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9 Wisdom Quotes from George Soros

  
  Education
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George Soros doesn’t need an introduction. He is a living trading legend. Here are some of the smartest things he has ever said about markets. His thoughts are in brown.

1. Perceptions affect prices and prices affect perceptionsGeorge-Soros-gold

I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.

For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.

As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.

2. On Reflexivity

Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.

Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way.

3. “Once a trend is established it tends to persist and to run its full course.” – Sentiment changes slowly in trending markets (up or down) and extremely fast in choppy, range-bound markets.

4. “When a long-term trend loses it’s momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.” (more…)

16 Points for Day Traders

  
  Education
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Accepting risk may cause losses, but accepting unfunded liabilities and negative skew can bankrupt us.

Use models not to predict, but to create a range of possible outcomes for which we can plan.

Markets follow cycles based on the perceptions and actions of its players, and one can gain alpha by using these cycles to manage risk and reward.

Markets SEEK efficiency, but offer tremendous opportunities while traveling from inefficiency to efficiency.

Both people and machines have flaws, so use the best attributes of each for peak performance.

Forecasting is necessary but should be timid in nature, while action is not always necessary but should be BOLD on the occasions when conditions dictate it.

Risk management is made more complete by searching for information that differs from your analysis rather than by that which confirms it.

Successful practitioners turn mistakes into assets by generating learning experiences and continuous improvement.

Remember to distinguish between clues that are necessary, vs. a complete picture revealing a group of necessary AND sufficient measures.

Markets can be generally explained 95% of the time, but extreme events happen much more than a bell curve would indicate…using options guarantees that we’ll survive fat tails and grab positive skew.

We are certain we DON’T know what will happen, so the best approach is to figure out what WON’T happen and blueprint accordingly.

Diversification reduces risk most of the time, but we assume all assets are linked and eventually correlate.

It is critical to have both a brain and a gut; the ability to find an edge, and the fortitude to trade it aggressively.

Profitable opportunities are best entered in the earliest stage of latent power being converted to energy. Too soon is a waste of capital, too late involves too much risk.

Virtually all long-term strategies are positioned to simply ride the tailwinds of rising prices. It is imperative to have methods to protect us from both headwinds and crosswinds to avert disaster.

Treat volatility as a psychological risk to be managed into an ally, not as a financial measure of risk to obsess over.

10 Lessons for Traders

  
  Education
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1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.

4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings. (more…)

Four Keys to Understanding Uncertainty

  
  Education
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1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.

If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.

2) Uncertainty has become a synonym for bad mood in our everyday life.

The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.

3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.

4) There are different types of uncertainty.

There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years.

A Look at 9 Quotes from George Soros

  
Education, Life
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1. Perceptions affect prices and prices affect perceptions

I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.
For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.
As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.

2. On Reflexivity

Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.

Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way. (more…)

HOW BELIEFS DRIVE TRADING

  
  Education
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What you believe, consciously or unconsciously, propels your trading in its many directions.  It might be so simple a matter as whether you believe a market is going up or down or nowhere.  Traders have biases that distort their perceptions and effect their actions, and they need to guard against these with various protections and bias detectors.

Other beliefs are more veiled and ubiquitous.  For example, you may consciously intend to make money, but you have a counter impulse that thwarts you due to unconscious beliefs that go against that intention.  Perhaps you unconsciously believe that money is the root of all evil, or that rich people are corrupt, or that there isn’t enough to go around and so you shouldn’t be greedy, or that you should be laying up your treasure in heaven, and not on this earth.  Perhaps on some level you believe you shouldn’t make more money than your parents.

When you want something, you have to really want it and not be ambivalent about it.  It has to be your desire, and not some alien value set by your parents or society.  The flower loves the sun, and stretches to receive its rays.  The plant loves water and digs its roots deep seeking the object of its desire.  If you want to make money trading, you really have to admire money and have good purposes for its use.  If you want to be a master trader, you have to be comfortable with that role, and not see trading as wasteful gambling, or an unworthy profession.

Perhaps you believe that you don’t deserve to make money trading, or that you have to work hard for your rewards.  Maybe you believe that only the big boys win, that the market is stacked against the ordinary trader.  Maybe you believe that it’s impossible to make money in the futures markets or, worse, any market.  Maybe you believe it’s possible to make money trading, but it’s not probable that you can keep your winnings.  All such ideas run in opposition to easy and effective trading.

Just as insidiously you may doubt that your system really works, or that it won’t work this time.  Some traders get superstitious: for example, they believe that they always, or tend to, lose money on Fridays, and so, of course, they do.  When any of their superstitious factors occur, somehow they manage to lose.

Strong emotions also get in the way of winning.  Underlying each emotion is some belief about what is happening.  The interpretations you give events color your reality. Underneath each interpretation is a rock core belief.  “That’s just the way it is.” you say. Such a statement flags a belief. Is it really the way it is?  Do you feel guilty, scared, angry, or depressed after a losing trade?  Perhaps you believe that you shouldn’t lose, that one losing trade implies you can’t trade, that one losing trade portends many more losing trades, or that you’ve jinxed yourself for the rest of the day or week.

Equally or possibly even more important are the positive conscious and unconscious beliefs that you hold about trading and investing.

To begin with, to do anything well, you need to believe that it can be done, that you can do it, and that you deserve to do it.  You’re in trouble if you doubt any of these three.  Your trading is at risk if you don’t firmly believe that money can be made trading, that you can make money trading, and that you deserve to make money trading. (more…)

Perception vs Reality

  
  Education
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“It is often said by experienced investors that the equity market discounts future events. Investors who support that contention believe that if you wait for an event to occur before investing, then you would probably be too late because the investment implications would already have been priced into the particular investment.

The notion that the equity market discounts future events necessarily leads us to the conclusion that the equity  market prices stocks based on perception rather than on reality. Future events that are supposedly being discounted have not yet occurred. Therefore, stock price movements reflect investors’ changing perceptions of what will occur, but not what will certainly occur. If the market were able to discount an event with complete certainty, then we would not worry about volatility or risk.”

Bernard Baruch’s 10 Trading Rules

  
  Education
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While pure trend followers and technical analysts will not agree with all of Mr. Baruch’s principles it is interesting to read through them, they are the same as some of the top traders and investors of our age. Some of these all traders can agree on.

Bernard Baruch was a millionaire in his early thirties after a few good runs in the stock market and devoted the remainder of his life serving the public and helping the U.S. win World Was I and World War II. He was a big believer in serving his country and that was the main purpose for the remainder of his life after he made his fortune.

Here is a summary of his 10 rules summarized:

1. Only speculate if you can do it full time.
2. Ignore inside information and tips.
3. Have a complete understanding of a companies fundamentals before you buy the stock.
4. Don’t try to buy bottoms or sell tops.
5. Cut your losses quickly.
6. Focus on and buy only a few stocks.
7. Review and update your investments periodically for changes.
8. Study your tax position to know when to sell at greatest advantage.
9. Never invest all your funds. Keep a reserve.
10. Stick to the field you know best in investments.

His biography is a great read for anyone interested in this great man and master trader who counseled presidents and was a close associate of Winston Churchill. It is interesting that it shows how far ahead of his time Mr. Baruch was in not only stock speculating but also discrimination and economics.  If you are reading it for only his advice on stocks just read Chapter 19: My investment philosophy. It is one of the greatest chapters you will find anywhere on advice for successful market speculation. He will explains to readers that economic conditions do not drive prices, peoples perceptions do. Cut your losses fast. Sell your worst performers and keep your best. Know what you are investing in. You can only truly learn the rules of stock trading by experiencing the losses personally.

Self-Factors' of Successful traders

  
  Education
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  • Self-awareness; – Knowledge of oneself and how one acts and behaves in situations and environments.
  • Self-Belief; – Self-Confidence – assuredness in one’s actions, judgments and abilities.
  • Self-Trust; -The ability to have faith in oneself under duress and pressure.
  • Self-Reliance; – Ability to depend on one’s own capabilities, judgment, and resources , and acceptance that nobody else is responsible for profits and losses.
  • Self-discipline; – A structured approach that keeps a person focused and grounded against negative forces and pressures.
  • Self-Control; – Is the ability of exert mind muscle and will-power to overcome the negative effects which can so easily distract and distort perceptions and judgments.
  • Self-Motivation; – Describes the initiative to undertake risks and activities when the mood and environment have been counterproductive.
  • Self-Esteem; – High regard, respect or value for one’s self, but not to the level of being conceited, or having an over-inflated opinion of their worth.
  • Self-efficacy; – Belief in one’s own competency and ability.

In summary, successful traders take responsibility for their own actions, but rarely beat themselves up. – If I was to sum it up succinctly, they know themselves, they like themselves, they believe in themselves, and above all – ‘they are comfortable in their own skin’.  (more…)

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