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The Speculator: 3 lessons from ace investor George Soros

Copyright Laurel Kenner and Victor Niederhoffer

Rules divined from a long friendship: keep something in reserve; go for the win -- and while you can be friendly while doing business, be careful about doing business with friends.

By Victor Niederhoffer and Laurel Kenner

Many acquaintances, knowing that I used to trade for legendary fund manager George Soros, have been sending me his new book as well as a new biography -- "George Soros on Globalization" and "Soros: The Life and Times of a Messianic Billionaire." After a while, they call to see what I thought, hoping for deeper insights.Arm yourself.

As a measure of the interest, I haven’t received so many gift copies of a book since the dark days of 1997, when losses in the Thai and U.S. markets forced me to close my hedge fund. The gift book of choice then was "Tuesdays With Morrie." I received 45 copies of it, not to mention three tapes, presumably to help me come to terms with the idea of death.

I never did read "Tuesdays With Morrie." I haven’t read either of the new Soros books either, although I intend to, as the maestro is endlessly fascinating and I enjoy his insights on every subject. George and I spent 15 years as business associates in a state of “best friendedness,” frequently speaking on the phone three or four hours a day and playing tennis three times a week. I did learn a couple of things from him that I used as the basis for developing further insights. I think they will provide readers with a unique perspective, and I’ll share them in a moment.

In the interest of full disclosure, however, I must say that I have not taken the liberty of interviewing George or any of the friends we have in common. The reason is that George has chosen at this time not to have any contact with me, concluding our last communication with the words, “No hard feelings.” And I do not wish to embarrass any of our mutual friends by requesting privileged information about him.

The lessons I learned from George are as follows:

Always use two cans of tennis balls

George is one of the few people I have ever played tennis with who as a matter of course buys two cans of new balls and uses them in a set. Generally, his approach is to use three of the balls for practice and then to use the second can for the match. The value of this is that often, the balls get lost when you play on crowded courts. By having a reserve of three balls, you can still play a reasonable game without wasting half your time retrieving balls.

As applied to the market, if you have an investment that loses you a lot of money, it is good not to have everything invested in it, and to have a new can of investments, if you will, in reserve so that you can still keep playing without wasting your time doing such things as searching for a new job or a loan, or taking out a second mortgage on the house.

Be willing to go for the win or ace if survivorship is guaranteed

In all candor, I am a better tennis player than George. But in almost all the close games I have played against him in doubles, he has been the victor. The reason is that when it gets to the wire, George invariably goes for the lines on his ground strokes, attempts an ace on his second serve and rushes to the net behind his first or second serve. He knows that fortune favors the brave. If he has a chance to make a killing in a market, he is not afraid to put an important proportion of his chips into it.

The amount of money he invested in speculation that the British pound would be devalued in 1992 represented a rather staggering proportion of his assets at the time. (I am relying on published accounts on this, as opposed to any knowledge I might have gained.) The result was fame and fortune.

The willingness to stay on the offense in life-threatening circumstances is a great trait to have. Western novelist Louis L’Amour’s heroes, when threatened with danger, immediately go on the offensive.

Friendship based on business is better than business based on friendship

George has always been a master at separating the personal from the business life. When I first met him, we realized that we didn’t agree about anything. George liked to go with the trend; I have never bought an up market or sold a down one. George liked modern dance; I like classical music. Most of all, George believed even then in a mixed economy, one with a strong central international government to correct for the excesses of self-interest. I believe in the power of the market to give consumers the quantity and quality they want in timely fashion, in the power of incentive to create a constantly increasing plenty, and in the power of competition to distribute that plenty harmoniously and bountifully to the deserving consumer.

Yet we agreed at the outset to bury our differences. Our friendship developed out of the ability of each to make money for the other, and the respect we felt for each other.

As might be expected, hardly a day passed that George was not beleaguered by numerous friends introducing him to a prospective deal or requesting that one or another of his foundations donate to a fantastically worthwhile project. In fact, one of the great unintended consequences of my no longer being in the Soros firmament is that I no longer get 10 requests a day from my friends for introductions. To the three to five daily inquiries I do receive, I automatically respond: “George doesn’t talk to me anymore, so if I were to recommend you, I’m afraid it would be an albatross around your neck. However, his secretary’s telephone number is . . . and the address is . . . and if you don’t mention my name, I’m sure you’ll get as fair a hearing as anyone else.”

George has a patented method for dealing with introductions and proposed business ventures from friends. The toughest negotiator and most careful investigator he knows is an 80-something Hungarian who, like George, was forced to flee the Holocaust. This friend routinely investigates any business deal with the skepticism of Rumpole and the persistence of Inspector Javert, the pursuer of Jean Valjean in "Les Miserables". He is an accountant, a lawyer, an investment analyst and a banker rolled into one, with the skepticism and negative checklists of each of them within his envelope of scrutiny. Occasionally, if a deal promises at least 50% a year guaranteed, with no chance whatsoever of a loss, after much analysis and delay to let any negatives emerge, he might consider investing some of his own money in the deal. (I must add that I love this man and hold his ability and analytic capability in awe.)

But now, back to how George uses this unique set of talents. When someone presents a proposal, George is likely to say: “Show this proposal to my Hungarian friend. . . . If he likes it, then I am willing to invest in the deal on the same terms to a moderate extent on a pari passu basis with him.” End of interview.

The obvious application of these rules to the market and life is so vast and so personal that I will leave to the reader the areas of application. However, I reprint below the reflections of a friend of mine, a hedge fund manager, concerning business and friendship:

The real question is, was the friendship based upon a principle of being an unconditional friend? If it wasn’t, then what does the word “loyalty” or other important words that guide us philosophically, ethically and theologically really mean? What does the word “friend” mean, therefore, to a man like Soros…and does he really need any?”

I cannot close without expressing my admiration for George’s work in creating a more open, educated and healthy society. He has created an untold, tremendous wellspring of benefits for millions of people.