If you read history books such as most of us do, there is a bias from the writers which is normal and natural. Much of the world is formally in a hierarchical process and given the nature of the beast, it is much easier to research. In a book called The Square and The Tower by Niall Ferguson published by Penguin Press, NY, 2018, the author suggests that one should also concentrate on the informal change or networks of the people with power.

In the book, Mr. Ferguson uses a number of different stories through the ages – for this blog the one of Breaking the Bank is relevant.

George Soros runs the Quantum Fund and when examining the European rates he knew that a system of fixed exchange rates would come under strain if there were significant and persisitent differences in the economic performance of the member states. He also understood financial crisis are not caused by individuals they are caused by herds – think of the movie Lion King and the herd of Wildebeest running. What they were running from and why, you do not need to know, all you need to know if the herd is running and to get out of the way or there will be trouble. Mr. Soros believes reflexivity played a role in financial markets. This means reality helps shapes the participants thinking and the participants thinking helps shape reality.

The critical thing is Mr. Soros could not by himself break the bank by himself. He observed most of the time I am a trend follower, but all the time I was aware that I am a member of a herd and I am on the lookout for inflection points. Most of the time the trend prevails; only on occasionally are the errors corrected. It is only on those occasions that one should go against the trend and try to be ahead of the curve.

In the bet against the English pound, the key was to get others to get a critical mass of investors to put on the same trade as he had in mind. That has not hard because Soros was already part of a network of like-minded investors. In fact Robert Johnson of Bankers Trust helped Soros devise the trade. The critical part was the Euro currencies were being maintained within relatively narrow bands; whatever happened, the values could not possible rise against the mark. so if the speculators sold the pound short and lost, they would not lose much money. However if  won, they stood to gain a great deal. Mr. Johnson thought at 20% on the upside. Mr. Soros thought why not go for the jugular or short as much as possible as the risk reward relationship was very favorable.

Other traders and hedge funds saw the same risk-reward and were in the trade and began the herd. As the hedge funds went in so did the commercial banks and the herd was betting against the English pound and won.

Linking to dividend paying stocks, hedge funds look for price opportunities or price differences that should not exist but do. They use a combination of short selling and options, to be safer with your money buy dividend stocks with no margin. It will take longer but over the years your money will roll in because you have invested in a profitable company. Over time, profitable companies are worth more than non profitable companies and you have achieved a dividend along the way.

There are more questions than answers, till the next time – to raising questions.