23 of 23 people found the following review helpful:
3.0 out of 5 stars
Some Insights, but also Wordy & Digressive, February 20, 2003
This review is from: The Alchemy of Finance: Reading the Mind of the Market (Paperback)
Soros is unquestionably one of the finest investors of our time, and the concept of "reflexivity" that he introduces in this book does have some merit. However, I found his wordy tome is a slightly burdensome read. Most of his most valuable points are in the first 80 pages; the remaining 300 could have been trimmed down by a wise editor.
Soros' main points revolve around a concept that he dubs "reflexivity." Reflexivity claims a few things: First, that prices aren't objective; they're based on people's biased perceptions of the fundamental factors influencing the market. Second, people make trades based on their biased perceptions, so perceptions will influence the market. Third, and most importantly, those market movements can in turn change the market's underlying fundamentals. There is, therefore, a continuous co-evolution of the market fundamentals, the market's price movements, and market participants' perceptions.
Let's run through an example to make this clear. Say a profitless Internet company's stock soars because investors have overblown expectations of earnings growth. That company could then use its inflated stock in a stock-swap to aquire another company that DOES has earnings. This aquisition would thus "justify" the stock's inflated stock value. Thus, mistaken perceptions have allowed a change in the structure of an industry (i.e. two companies merged which would not have earlier).
Soros makes a number of other valuable points about "reflexivity." He notes that traditional economics try to sidestep the issue of subjectivity and biased perceptions by assuming people behave rationally, which of course isn't always true. To demonstrate this, he points out that we see reflexive behavior all over the markets. For example, we see self-reinforcing price trends (people buy because a stock is going up, or sell when it's going down), rather than random-walks in prices. We see booms & busts in the credit markets. And so on.
Finally, the genesis of the title, "The Alchemy of Finance" comes from Soros' observation that finance can never be a science because the traditional tools of science -- that is, explanation, prediction and objectivity -- can't be used, because perceptions and subjectivity cannot be seperated out like they can in a controlled science experiment. Finance can only be a form of alchemy -- it seeks operational success, instead of being able to seeking and test fundamental laws as the scientific method does.
Overall, I found the book insightful in parts, but rambling. Some other reviewers claimed that the book was pseudo-intellectual. I did find that it lack academic rigor, but I can't be sure if that's because he was writing for a popular audience.
Since the book was written in the late 80's, there's been growing interest & academic research at the intersection between psychology and financial markets. Soros was not the first to recognize that financial markets involve a good dose of psychology, but his book serves to underscore this important truth about the market.
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23 of 24 people found the following review helpful:
5.0 out of 5 stars
required reading for aspiring money managers, March 2, 2003
By A Customer
This review is from: The Alchemy of Finance: Reading the Mind of the Market (Paperback)
Soros is the greatest publicly known investor of our times. His Quantum Fund numbers attest to that. In this book, he makes a Herculian effort to explain how he did it, including a real-time diary, which is as informative in revealing how often he is wrong-headed (and so exits) as it reveals how he piles on more leverage on a winning position. He also tries to honestly write about how some decisions are simply intuitive, and not the result of reasoned analysis. Though most investors will not be involved in macro-investing, where Soros simultaneously considers equity prices, forex, commodities, politics and economics, and using 5 to 1 leverage invests accordingly in stocks, bonds, currencies, both long and short --- still this is a must-read for anyone considering a carreer as a money manager. If you wanted to be an artist, you would read the biography of da Vinci, a master of art. Soros is a master of finance. The way the Beatles inspired a generation of musicians, so Soros inspired a generation of hedge fund managers.
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51 of 64 people found the following review helpful:
2.0 out of 5 stars
Disappointing,, December 15, 1999
By A Customer
This review is from: The Alchemy of Finance: Reading the Mind of the Market (Paperback)
In this book, Soros openly admits that he is completely unable to predict major developments in finance and economics. In addition, he admits that he has never been able to profit consistently in commodities markets. What does that leave us with? Soros is a glorified stock picker, and the Quantum Fund, a glorified mutual fund. Soros does not discuss equity analysis techniques, however; the book is comprised of macroeconomic analysis and prediction which is - by Soros' own admission - of questionable value.
Indeed, it is almost embarassing to read Soros' predictions - that the dollar will depreciate dramatically in the 90s, that Japan will surpass the US as economic leader, that the US economy will succomb to fiscal and trade deficits. Soros' predictions are not just wrong, they are the complete opposite of what actually has occurred.
Soros argues that he cannot predict anything, he can only explain economic developments as they unfold. If his predictions are invalid, however, why are his explanations valid? His predictions and explanations are premised on the same set of erroneous beliefs.
Those seeking practical and accurate financial theory should not read this book. Those seeking chapters like The Quandary of the Social Sciences and Reagan's Imperial Circle are invited to tackle this self-aggrandizing book. Better choices: Intermarket Technical Analysis by Murphy or Macro Trading and Investment Strategies by Burstein.
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