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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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George Soros was about to lay down the biggest bet in financial historyThe Worlds Greatest Investor Settled back in his high, leather chair behind an oval desk, George Soros gazed out the large windows to the left, taking in the breathtaking view of Central Park and the rush-hour activity some thirty-three floors below. He was thrilled to be once again part of The Game. Lately, when he entered the Soros Fund Management office in midtown Manhattan, Soros had begun to feel more like a visitor than the boss. But today he belonged. Today he could climb a mountain. Or break the bank. He was confident that he could still play The Game... and play it better than most. Maybe better than everyone. So what if he spent most of his time in recent years traveling in faraway places? His operation had run smoothly since 1988, when he entrusted it to a much younger man with a glittering fiial record, Stanley Druckenmiller. When Soros did show up at the office, he and Druckenmiller ran the place in tandem, even though they sometimes clashed over how to read the fiial markets. Ordinarily these days, though, Soros was more likely to be off in Eastern Europe or the former Soviet Union, helping to shape and nurture the philanthropic foundations he had established in the 1980s to turn those countries into models of democracy. Devoting all his energies for years to probing the fiial markets, he had made all the money he would ever need. Now, in the autumn of his life, he sought to escape the office routine as much as possible. Now he preferred to huddle with his foundation staffs in Hungary or Romania, to slog through the muddy streets of Bosnia, to take part in adventure. But today was no ordinary day. George Soros was about to lay down the biggest bet in financial history. His heart should have been pounding, he should have been pacing the floor, shouting nervously to terrified staff. But that was never his style. Only his mind was racing. He sat, a portrait of calm, asking himself the question he had always asked whenever he was about to jump in and make a splash. Is this the right thing to do? Am I going to drown? As he stared at the Frst Fickering white lights of the city, Soross mind drifted a few thousand miles away. Would he be better off in London? He wasnt entirely sure. Maybe today it didnt matter. George Soros had always taken great pleasure in staying far from the fiial precincts down on Wall Street - had always gotten a special charge knowing that he had figured out how to make a ton of money without having to toil in the shadow of the New York Stock Exchange. Given the way he played the investment game, given the contrarian style he had successfully adopted in reading the fiial markets, he had no reason to graze with the herd downtown. He was content to be in Midtown. Content to take this respite from his usual adventures. His office had a warm, homey feeling, a few paintings on the wall, family pictures on the desk. But just a few feet from Soross office, the staff sat in front of cold computer screens, peering straight ahead, as if the slightest head movement to the left or right might suggest they had fallen asleep on their watch. On a wall a sign, which appeared to have been composed on a computer, read: I WAS BORN POOR BUT I WILL NOT DIE POOR. It was George Soross credo. Now in his 62nd year, wealthy beyond imagination, he knew that he had won the contest, that he would not die poor. Indeed, he might well die one of the richest men in America. Yet no one dared suggest that it was time to take the sign down. The others in the office needed an incentive, after all. Some were wealthy in their own right, worth millions of dollars. They wouldnt die poor either. Indeed, it was as if those who toiled alongside George Soros had all taken part in the gold rush, and all had struck gold. The Soros Fund Management office did not look like Fort Knox, nor was it as difficult to penetrate. It did, however, have the same intoxicating smell of money. But as the city slowly sunk into darkness, Soros barely noticed. He was a global trader. An investor who was as interested in the fiial markets of Tokyo and London as those of Wall Street, as intensely curious about economic trends in Brussels and Berlin as he was about those in Peoria or Poughkeepsie. Today his mind was not in the office; it was in Western Europe. That was his chief concern at the moment. He had been following developments in the European economic community for the past few years and had sensed that the fuse was lit for a great fiial explosion. Soros was a master fiial theorist, and he liked to test his theories in the laboratory of stocks and bonds and curren. And what a wonderful Discern the chaos, laboratory it was. There were no gray areas. None whatand you could become rich. soever. A stock either went up, it went down, or it stayed the same. Any theory about how the stock market operated could be tested on a day-to-day basis. Many investors believed the fiial world to be rational, convinced that stock prices had a built-in logic. Discern that logic, and you could become rich. Soros would have none of that. He thought the fiial world was unstable, chaotic. Soros thought: Discern the chaos, and you could become rich. Trying to fathom the fiial markets, as if their movements were part of some gigantic mathematical formula, would never work. For Soros was convinced that mathematics did not govern the fiial markets. Psychology did. More precisely, the herd instinct. Figure out when and how the herd was going to get behind a certain stock or currency or commodity, and the successful investor could get out in front. That was the Soros theory in a nutshell. Today, George Soros was testing his theory out on the entire European fiial world. He had been applying it there for the past few years, laying back, waiting for the timing to be right, waiting for the murmur of the rumbling herd. And when he heard it, he would be ready to pounce, ready to seize the opportunity. When he sensed he was right about a fiial situation, he was ready to throw caution to the wind. This time, he was sure he was right. And this time, he was ready to place the biggest bet anyone had ever made in the investment world. If he lost, well, he would lose some money. No matter. He had lost money before. Take the October 1987 stock market crash. He had read the market wrong and had to cut his losses. He had been out $300 million. But more often, he had won money - for his elite group of clients and he had done it so well for so long that by June 1981 he had already been called The Worlds Greatest Money Manager by Institutional Investor magazine. In only one year since 1969, when he established his Flagship Quantum Fund, did Soros have a losing year. That was in 1981. Quite simply, no one had done as well for so long in the fiial markets as George Soros. Not Warren E. Buffett, not Peter Lynch. Not anyone. His record was the best on Wall Street. In his office late that day, Soros kept thinking about London. It was now 10:30 in the evening there. That was where the action was today. Not in New York City. A look of satisfaction crossed Soross face. He thought back to November 9, 1989, that crucial day that the Berlin Wall came tumbling down. Everyone knew how significant that day was for modern history. Others believed, or at least they hoped, that with the fall of the Berlin Wall, a new unified Germany would rise and prosper. Soros thought differently. He often did. Being a contrarian was his secret. He sensed that the new Germany would have a hard time trying to fie the unification. He also sensed that Germany would turn inward, worry about its own economic problems, and dismiss as less important the economic problems of the other Western European countries. An inward-looking Germany would have vast implications for the economies - and the currencies - of the other countries in Europe. So Soros believed. He watched and waited. In 1990, he had watched Great Britain take the fateful step of joining forces with the new Western European monetary system, the ERM, or Exchange Rate Mechanism. Soros thought it was a mistake for Britain to participate. The British economy was not strong, and by joining the ERM, the British were essentially linking themselves to the strongest economic power in Western Europe - the new united Germany. It was a linkage that, for better or for worse, would make Britain ultimately dependent upon the Germans. As the strongest economy in the region, Germany had the power to decide what was good economically for the rest of Western Europe. That dependence upon Germany, thought Soros, would eventually prove fatal for the British. For Britain might want to move one way in its monetary policiesand it would not be able to. It would have to link those policies with the dominant German monetary policies. Just as Soros had predicted, 1992 brought a fiial crisis to Western Europe. A number of economies there, including Great Britains, had sagged. Britain wanted to lower its interest rates. The Germans, however, were unwilling to reduce their interest rates for their own domestic reasons: They were deeply afraid that inflation would recur in Germany. They remembered with horror the 1920s, when inflation was the poison that brought the German economy to collapse. If Germany would not drop its rates, the other European countries could not afford to drop theirs. To do so would have put them in jeopardy of weakening their currencies, and once weakened, those currencies would be prey to speculators. So Britain was increasingly trapped. Its economy was deteriorating. Since it was overvalued, the pound was under increasing pressure. Britain wanted to improve its economy, but to do so, it needed to reduce the value of the pound, making its exports more attractive. But Britain was forced, under ERM rules, to keep the pound at 2.95 German marks. Over the summer of 1992, British political leaders insisted that they would survive the storm - and that there would be no devaluation of the pound. Britain would not leave the ERM. Somehow, they would muddle through. Nonsense, thought George Soros. He knew better. He understood how dire was Britains economic situation. It would not be possible for them to remain in the ERM. They would have to abandon ship. The crisis began in mid-September. Rumors started to surface that the Italians would devalue the lire. Traders in New York rushed to sell their lire. On Sunday, September 13, the Italian lire was devalued, but only by 7 percent, still within the range set by the ERMs rules. Investors made a good deal of money betting that the European central banks would honor their commitments to keep their currencies within ERM ranges. It seemed like a bad bet to wager on an ERM realignment that went beyond the ERMs rules. But if the Italians had devalued the lire, which they said they would not do, did that not mean the emperor had no clothes? That all the promises from other governments meant nothing? Perhaps there would be a second wave... perhaps it was time to start selling sterling? Suddenly, in different parts of the world, investors and corporations all at once lost faith in the willingness of Western European governments to permit the ERM to determine exchange rates. Now they were eagerly trying to get rid of a variety of weaker currencies, including sterling. As September 15 wore on, George Soross confidence that Britain would pull the pound out of the ERM was growing. It had been Stanley Druckenmiller who had thought the time ripe for making a bet against the sterling. He talked to Soros about doing something. Soros gave him the green light but urged his head trader to bet an even larger sum than Druckenmiller had in mind. And so Druckenmiller, acting for Soros, sold $10 billion worth of sterling. Leaving for his Fifth Avenue apartment, Soros seemed a man of extreme self-confidence. He slept well that night. The next morning at 7:00, the phone rang at Soross home. It was Stan Druckenmiller with news. Soros heard the trader say that all had gone well. While George Soros had slept, he racked up a profit of $958 million. When Soross gains from other positions he took during the ERM crisis were tallied, they totaled close to $2 billion. The British called September 15-the day they were forced to pull the pound out of the ERM-Black Wednesday. Soros called it White Wednesday. It was this bet, this single act of placing $10 billion on the fact that Britain would have to devalue the pound, that made George Soros world famous. It was, and remains, his greatest coup as an investor. Because of that bet, Soros - The Worlds Greatest Investorbecame a legend in the fiial world. After September 1992, myths grew around George Soros. The central one was that he could move markets: A word from him about a certain commodity like gold, or a currency like the mark, could cause a shift in trading. Prices would rise or fall, all because of what he said. He seemed infallible, worthy of emulation. A reporter doing a television documentary on Soros in December 1992, two months after his coup against the pound, was impressed with Soross seeming ability to move markets: You invest in gold, and because you invest in gold everybody thinks they should invest in gold, and the price goes up. You write an article that questions the value of the deutsch mark and the deutsch mark goes down. You make an investment in London real estate and overnight it seems that the trend of downward prices is reversed. Should one person have that much influence? Seeming to enjoy the compliment, Soros sought to offer some perspective. Currently, he began, the influence I have is exaggerated. In fact Im pretty sure it is. And it will correct itself because people will realize - he gave a big smile - Im not infallible, and you know, just as Im currently swept up on a wave of interest, Ill be swept down. Wrong on both counts. His influence had not been exaggerated. Nor was the wave of interest in him about to diminish. In a Business Week story, he was asked how it felt to be a guru. He said he was amused. Amused. Some people were becoming less than amused. |
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