"What’s important is how much money you make when you're right.." (George Soros)

George Soros

When we think of famous hedge fund managers, names like Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, and Jim Simons, who achieved a legendary 39.2% average annual return over 30 years with Renaissance Technologies, often come to mind. However, in the past, everyone thought of George Soros when talking about hedge funds.

Soros was born in Budapest, Hungary, in 1930 to Jewish parents. He attended university in London and immigrated to the United States at the age of 26, where he began his financial career on Wall Street as a trader. In 1973, he co-founded the Quantum Fund with Jim Rogers, leaving behind numerous investment legends. In 2011, the Quantum Fund returned all external investor funds and transitioned to managing only the Soros family's capital. Since then, Soros has focused exclusively on philanthropic activities.

Big Gains and Small Losses

The full quote is as follows: "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

It’s obvious that no one can always make the right decisions in investing. And what really matters isn’t the return on individual investments. It’s the total return of your entire investment portfolio. For instance, if you invest the same amount in Stock A and Stock B, achieving a 30% gain in A and a -20% loss in B over one year, your overall return is just 5%. However, if you invest 80% in Stock A and earn a 30% gain, and put 20% in Stock B with a -20% loss, your total return becomes 20% - exactly four times higher than in the first example. As Soros says, the crucial factor is not just making gains but maximizing them when you're right and minimizing losses when you're wrong.

The Man Who Broke the Bank of England

One of Soros's most famous investments is his shorting of the British pound. In 1992, Soros predicted that the value of the pound would inevitably fall due to the struggling British economy. Acting on this belief, he shorted $9 billion worth of pounds, earning an extraordinary profit of $1 billion in just a few months.

For some background, the UK joined the European Exchange Rate Mechanism (ERM) in 1990. The ERM was a fixed exchange rate system that required European currencies to be pegged to the Deutsche Mark, allowing only ±6% fluctuation. In 1992, however, the UK’s economy was weak, and to maintain the pegged exchange rate of 1 pound = 2.95 Deutsche Marks, Britain had to keep interest rates high, which led to recession and rising unemployment.

Believing that the UK could not sustain high interest rates any longer, Soros’s Quantum Fund and other hedge funds began massively shorting the pound. Although the Bank of England initially responded by significantly raising interest rates, it eventually capitulated on September 16, 1992, lowering rates and allowing the pound to depreciate. Within days, the pound had fallen about 15% against the Deutsche Mark and around 25% against the U.S. dollar.

This event was unprecedented - a hedge fund directly challenging and overpowering the central bank of a G7 country, shocking both central banks and the investment world. Later, during the 1997 Asian financial crisis, Quantum Fund shorted the Thai baht, reportedly earning around $2 billion as Thailand abandoned its fixed exchange rate, triggering the Asian financial crisis.

Such cases highlight the potentially severe negative impact of massive speculative capital: national finances drained to defend currencies, companies going bankrupt, and countless people losing their jobs. However, from a pure investment standpoint, these were incredibly successful trades. These examples demonstrate not only Soros's macroeconomic insight but also his boldness in making decisive bets when he had strong conviction.

Investment as a Game of Probabilities

George Soros considered that Investment is a game of probabilities. However, he emphasized that what’s more important than the win rate is maximizing gains when you're right and minimizing losses when you're wrong. Some may dismiss the idea of investing as a probability game as something suited more for speculators or day traders than for genuine investors.

But did you know that Warren Buffett, the iconic value investor, expressed a similar view? He said, “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect but that's what it's all about.”

In other words, Buffett also sees investing as a game of probabilities. His approach is about calculating [amount of possible gain × probability of gain] minus [amount of possible loss × probability of loss]. Other prominent value investors, like Charlie Munger and Howard Marks, have also made similar statements viewing investment as a probability game.

How to Win the Probability Game of Investing

To win the probability game of investing, two key strategies are essential. The first is to invest only when the expected investment return is positive. That is, invest when [amount of possible gain × probability of gain] exceeds [amount of possible loss × probability of loss]

However, that alone isn't enough. If your investment’s possible gain is small, even consecutive gains won’t result in substantial profits. The second essential strategy is what Soros emphasizes: earn significant returns when you're right and lose relatively little when you’re wrong. How? When you’re strongly convinced - believing that both the probability of gain and amount of possible gain are exceptionally high - invest a large sum.

Many people, fearful of losses, limit their investment to savings accounts or very conservative investment products. Others invest only a small portion of their capital that even high returns barely move the needle in terms of growing their wealth.

Soros advises that when the odds are highly favorable, and the expected profit is substantial, it's important to bet big, even if it's daunting. Let’s look again at Warren Buffett (I always find advice more convincing when it’s validated by Buffett!). Today, Berkshire Hathaway holds shares in over 40 public companies, but back in 1990, most of its investments were concentrated in just around 15 companies. While Berkshire was already a fairly large fund back then, Buffett’s approach was to concentrate investments in a select few companies he had strong confidence in.

5 Steps for Successful Big Bet Investments

To follow the concentrated investment styles of George Soros or Warren Buffett, I think it's important to keep these steps in mind:

(1) Establish a Specialty – Every investor should choose a specialty area and build deep knowledge and experience within it. For example, Soros specialized in macro strategies, particularly currencies, while Buffett focuses on stocks, especially traditional non-tech companies.

(2) Broad Research – The wider your scope, the better your chances of finding high-probability investment targets. Although Buffett primarily invests in the U.S., he has also invested in BYD (China), TSMC (Taiwan), POSCO (Korea), or trading companies (Japan)

(3) In-depth Research – The more you study an investment target, the more confident you become. This confidence, which is essential for making big bets, generally correlates with how well you understand your chosen investments.

(4) Courage to Invest Big When Convinced – Diversification is important, but when you have strong conviction, focus on a few key investments rather than spreading too thinly. This isn’t about going "all in" on one asset, but perhaps concentrating on around 10 well-researched stocks instead of 50.

(5) Unwavering Patience and Discipline – After investing, maintain a steadfast outlook, like Warren Buffett and John Neff. Stay calm during market fluctuations and resist the urge to secure quick gains or hastily cut losses.

Final Words

To be honest, since I primarily invest through ETFs, concentrated investing isn’t really my preferred approach. For instance, index investing in the S&P 500 or Nasdaq 100 is inherently diversified. I also like to invest through a portfolio that combines different asset classes, including stock index ETFs.

While I do invest in individual stocks (I’m a Berkshire Hathaway Class B shareholder, for example), my holdings are relatively small, so it’s difficult to achieve significant gains or losses. My investments in gold ETF and bitcoin is more or less substantial, so I suppose that counts as concentrated investing. However, I’ve never truly concentrated my investments in individual stocks.

I continue to research individual stocks and monitor select companies for their corporate and share price developments. When the time is right, I hope to gain enough confidence and courage to make significant bets on particular stocks. Ideally, that moment will arrive as Warren Buffett advises, “when others are fearful, and, as Rothschild puts it, “when there’s blood in the streets” - though perhaps that's just too wishful thinking on my part.

Thanks for reading. Wish you grow rich slowly and surely!

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