On August 25th, The Economist published a less than fascinating article titled What Makes a Great Investor? Naturally, that is a compelling title — the concept is vague, subjective and aspirational. Even better, it gives The Economist license to define “great investors” as they see fit. It’s their publication and they deified themselves as The Economist, after all.
Right out of the gate, the article did not disappoint with this 1992 quote and story about Quantum hedge fund manager Stanley Druckenmiller speaking to his boss, George Soros:
George, I’m going to sell $5.5bn-worth of British pounds tonight and buy Deutsche marks.
The idea was that the Bank of England was trying to sustain an unsustainable exchange-rate peg which speculative pressure could break, forcing the depreciation of the pound and netting Quantum a huge profit.
This story and its aftermath are relatively well known, but the root cause for this currency arbitrage opportunity is never discussed. On the surface, Druckenmiller and Soros are “great investors” because they discovered potential gains in an overvalued asset and were willing to put their skin in the game. The last part is true and important, but the rest of it is neither great nor investing.
Selfish or Selfless?
Practically speaking, the source code for Soros’ and Druckenmiller’s massive gains was the incompetence of the Bank of England — and by extension, all central bankers. And morally, the Quantum hedge fund trade may be considered selfish — but objectively speaking, it is an example of selflessness.
Selfless because Soros could not have enriched himself without the existence of foreign exchange markets created by economic overlords for the systematic devaluation of money. Furthermore, The Economist doubles down by redefining “investing” as speculation:
Plenty, including Mr Druckenmiller, reckon he thereby demonstrated two cardinal virtues of great investors: the wisdom to spot a winning chance and the nerve to bet the house on it.
Certainly “great investing” involves wisdom, but the ability “to spot a winning chance” presumes omniscience that does not exist — except when the incompetence of others is in play. After all, reality always wins and evil is impotent. But having “the nerve to bet the house on it” presumes clairvoyance — or stupidity. Not surprisingly, The Economist confirms this:
What a great investor really needs is a big dose of luck and a distinctly odd character.
Yet, all economic outlook reports hedge themselves and tell their readers, we are cautiously optimistic, expect continued volatility, but our long-term growth story is intact, and there is the potential for policy errors, but markets are always uncertain.
And The Economist is no different. In this piece alone, it seems that big doses of luck and a distinctly odd character are short-lived and subjective:
Today his would-be successors need luck, too. Most people who work in finance have to be right pretty much all the time. But a stock analyst can have an even lower hit rate and still be considered excellent, since no one can do much better. The fund managers building portfolios from analysts’ recommendations can merely hope to pick the right ones.
In summary, outlier trades — the hugely profitable ones that are equally rare, do not define “great investors,” they define outlier events. However, there are two excellent points in this piece that help define great investors — having skin in the game and anticipating the possibility of outlier events. Those are the ones that occur less than five percent of the time - or two standard deviations from the median historical outcome.
To Make Money for What?
First, a great investor understands the cause, purpose and meaning of money. Next, he respects the information of prices and the elegance of markets. Those two steps are necessary to clean out the fallacies of the State controlled economy: the illusion of free money, the injustice of prices, the inefficiency of markets and the exploitation of profits.
The truly great investors are the angel investors and venture capitalists who expect to lose 90% of the time, but they do not rely on luck. They take calculated risks. Great investors deploy risk capital in value-creating ventures — not in fiat currency futures. And they find talent, anywhere in the world, without regard to the wheel-spinning central bankers fixated on interest rate price fixing and fiat currency manipulation.
For the middle-class, mass market, affluent investors who are great, The Moneyball Method answers the question: to make money for what? And the “what” are the explicitly defined objectives and value-driven strategies that give purpose to every “great investor.” In concrete terms, the objective data for each investor’s cash flow strategy is combined with the objective data of capital market price behavior.
That includes every outlier financial event that has been documented over the last century. Great investors do not ignore these large deviation events — they anticipate their likelihood and calculate their impact in terms of the dollar hit to their net worth.
But most importantly, great investors reverse the traditional “best practices” of those who try to predict the future, beat the market and measure performance looking backward. Beating the market is for authoritarian governments and George Soros. In the end, it fails — and markets do not fail.
Instead, we use the most reliable historical data, anticipate market behavior, measure performance looking into the future, and always know our risk capacity. That builds pride.
I canceled my subscription to The Economist years ago, and your essay illustrates why!