Customer Reviews

The Alchemy of Finance: Reading the Mind of the Market

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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.

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.

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.

Started many times reading the book only to put it away again and again. It's very hard to read, not mentioning to understand. Soros is by no doubt one of the finest thinkers in the market and his trading comments are totally different to what I've ever seen. If you are willing to study Soro's theory on reflexing systems and self enforcement, it's worth the effort to read and re-read the book.

While there are several good things in the book like his view of reflexivity (extremely relevant for a world in which stock prices determine fundamentals instead of the other way round) or his trading diary the most important lessons from the book come in the section where he discusses Popper

To those who know little about him Popper in 1934 started a new era in the philosophy of science with a book written in German, and translated in 1959 under the title "The Logic of Scientific Discovery". He rejected the traditional idea that scientific knowledge was based on a method called induction whereby theories are verified by observations. Popper argued that the logical process of induction simply does not exist. Theories are forever tentative and the most useful function (and the only logically decisive effect) of observations is to act as tests or attempted falsifications of theories.

It is application of this theory to stock markets that is of extreme relevance for a trader. "Stock markets are places where different propositions are tested" are the nine most important words ever written about stock markets. Once we can see the mistake that the market is making in coming to general conclusions from specific events then making money is easy as a trader.

I think this philosophy of Knowledge reconciles his poor capability to predict events which is always based on some generalizations with his stock market success as well as his ability to see the flaws in general in a generalization that the market has accepted.

I studied System Dynamics and this book makes so mcuh sense when read from SD perspective. Systems can be reflexive and self enforcing. Soros simply discovered its relevance in world financial systems and successfully exploited it. I think he is a genius here.

It's funny to see the criticism of Soros and his book. I suspect much of it is politically driven, but there are fair comments to be made about his opaque and digressive writing style. He could have used a good editor, and probably a competent ghost. Since he's the king, however, that clearly didn't happen. The king doesn't need an editor. OK, so we know that about the book. Let me clue you in on a secret. Most financial writing that has any value at all (and most of it doesn't) could express all crucial points, with examples, in a 20-100 page essay. That's it. That's all that is necessary. But that isn't a book and no one would buy a 50 page essay, thinking it was too light on content. So 50 pages of real insight gets larded with 200 pages of anecdote, example and just plain silliness. This is the reality of books on many subjects, not just finance.

Here's another thing. George Soros is a self-made billionaire. You aren't. Neither am I. Some have commented that he had charges of insider trading against him. This is true. But what you may not know is just how much European securities and trading regulators hate him. He broke the pound, for God's sake. To dismiss him as "a criminal" is silly at best, reactionary at worst.

Even worse are the geniuses who say Soros is "shallow" "trivial" "obvious" or "invalid". These comments smack of utter arrogance, and likely, ignorance.

Look at the problems of today. They were caused by people applying "valid" academic financial theory and "sound" models. There is a veritable mountain of data and modeling supporting the catastrophe at hand. But the academics will handwave the actual result of application of theory with some phrase like "It wasn't properly applied. If only you'd asked ME!"

I myself wonder if the underlying error is in believing that finance is a scientific discipline, and that it will yield its secrets when the method is properly applied, like the production of industrial chemicals, or something like that. The tangible results of the application of increasingly complex models and theory are, to be mild, not encouraging.

In my observation, the greatest investors apply simple concepts with great discernment and acuity. They rarely, if ever, let even a well-understood "portfolio theory" tell them what to think, let alone how to invest. It might be that such investors really can't explain how they do it, it's simply a gift from heaven. That seems entirely possible. Lots of people try to be like Warren Buffet, no one succeeds at the same level, despite Buffet being quite open about his methodology and thought processes. But let's assume you can learn something from these sports of nature.

I find many of Soros' thoughts quite penetrating, despite his often baroque ornamentation. Applying them is hard, because you can't easily throw it into a model. You have to think, analyze and understand conditions with subtlety and precision. Then you have to be incredibly brave and believe in your analysis against the weight of the world's opinion and action. You have to accurately gauge the effect of a constantly altering, and self-referential decision loop on you positions and outlook. Soros is trying to provide a method for you to do that. He may not have succeeded, but dismissing him outright is the action of an idiot.

You have to read the book at least three times. First to know that the book is not worthless. Second time to understand the theories. And the third time to attempt any practical approach to use the theories. Soros is undoubtably one who can see the big picture and not just the trees. If you are similarly inclined and want to test your theories (at your own risk) this book is a useful reckoner. But read this if you are a serious investor and have to know what the world's second greatest investor thinks ( the first is Warran Buffet and his theories are too simple

It's not enough for Soros to be a billionaire, he also wants to be thought of as a scholar. His "theory" of reflexivity isn't at all developed; no system, no analysis, nothing but recurring promises to address the problems attendant to developing such a theory, without ever doing so. The basic premise, that markets are self-referential and are influenced by the psychology of market players, is pretty standard now and there are a number of academic circles which are truly analyzing it in-depth and truly developing theories.

But then these academics never have and never will make a killing in the market, will they? Exactly right, and Soros is more interesting in his simple war stories than in his feeble attempts at philosophizing, because he is essentially a man of action, not a coherent thinker. He relies, successfully, as much on instinct as on anything else. Why he should be ashamed of this is beyond me.

A very detailed and interesting recollection of Soros'finance strategy. But at the end of the book I am left with the feeling that the reason why he asks for so much regulation is because it is easier to forecast and influence the regulator than the market. I would trust him with my money but not with a classroom of economics students.