Finance: The Unifying Theme

A profile of financier George Soros

The Hungarian-born investment genius and philanthropist George Soros has shied away from publicity for most of his life, but the self-styled "financial and philosophical speculator" fairly vaulted into the public eye not long ago. Soros, age sixty-two, has been a figure of note on Wall Street for many years; his canny sense of financial-market turns led Institutional Investor magazine in 1981 to anoint him "the world's greatest money manager," a title he arguably retains today. He has also been exerting a significant and salutary influence in Eastern Europe since the mid-1980s, when he started distributing scholarships and photocopiers to dissident intellectuals in Hungary and other Soviet satellite nations, helping to set the fuse for the implosion of communism at the end of the decade.

Late last year he was yet more active in both spheres than he had ever been before. With the European monetary system groaning under high German interest rates, Soros's Quantum Fund and its investment outriders placed a $10 billion wager that Britain would be compelled to devalue the pound sterling. When this came about, on September 16, his funds were suddenly around $1 billion richer, and Soros had become the Man Who Broke the Bank of England. He made headlines again last December by committing $100 million of his own money to stave off the dispersion of the Soviet scientific establishment and by pledging $50 million to help provide areas of safety for Bosnia's tormented civilian population. Then, in January, he lent Macedonia $25 million to buy winter heating oil. All this is on top of the approximately $100 million annual budget of his many foundations. Explaining, Soros said that his financial gains had simply outrun his ability to give them away—though his magnanimity surely helped smooth feathers ruffled by his enormous profit from Britain's monetary misfortune.

Taken at face value, this is the tale of a Wall Street tycoon who made a bundle in the market and decided to give some of it back. But Soros has made rather more than a bundle—his personal worth probably approaches $1 billion—and his philanthropic method is anything but typical. What distinguishes him in particular is the elaborate philosophy underpinning both his financial dealings and his efforts in behalf of Eastern Europe. In books such as The Alchemy of Finance and Underwriting Democracy, Soros has developed an operating theory he describes as "reflexivity." His notion is that the movements of financial markets and of history are shaped both by the perceptions of those caught up in them and by purely objective factors; the term "reflexivity" refers to the interplay, or "feedback loop," between events and participants' views of them. Most often the two tend toward convergence, but frequently what Soros calls "far-from-equilibrium conditions" develop—for instance, when market trends or historical events move so wildly that they defy the comprehension of those involved in them.

Soros's reflexivity theory can easily be seen at work in financial markets, where prices often soar or plunge on little more than psychology. But Soros says that the rise and fall of Soviet communism was much akin to a classic stock-market boom-bust cycle: the destruction of the Berlin Wall became inevitable once belief in Marxism-Leninism had seeped away and a "dynamic disequilibrium" set in.

Whatever the intellectual validity of his theories, Soros has seldom been let down by his intuitions as to the direction of markets or history. "I am particularly concerned with these extreme conditions when there is no tendency toward convergence," Soros tells a visitor to his Manhattan offices, as a rainstorm rattles the thirty-third-floor windows that give on a mist-enshrouded Central Park. Paintings by Hungarian artists of the interwar years hang on the walls. "I specialize in these far-from-equilibrium experiences," Soros says, adding, "This is the unifying theme."

George Soro's wits were sharpened during the Second World War, when he went underground in Nazi-controlled Budapest with his Jewish family. His father, Tivadar Soros, an attorney, handed down the lessons he had learned as an escaped prisoner of war adrift in the Russian civil war. "That, of course, was a formative experience, a traumatic experience, for him," Soros says. "It changed his character and his outlook on life, and he passed it on to me." George fled postwar Hungarian Stalinism in 1947 to enroll in the London School of Economics. He studied under Karl Popper, whose critique of Marx, Hegel, and other proponents of historical determinism, in The Open Society and Its Enemies, has had an enduring influence on Soros's thought. Soros launched his financial career in London, and pursued it in New York beginning in 1956, with stellar results—though he still describes himself as a failed philosopher.

After serving Wall Street firms as an investment-portfolio manager and analyst, Soros turned to managing the Quantum Fund, an investment vehicle that he launched (under another name) in 1969. Its performance has been spectacular: compounded annual returns of 34 percent by the end of 1992 brought the fund's assets to $3.734 billion. An investor who placed $10,000 in Quantum at its inception and reinvested all dividends would by last year have held the sum of $12,982,827.62.

Soros has had financial setbacks, though. His fund posted a 22.9 percent loss in 1981, when he miscalled the direction of interest rates and took a bath in bonds; it shed $800 million in the 1987 market crash, which Soros had as much as predicted in The Alchemy of Finance earlier that year but had expected would hit first and with most force in Tokyo. High risk is a feature of "hedge" funds like Quantum, whose managers may borrow several times the value of their holdings to place large, aggressive market bets using futures, options, and other derivative securities, while hedging, or minimizing, potential losses with other such combinations of financial instruments. But at the end of the day they must be right in their hunches, or the consequences will be devastating. "To me, it's always been a very painful process, very painful, involving great suffering, actually," Soros once told a reporter. "Because if you lose money, it's very painful, and you can't make it without the threat of losing it."

Toughness is a Soros trait. Financial peers at one time described Soros as cold and arrogant, and Quantum has come under scrutiny for allegedly joining forces with the Salomon Brothers investment bank in a 1991 Treasury market "squeeze" maneuver. But he allows that his fiercely single-minded approach to markets has mellowed in recent years, referring to a 1981 "crisis" that he describes as "a battle between me and my success—that is to say, 'Am I the slave of my success or am I the master of my destiny?'" He resolved this in part by shifting his focus to Eastern European philanthropy and activism.

Another trademark is Soros's ability to discern patterns where others see only chaos. "He sees trends globally, and he understands enough about how markets work so that he can see where to apply leverage—both intellectual and financial leverage," says Michael Lipper, the head of a Wall Street firm that tracks investment-fund performance, and a longtime Soros-watcher. "He can think out where a trend is going, and which security would be the major beneficiary of it."

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