He has revealed about his investing method, “When I think of long/short business, to me there’s 5 ways to make money: 2 of those are you either play mean reversion, which is what a lot of long/short strategies do, or you can play momentum/trend, and that’s typically what I do. We’ve seen cheap companies get cheaper many, many times. If something’s going down, I want to be short it, and if something’s going up, I want to be long it. The sweet spot is when you find something with a compelling valuation that is also just beginning to move up. That’s every investor’s dream.”
He added this bit of wisdom when asked about his investing style.
“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”
George Soros
Known as the Dark Lord to those who trade against him, George Soros is a hyper-successful, billionaire investor, philanthropist and political provocateur. Others call him the “palindrome” since his last name can read backwards to say the same as forward.
His investing ability, massive $20 billion net worth, and political stance have made him both a feared and respected international powerbroker.
Driven by an investment philosophy built upon the scientific method combined with a focus on societal change; his reputation sends shivers of fear through the central banks with weakened currencies and disagreeable governmental policies. It is said that he was instrumental in the fall of the Soviet Union and other regimes around the world.
Appreciate his political stance or not, this mentor to hedge fund legends like Jim Rogers and Victor Niederhoffer, can teach critical lessons to every investor.
George Soros’ Biography
Born in 1930 in Hungary, George Soros survived the Nazi occupation of his homeland. Fleeing the communist-dominated Hungary in 1947, he attended the London School Of Economics graduating in 1952. It was here where he began studying Karl Popper’s “The Open Society and its Enemies” a critique of totalitarian societies and an examination of the scientific method. These two ideas became the guiding light for the rest of his life.
Making his way to New York City in 1956, Soros accepted a job at the Wall Street firm, F.M. Mayer. After gaining experience at several financial firms, he launched his own hedge fund in 1973. The fund first named the Soros Fund changed its name to the Quantum Fund had incredible success over the years. The success was so great that in 2012, Soros made list as the 22 wealthiest person on earth with an estimated fortune of $20 billion.
Another way to picture the success of Soros investing, is that if you had invested $1000 with him in 1969, you would have earned a cumulative annual return of 30% or around $4million by 2000. Talk about powerful investing returns!
Philanthropy
It is this financial success from trading and investing that funded Soros’s foray into philanthropy.
Launching the Open Society Institute in 1984 with the goal “to advance justice, education, public health, business development and independent media”, on a global scale.
Soros via his institute has given over $8 billion to support human rights, freedom of expression and access to public health and education in 70 nations. No shrinking violet, he has written 12 books and remains Chairman of the Quantum fund.
George Soros’ Investing Philosophy
His primary financial market philosophy is what he calls reflexivity. Reflexivity is a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value asset in that market.
He uses this framework as a means to predict financial bubbles among other economic changes.
Soros also applies the scientific method to his financial trading strategy. This means that his first step in deciding what to trade is to develop a thesis about what he believes will happen based on the available market provided evidence.
Secondly, he tests the thesis in the real market studying the results. If the position goes against him, he gets out. If it goes his way thus confirming the original thesis, he adds to the position.
Most interestingly, when testing his investing thesis, Soros relies on bodily hints and intuition as clues for decision making. For example, he has stated that if he gets a back ache after entering a trade, he takes this as a sign to close the position.